Silver: 12-Year Highs But Buyer Beware

seekingalpha10-21

Silver prices have surged to $33/oz, the highest in 12 years, but caution is advised, especially for new investors.COT data shows commercial traders are heavily short, not signaling a strong buy for ...

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recent price surge likely driven by factors beyond fundamentals.Historical patterns and market hype suggest silver prices may stagnate after rapid appreciation; new investors should be particularly cautious.   Monty RakusenI’m not a silver or gold bug, but I have been fairly bullish on silver in the past year or so. Shown below are my previous analysis on (NYSEARCA:SLV) (ETF tracks physical silver).   Author's past coverage history (seekingalpha)This article is an update as physical spot silver prices soared over $33/oz today, the highest in 12 years since it peaked at near $50/ounce in 2011.   Silver historical prices (Macrotrends) There has been a lot of buzz on social media given the appreciation in silver prices. While I continue to see the long-term potential in silver, in the short-run I think a few observations suggest caution is warranted, especially for new or small individual investors that get swept up by the hype of rapidly appreciating prices. Caution Point #1: Commercials in the COT (Commitments of Traders) report are still short There is a lot of discussion/books that mention the COT as a useful indicator, in short, it is typically believed to be bullish when the Commercial traders (e.g. non-financial companies that actually produce and use the metal) have increased their net long (or reduced net short) position and vice versa. If we take a look at silver’s COT positioning, in the below chart, the red line below signifies the Commercial Traders and it has been quite prescient:  Note how the red line went up (reflecting a reduction in net shorts) in Mar/Apr-20 when silver prices crashed during the COVID panic. Silver prices soon recovered. Commercials positioning went sideways for the next two years, and silver prices languished as well. Note how in Q4-2022, commercial positioning in silver was the highest net long in the entire 5-year period. While silver prices still bounced around a bit, eventually they started an upward trend.  With the strong performance of silver in 2024, commercial positioning has reached the most negative levels since before COVID panic. I wouldn’t necessarily view this as “bearish” as I would not use this indicator as a “silver bullet”, however the COT commercial positioning is definitely not issuing a strong buy signal.   Silver COT report (Barchart) Caution Point #2: Inventories Silver COMEX inventories increased from 2016 to 2021 (which probably kept silver prices low during this period). Inventories started declining in 2021 from 400 million ounces to 270 million ounces by year-end 2023. However, COMEX inventories have been steadily increasing this year to 306 million ounces at Oct. 16, 2024.   Comex inventories of silver (Datatrack) Likewise for the LBMA vault of silver holdings, which declined from 1.2 billion ounces in 2021 to 800 million ounces in 2023. Yet, there have been no further drawdowns in 2024, but rather a small increase instead.   LBMA silver inventories (LBMA)Both of the above suggest to me that the supply/demand of silver this year is likely fairly balanced, and the recent surge in price is mainly driven by factors beyond supply/demand. Caution Point #3: Rapidly appreciating silver prices If we look closely at the chart of historical silver prices above, it’s quite evident that silver prices are typically flat for many years and go up in short upward bursts that are typically followed by long periods of stagnation. Unlike an individual stock like Coca-Cola or Google that can become hundred or thousand baggers and continue their upward trajectory indefinitely, silver’s fate is probably a lot more mundane. While there are some “true believer” type silver bugs that compare silver and gold ratios and extrapolate silver prices to mind-boggling levels, I would have more realistic expectations: Silver is a nice commodity to have that has endured throughout the ages and probably will outlast many other assets (that get disrupted by economic and macro changes) and purchased at a low enough price is probably worth it as a storage of value. But it’s probably not a good idea to purchase at any price, especially after an almost 40% run this year, as the higher the purchase price the lower the margin of safety and the higher the risk of ending up holding silver through a lengthy unprofitable period. Caution Point #4: General hype around silver When gold and silver rise in prices, it’s typically surrounded by a lot of hype about USD weakness. While no doubt there is some fundamental truth in the hype, this is a process with a very long time horizon. In fact, peak hype may coincide with peak prices. For example, in 2011, S&P’s decision to downgrade the USA’s credit rating was much hyped and coincided with the peak in gold and silver prices. It turns out that this isolated event probably had limited impact on USD, gold and silver values, even over a 5 or 10-year period. Since that pivotal event, gold and silver prices languished for a decade as higher gold and silver prices induced more production and gold/silver fell out of focus as the market shifted to other profitable investments (e.g. stocks).   Silver peak in 2011 (macrotrends)Today, the rapidly growing US national debt is the focus of much attention. While this phenomenon is indeed bearish for the USD in the long run, it probably has limited impact on silver prices in the short run. In other words, just because the US is running a $1.8 trillion deficit annually, does not translate into immediate vast appreciation of silver prices. The $1.8 trillion deficit adds about 5% to the US national debt annually and while this continuously chips away at the USD’s value, the impact on silver is probably more circuitous and indirect. Risks to caution thesis That said, silver is in a bull market now, and I would definitely NOT go short. The market could continue bidding up silver prices as the massive peace-time deficits by the USA erode the USD’s value and, as in 2011, silver prices could surge to eye-watering (and perhaps even irrational) levels. Conclusion I would suggest investors treat the latest high in silver prices with caution as COT Commercial traders data is not bullish and inventories data actually show increased inventories. Those of us that have been around for a few decades remember the last several times social media was blaring with doom and gloom and how that more often than not coincided with a peak in gold/silver prices.  For investors with a long time horizon, it’s fine to keep holding silver (or maybe taking some gains), but I would definitely caution new investors against rushing into silver at these prices.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2477988710"}