Silver Set to Catch Up to Gold’s Gains?

There has been an “explosion” in options volume in iShares Silver Trust (SLV), the largest silver ETF

Paul Wong | August 11, 2020 | SmallCapPower: Spot silver surged $6.18 an ounce, or 33.95%, in July to close the month at $24.39, a seven-year high. Silver decidedly broke through the prior formidable resistance of $21/$22 with relative ease. The next resistance level of $26/$27 remains, but given the momentum, accumulation and further potential buying in futures, we expect this level will be surpassed soon to open the $30-$35 trade range.

(The following is an excerpt from an article originally published on on August 4, 2020)

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Most notable was the explosion in options volume in iShares Silver Trust (SLV), the largest silver ETF. Total open interest had climbed steadily to record levels. Options volume, however, has increased nine times its average daily volume, indicating that buying interest has now widened considerably, likely by larger investors that were not involved in silver earlier. We view the $21/$22 breakout level on silver as analogous to the $1,350/$1,375 breakout level on gold bullion, and the $26/$27 level on silver as the rough equivalent to $1,600 gold (see Figure 4). Silver continues to have plenty of scope for a catch-up trade to gold bullion.

Figure 4: More Upside Ahead for Silver
Source: Bloomberg. Data as of 7/31/2020.

Silver ETF Flows Reach Record Highs

The fundamental picture for silver continues to improve. As governments look to bolster economic growth, we already see fiscal stimulus directed at intensive silver areas such as solar energy and 5G networks (fifth generation technology standard for cellular networks). But the most significant surge in demand is from investor flows into silver-backed ETFs. Silver held in ETFs has increased 272 million ounces or 44.7% YTD, reaching a new record high of 878 million ounces of silver. YTD, the 272 million ounces added to ETF holdings, represents about 27% of 2019 total demand numbers.

As with the recent price surge in gold, investor interest in silver is focused primarily on the metal’s value as a store of monetary value. Investor demand for gold and silver is highly correlated to U.S. M2 money supply. Where gold buying (using Total Known Gold ETF Holdings from Bloomberg) has a 91% R-square with M2 over the past five years, silver has a still very high R-square of 79%. Silver also has an industrial component, and its correlation to copper (a proxy for cyclical growth) is quite high at a 57% R-square. By comparison, gold has almost no correlation to copper, as reflected by a 5% R-square.

Currently, silver is acting both as a store of value and leverage to economic growth, a very unusual but highly valuable quality in this current market environment. This latter point may help explain the surge in SLV option activity.

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