SIVR Weekly: Great Upside Potential

Investment thesis

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

SIVR is in a bullish posture, reflecting strong safe haven demand for silver in the current uncertain macro environment.

ETF demand for silver has increased massively so far this year, offsetting the decline in industrial demand.

While the wave of speculative selling in the silver futures market has come to an end since May, we expect speculators to build long positions at a more aggressive pace in the coming months.

We expect silver to outperform gold in the second half of the year, as silver has more catch-up to play relative to gold. Indeed, the gold-silver ratio is still too high judging by historical standards.

Our 3-month target for SIVR is at $20/share.

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 SLV, principally because its expense ratio is lower (0.30% for SIVR vs. 0.50% for SLV), which is key to make a profit over the long term.

Macro

Silver tends to be more responsive to changes in short-term US real rates. The co-movement between SIVR and the 5-year US TIPS yield is fairly tight, as can be seen below.

Source: Bloomberg, Orchid Research

Like gold, silver has shrugged off the appreciation in the dollar since June.

Implications for SIVR: We argue that short-term US real rates are the main driver for SIVR at present. The notable decline at the front end of the US real yield curve is bullish for SIVR.

Speculative positioning

Source: CFTC, Orchid Research

The speculative community left its net long position in COMEX silver essentially unchanged in the week to June 30, according to the CFTC.

Although the COMEX silver spot price is a little higher on the year (+3%), speculators have slashed the equivalent of nearly 5,000 tonnes of net long positions in COMEX silver over the same period. This represents around 18% of the annual supply. This explains the underperformance of silver prices compared to gold prices.

Source: Bloomberg, Orchid Research

We think that a positive swing in sentiment has emerged since May, meaning that speculators are likely to re-build long positions in COMEX silver at an increasing pace in the months ahead.

Implications for SIVR: The speculative community has plenty of dry powder to deploy on the long side of the futures market to push the COMEX silver spot price significantly higher. This is very positive for SIVR.

Investment positioning

Source: Orchid Research

ETF investors bought silver at a significant pace (+458 tonnes) in the week to July 3, according to our estimates. This was the 16th straight week of ETF buying and the largest weekly net inflow since May.

The increase in silver ETF holdings since the start of the year has been massive, especially since Q2, highlighting a clear positive swing in investor sentiment.

Investors have expressed strong buying interest for silver, owing to its safe haven characteristics and its relatively cheaper price than gold. Looking at the gold-silver ratio, silver remains too cheap relative to gold.

Source: Bloomberg, Orchid Research

Implications for SIVR: The increase in investment demand for silver has more than offset the decline in industrial demand for silver so far this year, despite the fact that industrial demand for silver represents 50% of the total silver demand. HSBC forecasts a deficit of 154 million ounces this year. This is positive for SIVR.

Our closing thoughts

Gold and silver tend to respond to the same macro factors. While gold is more dependent on long-term US real rates, silver tends to be more sensitive to short-term US real rates.

The sharp decline in US real rates in recent months has boosted meaningfully investment demand for silver, offsetting the contraction in its industrial usage. Nevertheless, silver remains too cheap versus gold, probably because speculators have only slowly re-built fresh long positions in COMEX silver since May.

Given the friendly environment for gold and silver and the positive momentum in silver, we expect the speculative community to turn more aggressively bullish on silver, resulting in stronger speculative demand for silver in the months ahead.

This should result in the outperformance of silver over gold in the months ahead, making us even more bullish on SIVR.

Our max target for SIVR over the next three months is $20/share.

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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.

Source: Seeking Alpha

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