It’s been another tough week for the precious metals bulls, with the price of silver (SLV) down 1% to start the week, following a violent 6% drop in holiday-shortened Thanksgiving week. The catalyst for this sell-off looks to be the fact that the general markets have become much turbulent following the discovery of a new strain of the virus, omicron, in South Africa.

With inflation on the rise, supply chains continuing to be pressured, and valuations in nosebleed territory, it’s no surprise that the market has softened these developments. However, while higher inflation and negative real rates are good for precious metals, silver seems to be at mercy to the general markets temporarily. Let’s take a closer look below:

As noted above, we’ve seen an increase in volatility in the markets this week, and it’s put a major dent in the silver price, which is down more than 4% for the month after starting the month up 3%. This has the silver/gold ratio teetering on a major support level (weekly moving average), and the key will be keeping the gold/silver ratio below 80 to prevent further weakness. Generally, the best time to own silver miners and precious metals are when silver is outperforming gold, and while this is the case, a lower low or break of this moving average (white line) would not be ideal.

(Source: TC2000.com)

The good news is that while the recent weakness has weighed on the silver/gold ratio with some short-term outperformance, it’s also helped to clear any optimism out of the silver market. As the chart below shows, which tracks bullish sentiment for silver, bullish sentiment soared from a reading of 10% in late September to nearly 70% in mid-November, and spikes of this magnitude often lead to silver being a crowded trade short-term. However, with bullish sentiment sliding all the way back down to 20% as of Monday’s close, this indicator has improved considerably, with four market participants being bearish for every one market participant that is bullish.

(Source: TC2000.com)

As we can see from the past two years for this indicator, dips below 15% have typically provided low risk buying opportunities, especially when the spike down has been violent. This was the case in early 2020, and in September of this year. So, while we have not yet headed into the low-risk buy zone, we are getting much closer to a buy signal, which should put a floor under the silver market near $22.00/oz.

Moving over to the technical picture, we can see that silver continues to trade in a massive base-on-base pattern, with the metal continuing to hover above its important $21.00/oz - $22.00/oz support zone. This is a pivotal level for the bulls to defend, given that successful breakouts should not close back below their breakout level, and to date, the bulls have been able to defend this level successfully. So, at the same time as most market participants are bearish, we appear to have silver trading in a clear uptrend on its monthly chart and consolidating near a 5-year high, a bullish pattern for the time being.

(Source: TC2000.com)

So, what’s the best course of action?

For investors interested in silver, the lowest risk buy point continues to be $22.30/oz or lower, which is within 5% of the bottom of the current trading range ($21.50/oz to $29.50/oz). This offers a low-risk entry into the metal, with the ability to have a relatively tight stop if the metal does break below $21.00/oz. For investors looking for more torque, my favorite idea is GoGold Resources (GLGDF), a silver producer with a small-scale operation in Mexico that’s simultaneously exploring a new silver district. This district appears to have up to 200MM silver-equivalent ounces. With an updated resource estimate due by year-end, GoGold looks like a takeover target, with one of the largest resource bases in Mexico not owned by a major producer.

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 $21.06 per share on Tuesday afternoon, down $0.10 (-0.47%). Year-to-date, SLV has declined -14.29%, versus a 23.04% 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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