Introduction:
Silver, often considered the ‘poor man’s gold,’ has faced a challenging period over the past three years. The price of SLV, the largest silver ETF, has been on a slow decline, closing at $24.93 on September 18th, 2020, and now resting at $21.23, marking a 15% drop. However, the time for change appears to be upon us. In this blog post, we’ll delve into the compelling reasons why we believe silver is poised for a remarkable resurgence, with a projected gain of at least 50% over the next twelve months.
A Three-Year Erosion:
A glance at a five-year SLV chart reveals a horizontal, red arrow highlighting the past three years’ slow erosion in silver prices. But the exciting part is the upward-sloping red arrow on the right side, which represents our expectation for SLV to reach $32 per share, signifying a potential gain of around 50%.
Relative Strength Analysis:
The green curve at the bottom of the chart reflects the relative strength of SLV over the last five years. Currently, it stands in the middle range, indicating that SLV is neither oversold nor overbought. This neutrality creates a strong foundation for an upward price movement.
Money Managers’ Short Positions:
An essential long-term indicator is the percentage of short positions held by money managers in silver futures. As historical data demonstrates, a high short position has historically foreshadowed major rallies in the silver market. Three instances on the graph show high ratios preceding significant price advances, with the most recent being last October’s price low.
Today, while the ratio is not at an extreme level, it remains relatively high, especially considering the eight-month rally. This suggests that last October’s buy signal still holds weight and implies that a reversal is not yet on the horizon.
Put Option Purchases:
The “puts to calls” ratio is a well-established market indicator that reveals investor expectations. It works as a contrary opinion indicator, meaning that heavy put buying typically indicates that investors expect prices to go down. In contrast, high levels of put buying often serve as a positive indication for higher prices.
We’ve adopted a slightly modified approach to this classic indicator, dividing the amount of money invested in put options by the amount in call options and forming a twenty-day moving average. The chart clearly demonstrates that peaks in the ratio, representing increased put buying compared to call buying, usually precede SLV price increases.
The current ratio is the highest in four years and has maintained its high range for two months, which further strengthens the belief that silver prices are gearing up for a substantial upward movement.
Conclusion:
In summary, the silver market has been stuck in a downward trading range for the past three years, but multiple key indicators suggest that this period of erosion is coming to an end. Both the high short positions held by money managers in silver futures and the soaring amounts of put buying in SLV indicate that silver is ready to break out in a significant upward move.
This resurgence aligns well with the strong buy signal observed in gold (GLD). Our projection is that silver prices are set to reach $32 over the next twelve months, marking a potential gain of approximately 50%. So, for those considering silver as an investment, now may be an opportune time to ride the forthcoming silver surge.
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