Silver on the Upswing Since Early September 2022

In a December 6 Barchart article, I highlighted that “Silver can be a speculator’s dream or nightmare.” In that piece, I wrote, “silver can perform as gold on steroids because of its speculative attraction and history of explosive and implosive price behavior.” On December 6, nearby COMEX silver futures were sitting around the $20.50 per ounce level. Since then, the price has continued to make higher lows and higher highs. After reaching $24.775 per ounce on January 4, silver futures have consolidated around the $24 level. 

Silver’s rise has been slow and steady, but we could see the metal kick into high gear over the coming weeks and months. 

Silver finds a bottom at the 2021 and 2022 low

In 2022, the nearby silver futures on the CME’s COMEX division posted a 2.95% gain, thanks to a 26.27% increase in the final quarter. Silver futures settled at $24.04 per ounce on December 30, 2022, and were slightly higher on Friday, January 13. 

The chart shows silver futures fell to $17.32 in late August/early September 2022, the lowest price since May 2020. Silver ran out of downside steam at the over two-year low and took off on the upside, with the price trading above the $24 level in mid-Janaury.   

 

The fundamental and technical factors supporting silver

Silver had been in a bearish trend, making lower highs and lower lows from February 2021 through September 2022. The break above the May 2022 $22.41 technical resistance level turned the bearish trend bullish. 

The following fundamental factors support silver in early 2023:

• Silver has many industrial applications. Silver demand should continue to rise as the world embraces a greener energy path, given its requirements in photovoltaic cells that convert sunlight into electricity. Solar panels require increasing amounts of silver. 
• Silver is also required for cars, electronics, soldering and brazing, engine bearings, medicine, water purification, jewelry, and batteries, and it has many other applications.
• From a financial perspective, silver and gold have long histories as hard money and financial assets. Silver and gold outperformed stocks, bonds, cryptocurrencies, real estate, and most other assets in 2022, validating the metals as stores of value. 
• Trend-following traders and investors tend to flock to silver when the price begins to trend. Silver’s penchant for volatility attracts speculative interest. 

Silver has been a financial and industrial asset for thousands of years. The Bible mentions gold 417 times and silver 320 times. Silver and gold have been a sign of wealth and financial stability for thousands of years. 

The ultimate price targets

Forty-three years ago, in 1980, nearby COMEX silver futures reached their all-time peak.  

The chart highlights silver’s record high at $50.36 per ounce. Silver attempted to reach that price in 2011 but stopped 84.0 cents short when it reached $49.52. The 1980 high is the ultimate upside target. 

Meanwhile, after the 1980 peak, silver spent decades, from 1983 through 2006, trading primarily below $10 per ounce. At the turn of this century, silver was around the $5 level and fell to $4 in 2001 before taking off on the upside. 

Silver has not traded below $10 in fourteen years since 2009. 

Silver has parabolic potential 

The long-term chart shows that the silver futures market experienced parabolic rallies in 1980 and 2011. In January 1976, silver futures traded as low as $3.80 per ounce before exploding over 1225% to $50.36 four years later in 1980. 

The global financial crisis sent nearby silver futures prices to an $8.78 low in October 2008. In April 2011, two and one-half years later, silver futures reached $49.52, a parabolic 464% rise. Silver’s most recent significant bottom came during the start of the worldwide pandemic in March 2020, which sent the futures to an $11.735 per ounce low. Since then, the precious metal has made higher lows and could be on a launchpad to test the 2011 and 1980 highs. The latest move from $17.56 on March futures on September 1, 2022, to over the $24 level has caused the nearby open interest metric to rise.  

The chart shows the increase in the total number of open long and short positions in the COMEX silver futures market since early September. Ascending prices and increasing open interest tend to validate a bullish trend in a futures market. 

Mining and exploration stocks could outperform- SILJ has some catching up to do

Most silver production comes as a byproduct of other metal output. Gold, copper, zinc, and lead mines produce 73% of annual silver output as secondary metal, and only 27% comes from primary mine production.

Silver miners can be senior or junior producers. The seniors tend to extract silver from the earth’s crust, while the juniors explore for reserves. Mining is a highly speculative business as it involves massive capital investments to find silver and then produce the metal at a lower cost than the market price. Therefore, silver mining and exploration companies tend to outperform silver prices on a percentage basis during bull markets and underperform when prices decline. 

The Global X Silver Miners ETF (SIL) holds shares in the leading silver mining companies. The top holdings include:

At $31.24 on January 13, SIL had $1.049 billion in assets under management. SIL trades an average of over 510,000 shares daily and charges a 0.65% management fee. 

The ETFMG Prime Junior Silver Miners ETF product (SILJ) has a portfolio of the leading junior silver miners and exploration companies, including:

While there is some overlap, SILJ tends to be more speculative as exploration companies involve more risk, which can translate to higher reward levels when silver prices move appreciably higher. Conversely, bearish periods in the silver market can lead to significant underperformance as exploration activities decline or stop. 

At $11.71 per share on January 13, SILJ had over $780.97 million in assets under management. SILJ trades an average of nearly 1.6 million shares daily and charges a 0.69% management fee. 

If silver is heading significantly higher in 2023, SIL and SILJ are mining ETFs that will likely go along for the bullish ride and could outperform the precious metal on a percentage basis. Silver turned higher in early September 2022, and the trend remains bullish in early 2023. 

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