SLV: Silver Has Broken Out (Technical Analysis) (NYSEARCA:SLV)

SLV’s breakout

This article’s goal is to A) analyze the technical signs that the iShares Silver Trust ETF (NYSEARCA:SLV) has finally broken out a multiple consolidation pattern, and B) analyze the fundamental forces that can support even higher prices.

I will start with the technical signs first. The chart below shows SLV’s price movements in the past five years on a weekly basis. As seen, the fund has been confined in a consolidation window, or more specifically, a narrowing wedge indicated by the two blue dotted lines. As time passes, the range has become tighter and tighter as seen, indicating that a breakout is likely as it becomes more and more delicate for the buying and selling pressure to balance.

To me, the price movements in the past few weeks provide a clear sign that SLV has finally broken out of the wedge in the upward direction. The fund is now sitting substantially above the upper bounds of the wedge as seen, more importantly, the heaviest trading volume in the past five years was in the range of $20 to $21 as seen by the horizontal volume-price bar. The current price is definitively above this range.

Furthermore, my experience is that the longer the consolidation periods have dragged on, the more upside there will be once a breakout happens. In SLV’s case, the consolidation has been at least five years, quite long in my view.

Next, I will move on to the fundamental forces that can support more upside price advancements. These fundamental forces include the supply-demand dynamics of silver and the mint ratio.

SLV ETF: A quick introduction

Before diving in, a quick intro to the ETF itself, in case there are readers new to it. SLV is the largest physically backed silver ETF as far as I know. It boasts an asset under management (“AUM”) of $12.3 billion as seen in the chart below, far exceeding its close peers like the Aberdeen Physical Silver Shares ETF (SIVR) and the Sprott Physical Silver Trust (PSLV). Note that PSLV is a CEF (closed-end fund). Its expense ratio of 0.50% is higher than SIVR (0.30%) but lower than PSLV (0.60%).

As such, my recommendation is that SLV is best suited for frequent trading. For frequent traders, its higher expensive ratio can be justified by better liquidity and tighter trade spread. However, for buy-and-hold investors (like myself), SIVR is a better option because of its low fee.

Silver: Demand prospects and production cost

Silver has been serving as currency and a store of value for a large portion of our civilization. In modern age, it has kept this role. As seen in the chart below, a large portion of silver global demand is still dedicated to jewelry (a form of storing value) and simply net investment.

However, the large use of silver is now industrial, as seen in the chart below. And among its industrial use, the main drivers are expected to be the following areas, according to Silver Institute’s report:

… key drivers in this growth are being driven by a strong green economy, including investment in photovoltaics (“PV”), power grids and 5G networks, as well as increased use of automotive electronics and supporting infrastructure. Improvements in PV were particularly noticeable as the increase in cell production exceeded silver thrifting, which helped drive electronics and electrical demand higher.

With the rapid expansion of these technologies such as PV, 5G, and EV, I anticipate a rapid surge in silver demand.

In the meantime, the supply has been struggling to keep up and the current silver price is quite low compared to production cost, in my view. As seen in the chart below, total demand has been exceeding total demand since 2021, and the gap has become wider and wider. The cost of silver production is difficult to pin down and varies from miner to miner. I will quote the number from some miners just to provide a reference point:

The production cost can vary substantially depending on many factors such as mine location and efficiency, ore grade, byproduct vs. primary metal, et al. With such variations in mind, an all-in sustaining costs (“AISC”) for Endeavour Silver is estimated to be in the $22-$23 range (based on per ounce of silver) in 2024.

The current silver price is around $28 as of this writing, which is not that far above the production cost in my view considering the surging demand, the supply shortage, the uncertainties of production (labor strikes, geopolitical conflicts, etc.), and also the ongoing inflation that tends to driver up production costs.

The mind ratio

Finally, another catalyst that could support a higher SLV price involves the mint ratio, which suggests now is a really good time for a silver-gold trade. The concept is detailed in my earlier article, and the gist is that:

The trade simply involves selling a certain amount of gold to buy silver when the silver price appears more attractive relative to the gold price, and vice versa. The key metric to evaluate which metal’s price is more attractive is the so-called mint ratio (“MR”) or the gold-silver price ratio (“GSPR”).

The current MR stands around 90x as seen in the chart below. To better contextualize things, the average MR is only about 64.9 in the long term, far below the current level of 90x, suggesting a very favorable silver price relative to gold.

Risks and final thoughts

Investment in SLV entails the risks common to all commodity funds. The SLV ETF does not generate any cash flow or dividends. Actually, storing and insuring the physical silver bars costs money and hence creates a negative cash flow, as reflected in SLV’s relatively high fee (especially compared to index stock of bond ETF funds). Also, the IRS considers ETFs backed by physical precious metals such as SLV (and SIVR too) as collectibles for tax purposes. As such, capital gains from SLV (even if it’s long-term gains) can be subject to a higher tax rate than other investments (such as stocks or bonds).

All told, I think the upside potential under current conditions can easily over the above issues and deliver a healthy return. To recap, I see both strong technical signs for SLV’s price breakout and fundamental catalysts to support a much higher price. The fundamental catalysts are the potential demand surge for silver’s industrial usage, the supply-demand imbalance, and the very favorable mint ratio.