Key takeaways 

 

•        Silver has organically rebalanced and is in deficit. ETFs critical, owning equivalent of 84% metal held in LBMA vaults.

•        Markets have been volatile, as P/NAV ratios and EFPs show. Yet, valuations have by and large remained within familiar ranges.

•        Not unusually, rally driven by retail/ institutional. We are bullish on fundamentals, but are concerned over speed of rally.

 

 

Silver has organically rebalanced

 

Silver had been oversupplied between 2016 and 2019, with prices then also capped. Yet, the market has gradually rebalanced on a confluence of factors, including the following: 1) miners have cut back production, 2) the perennial decline of demand from photography has been slowing and 3) demand from solar panels has risen. The last bullet in particular attracted significant investor interest in 2H20, when Biden published his manifesto, which targeted zero emissions from the power sector by 2035. To accomplish that, electricity generation would in all likelihood need to be overhauled, potentially also through an increase of investment in solar panels. Under our base case, we have silver in deficit this year, a shortfall that would carry over under Biden's plan. Given these market dynamics, we outlined that silver could rise to $35/oz this year, with a spike to $50/oz possible further down the line.

 

Markets volatile; many metrics do not show distress

 

Taking a closer look into recent price increases, investor interest has remained steady moving into 2021, with Silver Eagle coin sales and AUMs at ETFs rising YTD. Against this backdrop, news flow on Reddit has become a focal point, with some posts suggesting that market participants increase their exposure to physically backed exchange traded funds (ETFs) to remove ounces from the market, which would prompt tighter liquidity and ultimately a squeeze higher in prices. Digging a bit deeper into that, ETFs have absorbed the equivalent of 84% of metal stored in vaults linked to the London Bullion Market Association (LBMA), which is a high ratio. That said, while AUMs at physically backed ETFs have risen, many of the usual metrics, including prices/ NAVs have by and large remained within ranges seen of late. In another corner of the market, silver EFPs have also risen, but, similarly, levels have remained within familiar valuation ranges.

 

Silver is a different kettle

 

As such, any dislocations have overall been manageable. In particular, retail investor trends have not been significantly disruptive, as the NAV/price comparison shows. Notwithstanding, we acknowledge that AUMs at physical backed ETFs have risen, which points towards retail inflows. At the same time though, curves of futures, typically used by institutional investors have flipped into backwardation for some tenors, suggesting that these traders have also increased their exposure to the white metal. Ultimately, this suggests that purchases in recent days have come from both the retail and institutional space, which as such is not unusual. The speed at which prices have rallied is a concern though, with some of the traditional markets like China trading at a deep discount now. While we remain bullish on fundamentals, this is worth following because a lack of commercial buying ultimately means that the rally may come to an abrupt end once the recent strong investor buying fades. In the end, the silver market is somewhat bigger vs GameStop and an entirely different kettle.