A Silver Squeeze And The SLV ETF

February 3, 2021

It appears silver is in a new uptrend with support from the longer term up trend channel. Silver should test recent highs, so is doing much better than gold. A close at $29 or higher would signal a breakout. There is a lot of scuttle but and rumors out there about the Reddit and Robinhood (Wallstreetbets) gang piling into silver and causing the greatest short squeeze of all time. JP Morgan has been known to have a large short position for a long time, but has covered its short position, according to Ted Butler who has been following this topic for years. However, many other banksters are still short. Last September JP Morgan was fined almost $1 billion for precious metals manipulation. JP Morgan is the custodian for physical silver in the iShares Silver Trust (SLV) ETF.

Thursday and Friday saw volume increases in many silver investments, including a big jump in volume on the silver ETF SLV. Whether driven by rumor or the Reddit army actually coming in, their plan is severely flawed. Their plan from a number of internet postings is to create huge buying volume into the ETF to drive silver prices higher.

This article suggests Wallstreetbets has started their move into silver.

It just so happens the SLV ETF posted a share prospectus on January 13. It looks like great timing to protect their butt. Below is some of the highlights in the prospectus, the bold highlighting is their doing.

"The Trust intends to issue Shares on a continuous basis. The Trust issues and redeems Shares only in blocks of 50,000 or integral multiples thereof. A block of 50,000 Shares is called a "Basket." These transactions take place in exchange for silver. Only registered broker-dealers that become authorized participants by entering into a contract with the Sponsor and the Trustee ("Authorized Participants") may purchase or redeem Baskets. Shares are created to reflect, at any given time, the market price of silver owned by the Trust at that time less the Trust's expenses and liabilities."

A short squeeze is not possible on the ETF because an unlimited amount of shares can be created. If these buyers believe that JP Morgan will be forced to buy more silver because of the rising demand in the ETF, they have all kinds of outs as reported in the prospectus.

"The Trustee may suspend the delivery or registration of transfers of Shares, or may refuse a particular deposit or transfer at any time, if the Trustee or the Sponsor think it advisable for any reason. Redemptions may be suspended only (i) during any period in which regular trading on NYSE Arca is suspended or restricted, or the exchange is closed, or (ii) during an emergency as a result of which delivery, disposal or evaluation of silver is not reasonably practicable.

If the process of creation and redemption of Baskets encounters any unanticipated difficulties or is materially restricted due to any illiquidity in the market for physical silver, the possibility for arbitrage transactions by Authorized Participants, intended to keep the price of the Shares closely linked to the price of silver may not exist and, as a result, the price of the Shares may fall or otherwise diverge from NAV

The COVID-19 outbreak will have serious negative effects on social, economic and financial systems, including significant uncertainty and volatility in the financial markets. For instance, the suspension of operations of mines, refineries and vaults that extract, produce or store silver, restrictions on travel that delay or prevent the transportation of silver, and an increase in demand for silver may disrupt supply chains for silver, which could cause secondary market spreads to widen and compromise our ability to settle transactions on time. Any inability of the Trust to issue or redeem Shares or the Custodian or any subcustodian to receive or deliver silver as a result of the outbreak will negatively affect the Trust's operations.

The Sponsor and its affiliates manage other accounts, funds or trusts, including those that invest in physical silver bullion or other precious metals, and conflicts of interest may occur, which may reduce the value of the net assets of the Trust, the NAV and the trading price of the Shares.

Furthermore, although the Custodian is generally regulated in the UK by the Prudential Regulatory Authority and the Financial Conduct Authority, such regulations do not directly cover the Custodian's silver bullion custody operations in the UK. Accordingly, the Trust is dependent on the Custodian to comply with the best practices of the LBMA and to implement satisfactory internal controls for its silver bullion custody operations in order to keep the Trust's silver bullion secure.

Silver transferred to the Trust in connection with the creation of Baskets may not be of the quality required under the Trust Agreement. The Trust will sustain a loss if the Trustee issues Shares in exchange for silver of inferior quality and that loss will adversely affect the value of all existing Shares.

Share Splits

If the Sponsor believes that the per Share price in the secondary market for Shares has fallen outside a desirable trading price range or if the Sponsor determines that it is advisable for any reason, the Sponsor may cause the Trust to declare a split or reverse split in the number of Shares outstanding and to make a corresponding change in the number of Shares constituting a Basket."

As you can see JP Morgan has all kinds of outs from actually purchasing physical silver if you trust them in the first place. Ultimately as highlighted below, this ETF could just blow up and even be terminated.

