Silver and the SLV ETF: A Bullish Outlook with Room for Further Gains

General Discussion 2 replies 0 votes 2236 views Tags:  Bull MarketCommoditiesInvestingOption MarketsPrecious MetalsRisk-Adjusted ReturnsSilverSLV ETFUndervaluation
uyong jain 12 months

I would like to share my bullish perspective on silver and the iShares Silver Trust ETF (SLV) with you. In recent years, I have maintained an optimistic outlook on silver due to its undervaluation compared to gold and other commodities. While silver has recently experienced a significant rally, I believe there is still room for further growth. Historical data indicates that silver has often surpassed its fair value during previous bull markets, leading me to believe that history could repeat itself.

Let's focus on the SLV ETF. It has demonstrated a close correlation with the spot price of silver, exhibiting minimal tracking error. With an expense fee of 0.50%, it offers a more cost-effective alternative to purchasing physical silver. However, it is worth mentioning that there are competing ETFs such as the abrdn Physical Silver Shares ETF, which features slightly lower fees. The SLV ETF stands as the largest and most liquid silver ETF, currently managing assets worth $11.4 billion. It's worth noting, however, that the number of ounces under management has decreased by over 30% since the silver short squeeze event influenced by Reddit in January 2021.

The recent rally in silver, starting from its lows in 2022, reflects a reduction in its undervaluation relative to gold and the broader commodity index. In October, silver was trading approximately 40% below its fair value; however, it is currently undervalued by less than 10% based on its correlation with a 50:50 basket of gold and commodities.

Despite the ongoing decline in the commodity complex, silver has shown significant gains. Industrial metals, on the other hand, have not participated in the silver price rally. Nevertheless, my bullish sentiment towards silver remains. The recent recovery in risk appetite, driven by weak CPI data and falling interest rate expectations, has contributed to a decline in the value of the dollar and an increase in real assets. This shift should provide support for silver and the SLV.

It is important to acknowledge that silver bull markets typically come to an end when the metal becomes overvalued compared to gold and other commodities. When examining past bull market cycles, silver prices have spiked into overvalued territory prior to the conclusion of those markets. Therefore, it is reasonable to expect a similar scenario before the current bull market reaches its peak. Currently, options markets suggest low levels of implied volatility, indicating that silver bulls can make significant upside bets at a relatively low cost, potentially leading to further gains.

Some may have questions about the seemingly contradictory views on silver and gold. Since silver and gold are closely correlated, it is unlikely to witness a rise in silver prices while gold experiences a decline. In fact, silver tends to weaken in relation to gold during periods of falling gold prices due to its higher volatility. However, the key point here is the risk-reward trade-off. My objective is to capture the outperformance of silver in risk-adjusted terms. Over the past two decades, there have been instances when silver outperformed gold, even considering its higher volatility. I anticipate a similar outperformance, potentially manifesting through a spike in silver prices.

To summarize, the SLV ETF has a commendable track record of tracking the spot price of silver with minimal tracking error and reasonable fees. Silver bull markets have historically concluded with a spike higher, and the positioning of the options market suggests that there is potential for such a move, which investors may be underestimating. Overall, I maintain a positive outlook on silver, expecting it to continue rising from its undervalued levels.

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