The silver miners’ stocks have mostly drifted sideways this year, looking vexingly comatose. Such dull price action repels speculators and investors, so they’ve largely abandoned this lackluster sector. That weak trader participation has led to silver stocks’ responsiveness to silver price moves decaying. What can shock silver stocks out of their zombified stupor? And how soon is such an awakening catalyst likely?
Silver stocks’ flatlined behavior so far in 2017 is surprising and odd. Silver-stock prices are ultimately driven by silver-mining profits, which are overwhelmingly driven by prevailing silver price levels. Silver, in turn, is slaved to gold’s fortunes, the yellow metal is the white metal’s dominant primary driver. With gold faring quite well this year despite the euphoric record stock markets, silver and its miners’ stocks should be shining.
Since silver is a tiny market compared to gold, silver’s moves tend to leverage gold’s. The best global silver and gold supply-and-demand fundamental data available comes from the Silver Institute and World Gold Council respectively. According to them, worldwide silver and gold demand last year ran 1027.8m ounces and 4337.4 metric tons. Along with average prices, these can be used to approximate market sizes.
Silver and gold averaged $17.12 and $1250 last year. Run these numbers, and 2016’s total global silver and gold markets were worth about $17.6b and $174.3b. This latest-available data shows silver’s market is literally an order of magnitude smaller than gold’s! With silver only enjoying 1/10th the capital flows of gold, silver tends to be far more responsive. Any dollar of buying or selling is 10x more impactful for silver.
The silver market’s small size is one of this metal’s greatest strengths. Compared to the vastly-larger broader markets, it doesn’t take much new buying to catapult silver dramatically higher. Speculators and investors alike usually get interested in shifting capital into silver when gold is already rallying. Silver then tends to rally much more than gold, leveraging its upside, because silver inflows are relatively larger.
Given gold’s good performance this year, silver and the stocks of its miners should’ve surged. Year-to-date gold is up 11.3%, well ahead of full-year 2016’s 8.5% gain. But instead of amplifying gold’s 2017 advance by 2x to 3x like usual, silver is only up 6.7% YTD as of this week. This makes for really poor leverage to gold of 0.6x. Last year silver rallied 15.1%, yielding still-weak-but-more-normal 1.8x upside leverage.
Silver’s serious underperformance relative to gold this year has greatly retarded traders’ interest in the silver miners’ stocks. The leading silver miners’ trading vehicle and sector-index proxy is the SIL Global X Silver Miners ETF. Because of the great profits leverage to silver inherent in the silver miners, their stocks usually amplify silver’s upside. But YTD SIL is only up 4.0%, for extremely-poor 0.6x leverage!
Gold stocks aren’t having a great year either, with their leading GDX ETF only up 11.5% YTD compared to gold’s 11.3% gains. Like silver stocks, their gains tend to multiply their underlying metal’s gains by 2x to 3x. But the gold stocks’ weak in-line performance so far in 2017 highlights just how bad silver stocks’ lagging performance is. They have been largely drifting comatose this year, hardly even responding to silver.
Silver stocks have serious problems, and they certainly aren’t fundamental. Every quarter I analyze the latest operating and financial results from the top silver miners of SIL. They will soon start reporting their new Q3’17 results, but the prior quarter’s are the latest now available. In Q2’17 SIL’s elite top silver miners reported average all-in sustaining costs of $11.66 per ounce, well below average silver prices of $17.18.
That implies hefty industrywide silver-mining profits of $5.52 per ounce. While the average silver price did slump 2.0% sequentially in Q3 to $16.84, that’s certainly no fundamental threat. Assuming flat mining costs, the silver miners still should’ve been able to earn $5.18 per ounce last quarter. That’s down 6.2% quarter-on-quarter, but is still very profitable. Fundamentals can’t explain silver stocks’ vexing malaise this year.
That narrows down the suspect list to technicals and sentiment. This first chart looks at the price action in SIL and silver over the past couple years or so. Silver miners’ responsiveness to silver moves was excellent last year, but is decaying dramatically this year. With speculators and investors abandoning this sector, it’s barely budging. That has spawned a vicious circle convincing other traders to avoid silver stocks.
Silver stocks’ troubling lethargy is new this year. Back in December 2015 two days before the Fed’s first rate hike of this cycle, silver slumped to a major 6.4-year secular low in concert with gold. Silver stocks bottomed just over a month later in January 2016 paralleling the gold stocks. SIL fell to an all-time low in split-adjusted terms that day. A couple months earlier, Global X had executed a 1-for-3 reverse split in SIL.