"Authorized Participants with large holdings may choose to terminate the Trust. Holders of 75% of the Shares have the power to terminate the Trust. This power may be exercised by a relatively small number of holders. If it is so exercised, investors who wished to continue to invest in silver through the vehicle of the Trust will have to find another vehicle, and may not be able to find another vehicle that offers the same features as the Trust."

The volatility could just cause it to blow up like the NUGT ETF last March. NUGT is supposes to be 2X the GDX and you can see it turned into 1/2 times.

Investors that bought GDX have a +60% gain while those in NUGT have a -30% loss over the shown time frame.

As of the close of business on January 13, 2021, the net asset value of the SLV Trust was $14,091,710,671 and the NAV was $23.54. Gamestop (GME) has traded twice this valuation and more in a single trading day.

The Wallstreetbets crowd could cause volatility and another likely outcome is a spillover into silver related stocks, the silver miners. I would avoid the SLV ETF. I prefer the Sprott Physical Gold and Silver Trust (CEF). It is 50/50 gold and silver. For a pure silver play, the Sprott Physical Silver Trust (PSLV). Before I get into some of the silver stocks, more on the silver metal itself.

Silver is a very unique metal. It is considered a precious metal and often referred to as "poor man gold." I consider it a distant second to gold as a precious metal, but silver's strong industrial demand is an advantage it has over gold. The other unique thing about silver is it's very small market size. The Silver Institute is projecting mine supply for 2020 at 790.8 million ounces, which is eight year lows. At current prices around $25 this annual production is valued around $20 billion. Just one stock, Apple (AAPL) is valued 100 times higher. This very small market presents a challenge for investors because you will not find many $1 billion plus liquid investments.

Next, let's look at the industrial demand. For investors this makes the silver market much less liquid and why there are high premiums on silver coins. So much silver is off the market lying in silver panels, jewelry and silverware.

Silver in solar panels grew 7% in 2019 to its second highest annual level ever. With a Biden victory, The Green New Deal is back in play so solar and consequently silver is in the limelight.

Silver is the best conductor of electricity and is in high demand with the electrification in the auto industry. Projections in the chart below show a steady increase into 2030.

Silver is known as poor man's gold because it often runs up in price with gold and was once extensively used in coinage around the world. Currently the gold to silver ratio just came off historical highs and today is around 73, shown in this next chart.

Silver is more difficult to analyze than gold because gold has almost no uses except as money. (Gold is widely used in jewelry, but I consider gold jewelry a hard asset, what I call "wearable wealth.")

Silver, has many industrial applications and is both a true commodity and a form of money. This means that the price of silver may rise or fall based on industrial use, but can also be influenced by monetary factors such as inflation, deflation and interest rates. Silver will always be a form of money. I have been commenting that all the recent money printing and more so under the Biden administration, that confidence will erode in central bank money. Investors and savers will increasingly turn to physical money (gold and silver) and non-central bank digital money (Bitcoin and other cryptocurrencies) as stores of wealth and a medium of exchange.

The issue for silver investors is the lack of highly liquid, $billion companies. Some favorites in the past like Hecla (HL) and Coeur Mining (CDE) are really more so gold miners. Coeur's revenue from silver is only about 27% of revenue, the rest is gold, according to its Q3 report. Hecla is has a better silver to gold ratio, with about 48% of revenues from silver over 9 months according to its Q3 report and using today's metal prices. Pan American Silver (PAAS) has only about 31% of revenue from silver according to its production numbers in its Q3 report and using its realized gold and silver prices.

The best leverage to silver for a major miner is First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE) with a market cap last Friday of US$4 billion. According to its presentation, 65% of revenue is from silver and 35% from gold.

I have already suggested First Majestic and it is up substantially. The stock had a nice move in the last few days to $17.86 from $14. It could be attributed to increased interest with the Wallstreetbets news, but there was another development with First Majestic last week: its mines are in Mexico and for some time the company has been in dispute with the government over tax rates.

Bloomberg reported that First Majestic won a reprieve on criminal tax fraud charges in initial Mexican court hearings .A judge in Mexico City declined to charge the Canadian mining company with criminal tax fraud, said the people, who spoke on condition of anonymity as the matter is private. Prosecutors can still return to court and present additional evidence. One of the people said the judge delayed ruling until an audit by Mexico's tax authority was finished and that the judge hadn't ruled yet on the evidence presented in the case.

