SIVR Weekly: Silver Behaves Increasingly More Like A Base Metal

ETFS

Investment thesis

Welcome to Orchid’s Silver weekly report, in which we wish to deliver my regular thoughts on the silver market through the Aberdeen Standard Physical Silver Shares ETF (NYSEARCA:SIVR).

SIVR has rebounded strongly by roughly 9% since December 2019, comforting our bullish view on silver.

Nevertheless, our near-term bullish narrative has slightly changed because the behavior of silver prices has been altered since November 2019. Indeed, our cross-correlation analysis shows that silver is acting increasingly more like a base metal and increasingly less like a precious metal, which has, therefore, implications for our analysis.

Given our positive view of the macro picture for the base metals, we expect silver spot prices to enjoy upward pressure in the near term, which in turn should boost SIVR. To put it differently, we now hold the view that silver should enjoy tailwinds from the base metals space rather than from the precious metals complex.

We maintain our $19 per share target for SIVR by the end of the first quarter.

Source: Trading View, Orchid Research

About SIVR

SIVR is an ETF product using a physically-backed methodology. This means that SIVR holds physical silver bars in HSBC vaults.

The physically-backed methodology prevents investors from getting punished by the contango structure of the Comex silver forward curve (forward>spot), contrary to a futures contract-based methodology.

For long-term investors, SIVR seems better than its competitor iShares Silver Trust ETF (NYSEARCA:SLV), principally because its expense ratio is lower (0.30% for SIVR vs. 0.50% for SLV), which is key to making a profit over the long term.

Speculative positioning

Source: CFTC, Orchid Research

Speculators raised their net long position in Comex silver marginally in the week to January 14. The Comex silver spot price sold off by 4.1% over the corresponding period, suggesting the presence of selling forces elsewhere in the market.

The net spec length in Comex silver is at 29% of OI, markedly below its historical high of 57% of OI. From this perspective, we argue that silver’s spec positioning is light, which suggests that there is plenty of room for additional speculative buying pressure until we reach a “positioning” excess.

Implications for SIVR: The current light silver’s spec positioning suggests that non-commercials could push their net long exposure to Comex silver significantly, which in turn could push silver spot prices much higher. This bodes well for SIVR.

Investment positioning

Source: Orchid Research

ETF investors liquidated 79 tonnes from their silver holdings in the week to January 17, marking a second straight week of net outflows.

ETF investors have sold around 250 tonnes of silver since the start of January, on track to be net sellers of silver for a fifth straight month.

After a substantial wave of ETF buying of roughly 3,000 tonnes over June-August 2019 (absorbing around 10% of global supply), silver ETF investors have steadily cut their silver holdings since then, by a monthly average of 250 tonnes.

Nevertheless, we are not worried by the year-to-date wave of ETF outflows, which we attribute to seasonal patterns. According to our estimates, ETF silver investors were net sellers 73% of the time in January over the past ten years. In contrast, ETF investors were net buyers of silver 91% of the time in February over the past ten years.

Implications for SIVR: We expect ETF inflows to resume next month when seasonal patterns turn friendlier, which should be positive for silver spot prices, which in turn should boost SIVR.

Silver behaves increasingly more like a base metal

Our cross-correlation analysis of silver shows that silver has begun to behave increasingly more like an industrial metal and increasingly less like a precious metal over the past few months. As our chart below shows, the 1-month rolling correlation (smoothed by a 1-month moving average) of silver and other precious metals (pink line) has dropped markedly since November, while that of silver and base metals (blue line) has increased notably over the same period.

Source: Bloomberg, Orchid Research

As a result, investors should focus on the macro backdrop for the base metals complex to assess the future direction of silver prices, in our view. In this regard, we view the macro environment for base metals as positive, driven by a cyclical rebound in global manufacturing activity, de-escalating US-China trade tensions, and easy financial conditions due to a dovish bias from major central banks. This should indirectly be positive for silver spot prices.

Implications for SIVR: Our cross-correlation study shows that silver has started to act increasingly more like a base metal. Because the macro picture is positive for base metals, silver spot prices should enjoy upward pressure in the near term, which will be positive for SIVR.

Our closing thoughts

Our constructive narrative for SIVR has changed because the trading regime of silver has been altered since last November, with silver acting increasingly more like a base metal.

In this regard, we view the macro picture for base metals as positive due to numerous signs of a recovery in global manufacturing activity, driven by a noticeable policy easing shift among major central banks last year and the recent de-escalation of US-China trade tensions since the start of this year.

As we expect base metals to move higher, we think that silver will enjoy some positive tailwinds from the stronger base metals complex in the near term, leading us to maintain our constructive near-term outlook on SIVR.

We see SIVR trading at $19 per share by the end of the first quarter.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Our research has not been prepared in accordance with the legal requirements designed to promote the independence of investment research. Therefore, this material cannot be considered as investment research, a research recommendation, nor a personal recommendation or advice, for regulatory purposes.

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