At the beginning of the month, I described what I called “maximum bearishness for silver.” For the first time in at least 10 years, speculators flipped net bearish on silver. At the same time, speculators remained quite bullish on gold. I decided to initiate a pairs trade going long iShares Silver Trust (SLV) calls and SPDR Gold Shares (GLD) puts to play what I expected in due time to be a convergence between gold and silver positioning. Since then, SLV went exactly nowhere while GLD increased 1.8% – the exact opposite of what I wanted to see.

Yesterday, the Wall Street Journal published a piece called “Sliding Silver Sends Scary Signal” that pointed out the following additional extremes in silver:

  • Gold costs 82 times more than silver, the largest ratio in two years.
  • The inventory of silver stored in depositories approved by CME Group Inc. steadily increased from under 190M troy ounces a year ago to 251M troy ounces this month.
  • Hedge funds and other speculators combined are the most net short or bearish since 2006 (CFTC data)
  • Over $350M exited silver-backed ETFs in February – the largest monthly exodus since September, 2016 (Silver Institute and Thomson Reuters GFMS data).
  • Extremes tempt explanations and predictions. Given the surplus of negative headlines and bearish trading patterns in financial markets, it is easy to connect the dots from silver to dire scenarios. The WSJ pointed out that the gold/silver ratio was this high in early 2016 when fears of a Chinese economic slowdown drove a market sell-off. The ratio also reached current levels during the financial crisis in 2008.

    Yet, rather than panic over these correlations, I am looking at the potential bright side of this story. The current gold/silver ratio represented a peak twice in recent history. If history repeats, then the “mean reversion” I have been anticipating should be imminent. At a minimum, silver’s price should bottom here. Indeed a chart of the gold/silver ratio versus the price of silver provided by BullionVault shows how silver bottomed in 2008 and 2016 when the ratio hit the 80s. Moreover silver launched into a multi-year bull market after the ratio hit 80 in 2003. Before 2003, extremes in the ratio did not correlate well with movements in the price of silver.

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