December 13, 2022 (Investorideas.com Newswire) Expert Michael Ballanger revisits silver as both a monetary and industrial commodity to tell you where he believes the metal is headed.
It has been over twenty-two months since I have written about silver, a metal that has caused us all fits and starts since the notorious “Silver Squeeze” campaign of late February 2021 when the Reddit gang made the disastrous decision to challenge the bullion banks to a game of trading-ring “chicken” in the same manner that they forced short squeezes in stocks like Best Buy and Gamestop.
I cannot recall a single profitable encounter with the silver market since the summer of 2020, and I know for an excruciating fact that the four or five times I tried to scalp it for a few hard-won dollars, it turned right around and sent me scurrying for the ATM to replenish my trading capital, hair ablaze and eye sockets bleeding.
In inflationary bull markets such as the 1970s or the 2001-2011 Great Commodity Supercycle, silver traded beautifully, with peaks in 1980 at US$51 (up from US$1.50), 2008 at US$20 (up from the low US$4’s) and in 2011 at US$47 (up from the low US$9’s).
Fortunes were made by the few, while gut-wrenching losses were taken by the many, as silver has a very dangerous habit of luring in novice traders at or near major tops while repelling those same people at or near major bottoms. Even the professionals like TD Bank got hoodwinked by the shiny metal’s alluring powers when they took out a “tactical short” in silver above US$20/ounce in August, “looking for US$17,” only to get stopped out in late November for a 14% loss.
Silver is a Chameleon
Silver is a chameleon of sorts, taking on the visage of a monetary metal one moment, then transforming itself into an industrial metal the next and when one least expects it. This would explain the near one-to-one correlation between the price of copper and the price of silver during certain periods when economic conditions are tilted toward global growth or accelerating inflation.
During the 1970s, when silver soared from US$1.50 to US$50, only in the latter part of the decade did copper catch a bid during the final spike in U.S. inflation, moving from US$0.60/lb. to US$1.50/lb. in 24 months.
Over the past twenty-five years, copper and silver have enjoyed a close correlation with similar spikes in 2008 and 2020 and all occurring just prior to tail-risk events such as the Sub-prime meltdown and the Covid Crash.
While this seems to validate silver’s image as an industrial metal, in the initial launch of the Great Commodity Supercycle of 2001-2008, silver and gold moved in tandem more than silver and copper, creating the illusion of silver being more monetary than industrial. Whatever the case may be, I believe that it is time to revisit silver for what is shaping up to be – finally – a stellar performance in 2023.
Three Players Affecting Silver
What will set silver apart in terms of performance is that I believe that 2023 will see three powerful drivers kicking into play and bearing down with a vengeance upon not only silver but also the other metals, most notably copper, that are suffering from longer-term fundamental supply problems, having been forced to bypass the normal CAPEX cycles that replenish global reserves.
We can thank the ESG movement for this critical error in economic planning because it makes no sense to expect electrification to supplant ICE’s without an increase in copper usage.
Erecting roadblocks to permitting exploration and development is counterintuitive to the process of reducing carbon emissions, but that is exactly what has been happening for the past decade, causing shortages to pop up across the metals (and energy) spectrum placing huge stresses upon availability and price.
Followers of my work know that I am a huge copper and uranium bull, but silver is a completely different beast because it will be free of the headwind of central bank tightening at some point in the first half of 2023, thus benefitting from the rebound in industrial activity in North America and abroad. Driver number three will be full-on monetary as the egregious levels of sovereign debt on balance sheets around the globe will exert enormous pressures on the purchasing power of all fiat currencies and drives hard assets into the hands of the new generations of investors.
Three powerful drivers – monetary, industrial, and supply-related – are going to come to bear upon both demand and availability of silver in 2023 and beyond, which would suggest that since we have seen all-time highs for many of the base metals as well as gold in early 2022, it would not be a stretch to expect silver to rise to ATH’s above US$50/ounce by the end of next year.
