The backdrop of this article is a letter I sent out to a potential investor regarding Silver.
After a volatile start of 2024 and the first two-week shenanigans behind us, one contract that has recently grabbed our attention as a long-term value play is the March Silver contract. We anticipate that Silver prices are trading near a critical support trendline (see chart), and the downside remains limited.
Daily Silver Chart
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Recently, Silver has lagged behind other commodities due to its dependence on industrial applications and reliance on China as a consumer. China remains the largest consumer of Silver globally, consuming 18% of global fabrication. After a disastrous 2023, China has taken extraordinary measures to step up and support its economy by curbing short selling and proposing a stock market rescue package backed by $278 billion as part of a stabilization fund to restore confidence in its economy.
While China may be one part of the puzzle, higher interest rates have been a significant headwind that is near coming to an end. Depending on upcoming economic data, the market could see our first interest rate cut as early as March, but more likely in May. Regardless of one or the other, the first cut should set off a chain reaction of events leading to a weaker U.S. Dollar followed by a steady stream of fund inflows into the Gold market. Historically, Gold has, on average, seen a 6% rise within 30 days of the first interest rate cut. Additionally, the Gold/Silver ratio is trading near 91:1, leaving Silver at a historically low valuation to Gold. Funds have also cut their bullish bets on Silver to 10-week lows, leaving them underinvested. With Silver's high beta nature, the returns after the first interest rate cut could significantly outperform Gold.
Gold/Silver Ratio
In addition to Gold and Silver, we see value in owning Copper at lower levels. Copper mining supply has contracted sharply, leaving inventories in one of the tightest instances since 2021. Copper has also historically seen double-digit gains within the first quarter of the first interest rate cut. Whether Gold takes off first or Copper, Silver will want to join the party and, in traditional Silver fashion, come out with a Bang! Please let me know if you would like to discuss both defined risk option strategies or further take outright futures positions in the Silver market.
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