To The Moon

$iShares Silver Trust(SLV)$

Silver has surged by an impressive 67% since the market's low in October 2022. In comparison, the S&P 500 has only gained about 53%. While silver has been much more volatile than the S&P 500—experiencing multiple 10% declines during this period—it remains one of the best-performing assets since October 2022, largely flying under the radar.

Silver & S&P 500 Percentage Gain

Recently, silver retraced to test a key uptrend line. Despite a brief bounce, it was unable to hold, raising the question of whether silver will continue to decline and possibly reach its longer-term uptrend line, or whether it can reverse and maintain its strong performance.

Looking at the bigger picture, silver's strong returns are not unprecedented. For example, during the bull market from October 2001 to April 2011, silver saw a staggering 1,000% return. Both gold and silver tend to move in tandem, as seen in 2024, where gold has reached new all-time highs, but silver has not yet surpassed its previous all-time high from April 2011. There's a clear relationship between the two metals, with silver typically rising when gold rises and vice versa. Occasionally, silver outperforms gold, but it is rare for silver to rise without gold.

Assuming gold remains in its bull market or at least stays around its all-time highs, this could create an opportunity for silver to catch up. To explore this further, we need to look at the Gold-to-Silver ratio, which compares the performance of gold and silver over time. The ratio has seen significant fluctuations, such as in 2011 when it dropped by over 40% as silver outperformed gold, and in 2020 when the opposite occurred, with gold outperforming silver.

When we add recession markers to this chart, we see that the gold-to-silver ratio tends to rise during economic downturns, indicating silver's underperformance relative to gold. This is because gold is often considered a safer asset during recessions. However, outside of recessions, silver can experience significant outperformance.

Zooming in on recent years, we observe that the gold-to-silver ratio increased between 2021 and 2022, not due to a recession, but because of economic uncertainty and aggressive interest rate hikes by the Federal Reserve. Since mid-2022, the ratio has been relatively stable, with the light resistance line acting as a key reversal point. Each time the ratio has approached this level since 2023, it has shown notable behavior.

Demand for silver has caused the gold-to-silver ratio to decline. Currently, the ratio is once again approaching the same key resistance level. A strong rejection here could set the stage for silver to outperform gold significantly. In fact, if the ratio drops to the same level it reached in 2021, it would represent a 27% outperformance of silver relative to gold. However, if the gold-to-silver ratio breaks above this resistance, it might signal a shift towards a risk-off environment. This could indicate that the market is pricing in a potential recession and is too concerned about the economic outlook to support higher silver prices, which would serve as a warning for silver.

At this point, though, this scenario hasn't materialized yet, and resistance should be respected until proven otherwise. One key factor that can help confirm the direction of the gold-to-silver ratio is the US Dollar Index (DXY). As seen in this chart, the gold-to-silver ratio tends to have a positive correlation with the DXY. When the DXY rises, gold usually outperforms silver, and when the DXY falls, silver tends to outperform gold. This is because the US Dollar Index is considered a safe-haven asset. When the DXY rises, it suggests that investors are becoming risk-averse and flocking to safety, which generally isn't favorable for silver.

While this relationship has generally held true since 2003, it is not guaranteed. For instance, between June 1982 and August 1983, the DXY was on the rise, but silver still outperformed gold by 45% during that period. More recently, the US Dollar Index has risen 8% since October 2024, marking a significant move in the currency market. However, the DXY is now approaching a critical resistance level, one that also served as a turning point in December 2022, March 2023, and October 2023.

If the DXY follows a similar path as in previous instances, it could lead to another correction in the US Dollar Index, which would be favorable for silver, as we've seen earlier. However, a breakout above current levels would be concerning.

Looking at silver's technical chart, we can see that the price has fallen below its short-term uptrend. As long as the price stays below this line, the risk of further downside remains elevated. In fact, if silver drops to its longer-term uptrend, it would represent a further 13.3% decline from current levels. Such a move would likely be driven by recession fears and economic concerns, an environment we've seen to be negative for silver.

On the other hand, if silver manages to reclaim the short-term uptrend, it could indicate that the current decline was a false breakdown. This could coincide with a weakening US dollar, signaling a shift to a risk-on environment that could support higher silver prices.

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