Near-term, there is a great deal of resistance in the US$26.50 and US$30.00 levels, with US$26.50 a support level from 2013, where the Sunday Night Massacre crushed the metals thanks to a concerted effort by global bullion banks under orders from the central planners. The US$30 level was where the #silversqueeze originators were thrashed like rented mules, and it is at US$30 that it will require serious volume in order to set up the run to new highs.
The Narcotic Imbued by the Word Silver
So now that I have pled the case for silver ownership, the really difficult part arrives, and that is “What is the best way of playing the move to $50?” and the answer lies in one’s risk tolerance level.
For the “riverboat gambler,” there are the futures markets where one can speculate on the “big silver” contract (5,000 ounces) or the “mini-silver” contract (1,000 ounces). I knew a futures trader back in 1980 that went long one “big silver” at US$15/ounce with the idea of adding one additional contract with every US$5 move, using the added equity in his account to cover the increase in maintenance margin.
This worked wonderfully for a few weeks on the move to US$35/ounce, where he had moved to a five-contract position and US$250k paper profit with his target price of US$50/ounce firmly planted in his head.
Well, as it would turn out, silver did hit US$50/ounce In 1980 but what my Mississippi Punter did not expect was the six-day shakeout that took silver from US$35 to US$25, bringing down upon him a margin call which he could not meet forcing a complete liquidation and wipe-out of account equity. Imagine that.
You call for a move from US$15 to US$50 and lose US$10,000 in the process despite being 100% right. Such are the perils and pratfalls of the CME/CBT arenas.
For the sleep-deprived, there is the physical market where 100-ounce bars can be kept in a safe in your closet (along with the Sam Bankman-Fried wardrobe of fifty T-shirts and three pairs of sneakers). One can own any number of “physical silver ETFs” that all claim to have actual silver in their vaults but who rarely, if ever, get audited.
You can also elect to use the senior silver producers (PAAS:US, CDE:US etc.), where hopefully they have not been forced by lethargic markets to switch into lithium or crypto or the juniors who most certainly have been tempted to vacate their primary venue in favor something – anything -that can keep them alive.
Lastly, the group that falls into the wheelhouse of the steamship card sharks are the silver exploration companies, whose fortunes have been on a par with those of the crypto exchange speculators due to the most appalling sentiment numbers for silver that I had ever seen (up until late September).
However, it is the highly-speculative junior explorers that have earned them the reputation of being like “junior gold explorcos on steroids and amphetamines chugging Red Bulls.” In fact, if you think that the move in cannabis and crypto stocks have been poster children for the presence of “irrational overexuberance” brought on by those obscene amounts of stimulus cash doled out like confetti at an Italian wedding, wait until silver catches that all-important bid once it clears US$30. The life-changing narcotic imbued by the word “silver” is like nothing you have ever experienced once it enters the “mania phase.”
An Anecdote About Silver Hypnosis
As I love anecdotes, I will relate my first encounter with the haunting hypnosis that accompanies silver. It happened in 1979 when an analyst I knew back in the day was having a few beers with us down at the “Lock and Key” at the bottom of the Commercial Union Tower in Toronto. We were all talking about the big gold names when “John” decided to interrupt and tell the table all about a little junior called “Dolly Varden Silver” (do not confuse it with the one listed today on the TSX Venture) that had a large silver resource way up in the Canadian Yukon.
Silver was still around US$8/ounce, but Dolly Varden’s resource had a cost of production estimated at around US$18 per ounce, which was precisely why the shares were priced at CA$0.35 per share. Nobody expected silver to see anything close to US$10, let alone US$18, but “John” argued that the risk-reward ratio favored a position because, as he said, “What if silver does hit US$20, or US$30, or US$50?”
There were only 5 million shares issued (after about two dozen rollbacks in the prior ten years), so the share structure offered enormous leverage in the event that the seemingly impossible actually came to pass. Being a relative youngster at the time, I scrounged up a few meaningless questions for “John” (to make myself appear “smarter”). After a table full of rolling eyes disappeared, the group disbanded and went on their wobbly way.
That was the last I heard or thought of Dolly Varden Silver until about six months later when my phone rang and on the other end was none other than “John,” who was calling me to see if I wished to participate in a private placement on one of our firm’s “senior underwritings.”
