Silver Bounces Off Important Level

Investors in silver (SLV) and the Silver Miners Index (SIL) were able to breathe a sigh of relief in October, with the metal finishing the month up 8% and looking like it may have finally bottomed. However, just six weeks later, the bulls are staring down a dreaded re-test of the low, with many likely wishing they had taken some profits above $25.00/oz. The good news is that sentiment continues to be supportive of a potential bottom, prevailing sentiment continuing to be extreme pessimism. However, the bull case is contingent on the October low holding. Let’s take a closer look below:

(Source: TC2000.com)

Many assets have responded well to high inflation readings over the past year, with the S&P-500 (SPY) being one of them, up over 20% year-to-date. However, the supposed inflation hedges, precious metals, have been unable to hold their ground and continue to sink year-to-date. This has certainly made the precious metals a frustrating trade, and the only good news to come of this frustration is that it’s left bullish sentiment readings near multi-year lows. As the chart below shows, sentiment has not been this bad for the precious metals sector since March 2020 (except for September 2021), and extreme pessimism often breeds major rallies. Looking back to March 2020, silver was up more than 100% in less than six months. In the most recent instance, the metal gained 18% in less than two months, but has since given up most of these gains.

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

There’s obviously no guarantee that history repeats itself, and I certainly wouldn’t expect anywhere near a repeat of March 2020, given that this was a major trough for the metal following a waterfall decline. However, it’s at these times when sentiment is at its worst that traders can find the most attractive entry points into the metal or into miners that are producing the metal. This is because the risk is relatively low when the metal has pulled back 15% in less than thirty days, and no one wants anything to do with the metal. The reason is that when the majority are bearish like we see above with just 20% bulls, there are few investors/traders left to sell.

Sentiment alone is not a great timing tool, but the technical picture can leave clues as to where support for the metal might come in, and the daily chart above shows a significant support level at the $21.00/oz to $22.00/oz level. This area was a prior resistance area for silver in its previous multi-year consolidation, and often after major breakouts, prior resistance will morph into new support. We can also see from the below chart that silver is just 1% away from back-testing its multi-year downtrend line, an area that is also often a major support zone. So, at $22.00/oz, the metal is finally entering a low-risk buy zone to start a position.

(Source: TC2000.com)

(Source: TC2000.com)

However, with the metal being volatile and not paying a dividend, I believe there are more attractive ways to play the sector, and one of my favored ways is GoGold Resources (GLGDF) and Wheaton Precious Metals (WPM). In GoGold’s case, the company has proven up over 260 million silver-equivalent ounces in a new silver district and is a takeover target for producers looking to diversify their operations. This is especially true given that the district looks ripe for more discoveries. In Wheaton’s case, the stock offers exposure to silver but pays a ~1.6% dividend yield, has 75% margins, and is trading at one of its cheapest multiples in the past several years. I see these as preferred ways to gain exposure to silver, given that they are much stronger than silver from a relative strength standpoint.

(Source: FASTGraphs.com)

To summarize, silver is finally nearing oversold levels and heading towards a low-risk buy-point as it re-tests a major prior resistance level in the $21.00/oz to $22.00/oz region. However, this buy point is contingent on the metal not breaking back below $21.00/oz on a weekly close, which would be a negative development, suggesting a change in the character. Given that silver remains volatile and has struggled to make higher highs and higher lows, the more attractive ways to play silver look to be GoGold Resources and Wheaton Precious Metals. While I am already long GoGold, I am not long Wheaton, but I would view any pullbacks below $38.90 as low-risk buying opportunities.

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 $20.37 per share on Thursday afternoon, down $0.39 (-1.88%). Year-to-date, SLV has declined -17.09%, versus a 26.50% 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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