SLV: Sign of Surrender (NYSEARCA:SLV)


The Fed’s tightening cycle has kicked silver prices, which have trailed gold and the commodity complex at record highs over the past four months. However, there are now some signs of a possible surrender in the metal, and i took the opportunity to sell my long positions via the iShares Silver Trust ETF (NYSEARCA:SLV). The ETF, which has tracked spot price with a mean 12-month tracking error of just 0.48%, should continue to offer investors direct exposure to the metal. With an expense charge of 0.50%, this is far lower than the spreads when buying the physical metal. SLV is the largest and most liquid silver ETF but compared to others like the Aberdeen Standard Physical Silver Shares ETF (SIVR). Since the most recent peak in April, SLV has seen its ounces under management fall by 20%, underscoring the magnitude of the drop in speculative demand for the metal.


SLV price vs. SLV assets under management (Bloomberg)

Speculators are bearish, which is a contrarian signal

Silver’s net non-commercial positioning is now negative, which has only been about 6% of the time over the past 30 years. While not a perfect contrarian indicator, there is certainly evidence that bearish speculative positioning tends to lead to strong subsequent returns. Of the 84 cases where net specs were negative over the past 30 years, the average 12-month return was just over 12%. This compares to a 9% annual return on all occasions. Furthermore, the maximum 12-month gain was 82%, while the maximum 12-month loss was only 15%. Evidence therefore suggests that bearish speculative positioning is a reasonable contrarian indicator, pointing to a strong improvement in the risk-reward outlook for the metal.


Non-Commercial Positioning of Silver Net (Bloomberg, CFTC)

Valuations are at rock bottom

Another positive sign for silver is how cheap the metal has become compared to both gold prices and the broader commodity complex. As the chart below shows, there has been an incredibly strong correlation between the price of silver and a 50:50 basket of gold and the Bloomberg commodity index over the past 20 years. Over the past year, this correlation has broken down, with silver selling off sharply, even though gold prices have remained relatively elevated and the commodity complex has risen significantly. In part, this may reflect supply issues in other industrial commodity markets, which have a greater impact on prices given silver’s high inventory-to-consumption ratio relative to silver.


Bloomberg, author’s calculations

Irrespective of this, I continue to assume that the long-term correlation will be confirmed again. Of course, given how elevated commodity prices in general have gotten and the headwinds facing gold from the Fed’s tightening cycle, there is a risk that gold and commodity prices will “catch up” to silver prices, and further silver price weakness cannot be ruled out will. This is especially the case when we see a market panic and a fight for cash like we saw during the 2008 global financial crisis.

Monetary conditions are getting too tight for the Fed to ignore

However, I firmly believe that any further signs of disinflation are likely to be met with a reversal of Fed policy in favor of supporting asset markets. Although it doesn’t appear so due to the large gap between the trailing CPI and the Fed’s current policy rate, monetary policy is now very tight. As I wrote about it in ‘STIP: 3 reasons to lock in these real returns‘ The continued rise in short-term interest rates has been accompanied by a collapse in inflation expectations, resulting in the highest short-term real yields since the peak of the Covid crisis. Any sign that the Fed is ready to ease its tightening campaign is likely to result not only in bond yields falling, but also in a recovery in inflation expectations, which would result in a sharp drop in real yields. I wouldn’t be surprised if real bond yields dip back into negative territory by the end of the year as the economic damage being caused by more restrictive policies is becoming more evident, which would strongly support demand for silver as a store of value.


The SLV has taken a hit in recent months and speculators are betting on continued weakness as the Fed tightened liquidity further. A negative non-commercial net positioning has been a strong contrarian indicator of silver price strength over the following 12 months and combined with how cheap the metal has become I believe the risk/reward outlook is very favorable here . Much will depend on how long the Fed can tighten further despite mounting signs of disinflation and economic weakness. However, I believe we are at or near the peak of the tightening cycle and any sign of the Fed moving to prioritizing asset prices over inflation could result in a significant short squeeze in silver and by extension the SLV.

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