Silver: Time For Bulls To Start Playing Offense

It’s been a disappointing year thus far for silver (SLV) and the Silver Miners Index (SIL), with the metal sliding by more than 8% year-to-date and the Silver Miners Index plunging more than 13%. While the underperformance and consolidation are not surprising after a 47% return for silver, the volatility has likely unnerved many investors and forced some to go looking for greener pastures. Fortunately, when it comes to the bigger picture, we haven’t seen any real technical damage, and the Silver/Gold ratio continues to remain in a long-term uptrend, though, this is contingent on silver holding the $21.50/oz level. So, while it’s easy to throw in the towel and I would not rule out a re-test of the recent low at $22.50/oz, I remain bullish on the price of silver long-term, especially given the recent capitulation in bullish sentiment.

(Source: Daily Sentiment Index Data, Author’s Chart)

As shown in the chart above, bullish sentiment for silver has fallen off a cliff in the past six months, descending from single day readings of more than 90% bulls in late February to a reading of barely 10% bulls on Wednesday. This exodus from the bull camp is a great contrarian indicator, with silver typically finding strong buying support on further weakness when readings dip to these depressed levels. As the chart above shows, this plunge in short-term sentiment has pushed the long-term sentiment moving average for silver to its lowest levels in years, with a current reading of 24%. This is the worst reading since September 2018, which ended up marking a bottom for silver. While silver did fall another 4% after hitting a reading of sub 25% bulls on its long-term moving average, the metal was 9% higher over the next six months and 24% higher just 12 months later. This represented an attractive forward 12-month return drawdown to forward 12-month return of 6 to 1.

(Source: TC2000.com)

Moving over to the technical picture, we can see that silver has remained in a steep downtrend since June, making lower highs and lower lows, with a massive shake-out in early August. This would be concerning from a technical standpoint if the long-term chart confirmed it. However, a look at the long-term chart below shows us that we do not have time-frame continuity, with the quarterly chart for silver looking the most bullish it has in decades. This is because silver broke out of a 6+ year base last year and continues to hold this breakout level, building a very bullish base-on-base pattern. These patterns typically resolve to the upside, and as long as silver remains in a range between $21.00/oz and $30.00/oz, the pattern will remain intact.

It’s important to note that while new 52-week highs are bullish, the most bullish setup is new 52-week highs that also coincide with new multi-year highs from a base. In silver’s case, we had a massive shake-out followed by a violent breakout to new multi-year highs, quite similar to what we saw from the S&P-500 (SPY) in mid-2016 following the 2015-2016 cyclical bear market, albeit on a smaller scale. If the case that this is a successful breakout for silver and the metal defends $21.50/oz, the multi-year breakout we saw targets the $33.00/oz to $34.00/oz before 2023, representing more than 50% upside from current levels for the metal.

(Source: TC2000.com)

So, what’s the best course of action?

With silver continuing to remain in a downtrend short-term, I don’t see any reason to rush in and buy the metal here. This is because there is a possibility of silver dipping another 9% to retest its lows in the $21.50/oz to $22.00/oz zone. However, if we were to see a pullback below $22.50/oz towards this zone, this would represent a very low-risk buying opportunity. This is because silver would have more than $4.00/oz in upside to its next resistance level near $27.00/oz, and just $1.00/oz in downside to a key support level, where one would be able to place stops. Having said that, my preferred way to play silver is GoGold Resources (GLGDF), a silver producer in Mexico that made new all-time highs this year ahead of the silver price and continues to act much stronger than silver. So, while I am not long silver and will only start a position if we see a deeper correction, I see GoGold Resources as a buy on dips, with the stock showing that it doesn’t need new highs in silver to continue to make new highs.

Disclosure: I am long GLD, GLGDF

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

SLV shares were trading at $22.27 per share on Thursday afternoon, up to $0.10 (+0.45%). Year-to-date, SLV has declined -9.36%, versus a 21.40% rise in the benchmark S&P 500 index during the same period.

Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles.

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