Before I proceed, in the six months since the giggle juice contest at the Lock and Key, silver had exploded to over US$40/ounce, and the Coeur d’Alene’s of the world were all screaming at record highs (while futures traders were getting margin calls) and since I was a “gold guy,” my South Afrikaan Golds were making us huge money, and I was pretty much unaware of the other names.
You can imagine the shock when “John” faxed me the terms sheet for that “Senior Underwriting,” and the name of the company turned out to be none other than “Dolly Varden Silver” with the issue price at CA$28.00 dollars per share. Six months prior to that, I had been handed the name on a beer-soaked napkin at CA$0.35 per share, and here they were raising US$5,000,000 for “General Working Capital Purposes” at a price 80 times the price on the bar rag.
Now, it must be known that I, for one looked back on this entire event about two years later and postulated as to the reason the “Use of Proceeds” was not “Mine Construction” or “Exploration and Development of the Dolly Varden Project” but rather “General Working Capital Purposes” and the reason became starkly apparent by Summer 1982.
You see, it was literally within weeks that silver topped out at US$50/ounce and proceeded to crash to under US$5/ounce, throwing the feasibility of the Dollar Varden Project onto the trash heap of broken dreams and failed promises. So, management cleverly inserted “General Working Capital Purposes” because they seriously doubted the longevity of a US$18-plus silver price, and by not pigeonholing the new funding to the actual silver project, it was “free to spend” in other areas.
However, the next time I saw “John,” he was pulling out of the underground parking at the TD Centre in his brand-spankin’ new Bentley convertible with the chrome hubbies and a license plate that spelled “DOLLY” on it. God Bless Capitalism …
I applied the “Dolly lesson” in 2001 when I turned bullish on gold and proceeded to buy a basket of junior explorco’s that all had remote deposits with costs of production north of US$500/ounce. With gold then under US$300, these were all “penny dreadful,” and there was nary an analyst that was brave enough to even mention them, let alone initiate coverage.
By 2008, these names were all trading well north of US$5 per share and were all raising big dollars thanks to the shifts in sentiment. The lesson of Dolly Varden Silver is a lesson that can be applied today: Buy a basket of junior silver developers that cannot make a plug nickel today at US$23.50/ounce but who will make huge money at US$35. (I have a list going out in January to all subscribers (wink, wink).
Shift Portfolio Assets Into Silver Developers
While I do not believe that there is a world shortage of silver, it is important to remember that the vast majority of annual silver production is derived from much larger base metals mining operations with particular emphasis on copper, lead, and zinc mining, where the silver bi-product can be substantial. If we see accelerated exploration efforts targeting the base metals over the next few years, we could see the silver supply increase sharply, although its deliverability to market is subject to a great deal of speculation.
The forty-seven years that have passed since I was first employed by the securities industry have taught me one unforgettable lesson: everything is for sale at the right price. Whether it is the Dolly Varden lesson or the Riverboat Gambler futures lesson, there is a myriad of events that can torpedo even the best of investment/trading ideas.
In the case of silver, owning an in-ground resource where its commercial viability depends on either price or volume, I will always opt for price because increasing the volume of mineable ore requires the dual blessings of those two very demanding ladies that control the fortunes of the resource industry and they are Mother Nature and Lady Luck.
You could be right in your assessment of the future price of silver and still be wrong if the resource turns out to be too small. If you buy a company with a big resource that needs only an improved pricing structure in order to meet with success, then there is only one variable that needs no attention from either of the two ladies. Pricing is a function of supply and demand which can be calculated, and as long as that calculation determines direction, you need not pick the top in order to ring the register.
As 2022 winds down into 2023, I will be shifting more of the portfolio assets into the silver developers before the insidious dregs of the drug enter the bloodstream of the masses.
Michael Ballanger Disclaimer:
This letter makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents my views and replicates trades that I am making but nothing more than that. Always consult your registered advisor to assist you with your investments. I accept no liability for any loss arising from the use of the data contained on this letter. Options and junior mining stocks contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. One should be familiar with the risks involved in junior mining and options trading and we recommend consulting a financial adviser if you feel you do not understand the risks involved.
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