We have been particularly bullish on the iShares Silver Trust ETF (NYSEARCA:SLV) in recent months after the massive policy from the Fed in response to the COVID-19 macro shock. In this regard, we have not been disappointed by the substantial appreciation in SLV – SLV rose as much as 120% from its mid-March low to its year YTD high established in August.

Source: Bloomberg, Research

The iShares Silver Trust ETF

SLV seeks to track the performance of silver spot prices by physically holding silver bars in England or New York.

The physically-backed methodology used by SLV prevents investors from getting hurt by the current contango structure of the COMEX silver forward curve (forward>spot) contrary to a futures contract-based methodology.

Its expense ratio is 0.50% per year.

SLV has come under renewed downward pressure since it reached its highs since April 2013 earlier this summer. In this note, we investigate whether SLV can go back up to its previous YTD high, and if so, how fast.

Source: Bloomberg, Orchid Research

To answer these questions, we investigate the positioning in the silver market because the fluctuations in SLV in the short-term tend to be highly driven by sentiment and thus changes in positioning.

The recent behavior of silver prices suggests that prices are more sensitive to changes in investor sentiment (via ETF investors) than changes in speculative sentiment (via non-commercials on the COMEX). To illustrate our point, we construct a joint plot, which allows us to illustrate the bivariate relationship between the CME silver price (USD/ounce) and positioning (i.e. the net speculative length held by non-commercials in contracts) since 2015. We perform a linear regression and compute the R-squared to assess the explanatory power of spec positioning and ETF positioning.

Source: Orchid Research

As can be seen below, the R-squared resulting from