An Extended Silver Rally Is Unsustainable

(Bloomberg View) -- The weekly Commitment of Traders data from the Commodity Futures Trading Commission for the week ended April 11 had indicated that large speculators and traders, known as non-commercials, representing hedge funds, technical traders and other portfolio managers, continued to boost their bullish net positions in the silver futures markets for a third consecutive week.

Non-commercial Comex silver futures contracts totaled a net position of 105,515, representing a weekly gain of 4,133 contracts from the previous week’s total. This number was significant because it brought the net position to the most bullish speculative level on record and marked the second consecutive week with contracts above more than the 100,000 net level. Over those three weeks, silver speculative positions have grown by 26,403 net contracts.

The most recent data broke the three-week bullish trend, as long-only positions fell 3,882 lots to 110,269 for the week ending Apr. 18. Nevertheless, short-only positions fell 1,582 lots to 13,724, making the total the lowest in three weeks.

An Extended Silver Rally Is Unsustainable
Source: Countingpips/CFTC

As for the non-speculative positions put on by commercial traders that are hedging or engaged in buying and selling for business purposes, those fell by 114,414 contracts last week as they took advantage of higher prices.

In addition to bullish signals in the futures markets, there are a number of macro trends that should support silver in the near- to medium-term, but not necessarily dictate significant or sustainable rallies. The first has to do with one characteristic of the metal that has generally stayed consistent over time -- its positive correlation to the gold price. Of course, there have been exceptions, such as the December 1980 Hunt Brothers squeeze.

This correlation exists not just because silver and gold are both precious metals but rather that one is a biproduct of the other. When mining for one, the other tends to show up in the earth’s concentrate, in varying ratios. So as producers mine for one metal, the supply of both tends to increase. Furthermore, demand for both metals coincides with the strength of the global economy.

An Extended Silver Rally Is Unsustainable
Source: Macrotrends

Silver (orange line, RHS), Gold (blue line, LHS)

As a result, it only makes sense that the silver market is experiencing a nice rally along with its first cousin, gold. And that correlation effect will continue to boost silver, so long as the markets are looking for a safe haven from North Korean nuclear threats, Russian hacking, rising European populism and inconsistent U.S. presidential tweets. 

And along with these tweets, President Donald Trump recently argued that the U.S. dollar was too strong and Treasury Secretary Steve Mnuchin championed that idea. A weaker dollar, and/or expectations that it will falter, signal higher commodity prices.

Further, emerging markets are swinging back after a difficult stretch for the past few years. Their currencies are strengthening; commodity prices have stabilized, helping EM producer nations; and structural reforms are taking root. India and China in particular are major fabricators and consumers of silver.

Finally, while global demand for silver in many sectors has been lagging, one industry in which silver has benefited is photovoltaic cells. The solar energy sector purchased 11 percent more silver in 2016 than the year prior, and the industry is expected to hold strong in 2017, according to analysts. This benefit, however, is not likely to carry through in succeeding years, due to a slowdown in new PV installations. Furthermore, new PV cells need only one-fifth as much silver in 2016 versus a decade before, according to the International Technology Roadmap for Photovoltaic, known as ITRPV. And PV panel manufacturers will likely continue to reduce the quantity of silver pasted on the front and back of each cell, as research is pushing to substitute the precious metal with cheaper copper.

In the long term, there are other industries in nascent stages where silver could become the optimal material for usage on a commercial scale, including the “Internet of Things,” OLED lighting, and in various medical applications due to its powerful antibacterial qualities -- albeit, don’t expect sizable volumes.

An Extended Silver Rally Is Unsustainable

Surely there are many factors involved in the assessment of silver prices, including silver ETPs, physical demand (bars, coins, medals), vault stocks, industrial fabrication, the jewelry industry and scrap supply. But from a high level macro-view, silver prices have good support and greater potential on the upside. 

The probability of seeing silver price spikes or extended rallies in the short to medium term, nonetheless, is low and unsustainable. Thus it is advisable to sell on rallies and dip back in on setbacks, or better yet, trade volatility over price for the time being.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shelley Goldberg is an investment adviser and environmental sustainability consultant. She has worked as a commodities strategist for Brevan Howard Asset Management and Roubini Global Economics.

To contact the author of this story: Shelley Goldberg at

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