Silver's Bull Market is Officially Underway

Introduction

Over the past few weeks, there have been numerous articles and video presentations predicting a silver breakout that could potentially push prices to $50. Despite investor cynicism due to silver's sideways movement over the last five months, these articles urged investors to remain confident, predicting that silver was on the verge of a historic bull market. On Friday, these predictions were confirmed as silver surged nearly 7%, meeting the criteria outlined to confirm the next phase of its bull market. This article will delve into the details of silver's Friday breakout and explain why a powerful silver squeeze has now officially begun.

Criteria for Silver Rally

The key criterion outlined to confirm the next leg of the silver rally was straightforward but often overlooked by investors and surprisingly difficult to achieve: the spot price of silver must decisively close above the $32.50 resistance level, supported by strong trading volume. The $32.50 resistance level was set at the May high, after which silver retreated and stagnated over the summer. Silver made attempts to break through this level on September 26th and October 4th, but both attempts failed, resulting in further pullbacks. Silver's impressive $2.02 (6.38%) surge on Friday, accompanied by trading volume more than double the prior week’s average, definitively fulfills that criterion. (However, if silver closes back below the $32.50 resistance level, it would invalidate Friday’s bullish signal. This scenario is unlikely.)

Trading Volume and Institutional Interest

Although Friday’s trading began like any ordinary day, volume surged in the afternoon as it became evident that silver’s breakout above the $32.50 resistance level had staying power. It's likely that a good portion of this volume came from traders scrambling to cover their short positions. The heavy trading volume serves as a crucial confirmation of silver's breakout, signaling that major institutions or 'smart money' are getting on board. This significantly reduces the likelihood that this is a false breakout.

Silver Priced in Euros

The next condition outlined was that silver priced in euros must decisively close above the €30 resistance level, which was established at the May peak. This event would help confirm a close above $32.50, greatly reducing the chances of it being a false breakout. Analyzing silver priced in euros is valuable as it removes the impact of U.S. dollar fluctuations, offering a clearer view of silver's intrinsic strength or weakness. Notably, silver priced in euros often respects round numbers like €26, €27, and €28, frequently establishing key support and resistance levels at these points. On Friday, silver finally broke through the €30 level with such momentum that it even closed above €31, signaling the strong potential for further gains in the coming week.

Synthetic Silver Price Index

The final condition listed is more esoteric, but it will significantly reduce the likelihood of a silver breakout being a false one: an index developed, called the Synthetic Silver Price Index, must close above its key resistance zone between 2,560 and 2,640. This index represents the average of gold and copper prices, with copper's price adjusted by a factor of 540 to prevent gold's higher price from disproportionately influencing the index. The index closely mirrors silver's price movements, yet surprisingly, silver’s price itself isn’t even an input!

Gold and Copper Prices

Gold, a major driver of silver prices, is generating a strong tailwind for silver after breaking through two key resistance levels since September. Gold is in a confirmed uptrend, and it’s on track to reach $3,000 in the near future. This momentum should continue to bolster silver’s rally. While gold reaching $3,000 might seem far-fetched, it's actually quite realistic, as it's just over a 10% increase from today’s price.

The price of copper is often an underappreciated factor in silver's performance. Copper's recent decline has weighed on silver, but there is a strong likelihood that it will find support around the $4.25 level and bounce from there. This rebound should provide an extra boost to silver’s nascent rally.

Silver Mining Stocks

Silver mining stocks are also important to watch for confirming silver's price movements, as they often mirror investor sentiment toward the metal. The Global X Silver Miners ETF (symbol: SIL), the most heavily traded silver mining stock ETF, had been stuck in a flat range since April. A strong, high-volume close above the $36 to $38 resistance zone would indicate that both silver and silver mining stocks are primed for a major breakout—and that's exactly what occurred on Friday.

Gold-to-Silver Ratio

Another key confirmation is a breakdown in the gold-to-silver ratio, a useful indicator for assessing silver's price trajectory. A close below the 83 to 84 support zone is valuable for confirming the start of a silver rally and its outperformance over gold. The long-term gold-to-silver ratio chart reveals that silver is currently significantly undervalued compared to gold, indicating that silver has much more room to rise in order to catch up. If the ratio were to revert to its historical average of 52.8 since 1915, even without any increase in gold’s price, silver would be valued at a respectable $51.55 per ounce.

Silver's Value

Adjusting silver’s price for inflation further highlights how undervalued it is by historical standards. During the Hunt brothers-induced spike in 1980, silver reached an inflation-adjusted price of $143.54. In the 2011 bull market, driven by quantitative easing, it hit $68.04. Currently trading at just $33.70, silver has significant room to rise if it’s to catch up with these previous inflation-adjusted peaks.