First Majestic has 146.5 million ounces silver equivalent in the Proven and Probable category plus 267.8 million ounces silver equivalent (M&I) Measured and Indicated Resources. The total is 414.3 million. Market cap at 222 million shares X $18.12 = $4.022 billion, less $238 million cash, plus $140 million debt cash gives a rough EV per silver ounce of $9.50.

This next graphic is from First Majestic's presentation. It shows that BMO's silver report is predicting 70% revenues from silver for First Majestic. It is also a good comparison to other silver producers.

The stock broke out above resistance Thursday/Friday. A short squeeze might also be in play here. Shortsqueeze reports the last short position at 45.8 million shares.

Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE) is worth a look and will trade with the silver price.

The company has Proven and Probable reserves of 82 million ounces silver equivalent plus 43.6 million ounces M&I for a total of 125.6 million ounces. There are 157 million shares out X $4.95 = $777 million market cap less $45 million cash, plus $7 million debt for a rough EV per ounce of $5.90.

Endeavour is valued cheaper than First Majestic on a per ounce basis but is a much smaller producer. Endeavour achieved its 2020 production guidance with 6.5 million ounces silver equivalent produced.

First Majestic produced 25.6 million ounces in 2019 and it looks like it will come in around 20 million ounces for 2020, a drop due to Covid-19 mine shutdowns.

Near term I prefer First Majestic because the break out on the chart and the large short position. The company provided this chart in its presentation that shows the large increase in the short position. I noted the 45.8 million shorts reported on the U.S. side and when we add in the 4.1 million shorts reported on Toronto, the total is almost 50 million for the period to January 15.

I am avoiding Silvercorp Metals Inc. (SVM:TSX; SVM:NYSE) with a market cap around US$1.1 billion. All its production is in China. Relations are on the decline between China and Canada as well as the U.S. Recently in December Canada blocked a Chinese takeover of a gold mine in Nunavut, Canada.

Next is to explore further down the chain to the silver developers and explorers.

I have already presented Blackrock Gold Corp. (BRC:TSX.V; BKRRF:OTCMKTS), so this is some follow up developments. Despite its name, the company ended up discovering a high grade silver discovery in Nevada. Here are some recent drill results from its Tonopah West project in the Walker Lane Trend:

  • Jan 14, 2021, news - TW20-061C cut 18.5 meters grading 295 g/t Ag Eq (142 g/t silver and 1.54 g/t gold) which included 1.52 meters of 1,791 g/t Ag Eq (808 g/t silver and 9.83 g/t gold)(Ag/Au = 100:1);
  • and TW20-041C cut 3.11 meters grading 386 g/t Ag Eq (198 g/t silver and 1.88 g/t gold), including 0.31 meters of 1,121 g/t Ag Eq (571 g/t silver and 5.5 g/t gold);
  • December 3, 2020 news - TW20-037 cut 3 meters returning 10.5 g/t gold and 1,188 g/t silver or 2,238 g/t Ag Eq along the Merton vein and indicates 290 meters of dip potential. Silver–gold ratio is 100:1 using a 200 g/t Ag Eq cut-off grade;
  • and TW20-027 drilled 12.2 meters grading 297 g/t Ag Eq at Bermuda-Merton vein intersection;
  • and TW20-022 intersected 4.5 meters grading 285 g/t Ag Eq on the Paymaster vein.

There was significant news on December 18 when Summa Silver Corp. (SSVR:TSX.V; SSVRF:OTC) reported results of core drilling along the eastern border of the Tonopah West project. It shows the Victor vein extends 480 meters to the east. Summa Silver's drilling along strike of the Victor/Murray vein adjacent to Blackrock's eastern border returned 1,079 g/t Ag Eq (5.19 g/t Au and 560 g/t Ag; Au/Ag=100/1) over a 0.9 meter interval in SUM20-17 (see Summa Silver (CSE: SSVR) news release December 17, 2020). Additional reported intercepts from Summa Silver in the Victor/Murray zone included 582 g/t Ag Eq (2.41 g/t Au and 341 g/t Ag) over 0.7 meters and 6.8 meters grading 212, which included a high interval 0.8 meters of 727 g/t Ag Eq (3.56 g/t Au and 371 g/t Ag).

These drill intercepts confirm the Victor/Murray vein system extends to the eastern border of the Tonopah West project giving an additional 480 meters of strike on Blackrock's project. Blackrock is awaiting additional assays from further drill holes from this target area. This property and drill map of Blackrock's project gives a good picture of its recent drilling. I pasted in a red arrow to point out the direction of Summa Silver's recent drill hit.

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Peru became the world’s largest producer of silver in 2012.

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