Battered silver remains deeply out of favor, recently plumbing miserable new lows after drifting sideways for most of 2014. This metal’s relentless and oppressive weakness continues to break the wills of long-suffering contrarians. But professional investors are taking advantage of the epically-bearish psychology plaguing silver. They’ve been steadily accumulating positions all year long in massive stealth buying.
Silver certainly wasn’t always a loathed market pariah. Back in early 2011, silver blasted up above $48 on widespread enthusiasm from investors and speculators. It was one of the 2000s’ greatest bull markets, up an astounding 1105% during a 9.4-year span where the benchmark S&P 500 limped to a 20% gain. The brave contrarians fighting the herd to buy silver low in the early 2000s greatly multiplied their wealth.
But in spring 2011, silver was getting very overbought and euphoric. As I warned at the time, it needed to suffer a sharp correction to rebalance sentiment. And it did, plummeting in a near-crash which is typical for this exceptionally-volatile asset. But that left silver very oversold so it soon stabilized. This white metal averaged about $35 in 2011 and $31 in 2012, and contrarian investors maintained sizable positions in it.
But silver’s primary strength and weakness is it has always been slaved to gold’s fortunes. Silver traders look to gold for their trading cues, so the white metal leverages the yellow metal’s upside and downside. And unfortunately due to a major support failure and mind-boggling gold-ETF liquidations, gold suffered its worst quarter in 93 years in 2013’s second quarter. Silver was sucked into this maelstrom of gold selling.
By late June 2013, silver had plummeted 39% year-to-date! And that happened while the S&P 500 was able to surge 13% higher thanks to the Federal Reserve’s third quantitative-easing campaign. Investors and speculators alike abandoned silver in droves after this horrendous performance. Bearishness was off the charts, and silver essentially just drifted sideways near the summer of 2013’s lows until this past month.
Then lingering precious-metals bearishness combined with a surging US dollar and levitating US stock marketsto motivate American futures speculators to borrow and sell gold futures at extreme levels. But while gold’s strong support since the summer of 2013 held, silver’s failed. Silver is gold’s best sentiment gauge, amplifying both greed and fear in the yellow metal. And the latter emotion has been suffocating lately.
So with silver now super-low and despised, it seems like no one wants anything to do with it. There is a widespread belief that silver is no longer cyclical, that it is doomed to spiral lower forever. Not even the majority of contrarian investors, who claim they like buying out-of-favor assets cheap, will touch silver with a ten-foot pole. It has been left for dead, starved for capital in a parched wasteland of hyper-bearish sentiment.
But provocatively, such extremes are exactly what major bottoms are made of. Bearishness is finite, at some point everyone susceptible to being scared into selling low has already dumped their silver. And there are only so many futures speculators willing to make leveraged short bets against it near 4.5-year lows. Once bearishness and selling inevitably peak, a major new upleg is born as bargain hunters start returning.
This post was published at ZEAL LLC on October 24, 2014.