Comparing Silver to Money Supply Measures

Another way to assess whether silver is undervalued or overvalued is by comparing it to various money supply measures. The chart below shows the ratio of silver’s price to the U.S. M2 money supply, providing insight into whether silver is keeping pace with, outpacing, or lagging behind money supply growth. If silver’s price significantly outpaces money supply growth, the likelihood of a strong correction increases. Conversely, if silver lags behind money supply growth, it suggests a potential period of strength ahead. Since the mid-2010s, silver has slightly lagged behind M2 growth, which, combined with other factors discussed in this piece, position it for a strong rally.

Potential for Silver to Reach $50

There is a high probability that silver will quickly run to $50 in the course of this rally. $50 is a significant psychological level and the peak reached during both the 1980 and 2011 rallies. One of the reasons for this bullish outlook on silver is because its monthly chart reveals a recent breakout from a massive, two-decade-long triangle pattern. This breakout confirms that silver is on the verge of a powerful bull market.

Short-Covering and the Risk of a Short Squeeze

Earlier in this article, it was mentioned that a significant portion of Friday's silver buying volume was likely driven by short-covering. Short-covering happens when traders who have bet against an asset, like silver, through short-selling are forced to buy it back as the price rallies, in order to limit their losses. As the asset's price rises, these traders become increasingly desperate to buy it back to close their positions, which in turn fuels the rally even further. If the buying is aggressive enough, this can lead to a short squeeze, amplifying the upward momentum.

A key condition for a short squeeze is the presence of unusually heavy short positioning in the asset. This is currently the case in COMEX silver futures, where swap dealers—mainly bullion bank trading desks—hold their largest net short position in eight years, totaling 38,832 contracts. This is equivalent to 194.43 million ounces of silver, or roughly 23% of the annual global silver production— a staggering figure.

Bullion Banks and Short Selling

Many analysts believe that bullion banks like JPMorgan and UBS are engaging in aggressive naked short-selling—dumping silver futures without actually holding the physical silver to back them up—in an effort to manipulate silver prices downward. There is a strong chance that these banks will end up on the wrong side of the trade as this rally continues, triggering a powerful silver short squeeze. Given the current size of their short position, bullion banks face nearly $200 million in losses for every dollar increase in the price of silver. This means they lost nearly $400 million on Friday alone! Now, just imagine what will happen as silver climbs by $5, $10, $20, and beyond from this point.

Ratio of "Paper" Silver to Physical Silver

The risk of an explosive silver short squeeze is further amplified by the astonishing ratio of 408 ounces of "paper" silver—ETFs, futures, and other derivatives—for every single ounce of physical silver. In a violent short squeeze, holders of "paper" silver could be forced to scramble for the extremely scarce physical silver to fulfill their contractual obligations. This would cause the price of "paper" silver products to collapse, while physical silver prices would skyrocket to jaw-dropping levels, potentially reaching several hundred dollars per ounce.

Silver’s Fundamentals

As if the technical outlook weren’t already bullish enough, silver’s fundamentals are just as compelling. Surging industrial demand, coupled with declining global mine production, has kept silver in a structural deficit for the past four years—and there’s no sign of relief on the horizon. In 2023, the deficit reached 184.3 million ounces, with an even larger shortfall of 215.3 million troy ounces projected for 2024. The silver deficit in recent years has rapidly depleted above-ground supplies, tightening supply even further. This shrinking supply will intensify the impending silver short squeeze, driving an even more dramatic price surge.

Conclusion

Silver’s breakout on Friday marks a pivotal moment in its ongoing bull market, confirming many of the key conditions previously highlighted. With silver decisively closing above the critical $32.50 resistance level and surging on high volume, the stage is set for a powerful rally. The technical and fundamental drivers behind silver are aligning, from the breakdown in the gold-to-silver ratio to surging demand and shrinking supply. The looming threat of a short squeeze, combined with silver's structural deficit, suggests that the price could climb significantly higher, potentially reaching levels not seen in decades. As silver continues its upward trajectory, the potential for explosive gains has never been clearer.

Bottom Line

The silver market is showing signs of a significant rally, with prices potentially reaching historic highs. This is due to a combination of factors including technical indicators, fundamental drivers, and the potential for a short squeeze. What are your thoughts on this development? Do you think silver prices will continue to rise? Share this article with your friends and discuss it together. You can also sign up for the Daily Briefing, which is delivered every day at 6pm.