The gold price (GLD) hasn’t seen much upside progress since the December Federal Reserve Meeting, but silver (SLV) has roared higher and is working on a robust double-digit gain for December. While this is great news for silver investors, it’s also great news for this bull market, as the key to a healthy bull market is silver leading the way. In fact, the best gains for metals bull markets have come when silver has shifted from significant under-performance to massive outperformance, and this is precisely what we see currently.
Based on silver’s continued outperformance vs. both the S&P-500 (SPY) and gold, I see no reason to believe that we’ve seen the highs for the current precious metals bull market. Let’s take a closer look below:
For nearly a decade now, we’ve seen massive underperformance when it comes to silver vs. gold, with a steep downtrend in place since the 2011 highs. There was also a steep downtrend in place for silver vs. the S&P-500, which favored owning a combination of either gold and the S&P-500 or solely the S&P-500.
However, this downtrend finally broke in mid-2020, and it’s seen zero signs of slowing down since. This breakout after nearly a decade of underperformance is a long-term bullish indicator, and the last time we saw a breakout of this magnitude was in 2010, and again in 2004.
In both periods, we were in the much earlier innings of a new bull market. This continued outperformance from silver suggested that 20% plus corrections in the metals would likely present buying opportunities. However, with silver now outperforming the S&P-500, we have a perfect storm for silver and the precious metals market. This does not preclude sharp pullbacks along the way because this is a long-term indicator. However, it does suggest that the time is right for a minor shift in allocation towards precious metals. The safest way to play this, of course, is the yellow metal, as it is much less volatile than silver. Having said that, silver will benefit from more upside if one can stomach the volatility.
If we take a close look at the silver/gold ratio above, we can see that this ratio is set to make a new high despite gold struggling to find much direction. This is the last thing we would expect to see if we had just seen a major top in the metals bull market, which is why it’s confusing to a few perma-bears still calling for $1,200/oz gold. While anything is possible and there’s no guarantee that we see new highs for gold next year, this continued improvement in the silver/gold ratio suggests that silver has a good shot at breaking above $30.00/oz in the next six months. Let’s see what the technical picture looks like:
While the long-term picture remains bullish for silver, the short-term picture is messier, with silver struggling to get above key resistance at $26.55/oz. However, the pullbacks from the $26.00/oz area are becoming much less violent, with a 16% correction from the November test and a 9% correction more recently. This suggests that the sellers are running out of ammunition.
Obviously, there’s no guarantee that $26.55/oz breaks to the upside. Still, the fact that silver is giving up ground grudgingly after testing this area suggests that this resistance level is becoming weaker. A sustained breakout above $26.55/oz is the key to increasing the probability of new highs.
So, what’s the best course of action?
While the long-term picture for silver remains bullish, sentiment on silver has spiked to over 85% this week, which does suggest that we could see some volatility with investors rushing back into the metal. Therefore, I am not buying more silver miners at current levels after adding to my positions recently, but I continue to hold core positions in GoGold Resources (GLGDF) and Wheaton Precious Metals (WPM).
If we were to see a further pullback over the next couple of weeks to shake out some weak hands, I might look to start some new positions. While it’s easy to believe the chatter about the peak being in for precious metals, most major indicators suggest this is not the case. For this reason, Q1 2021 should be an opportunity to buy the dip, not reduce positions. If silver can sustain a breakout through $26.55/oz, I would expect the metal to trade above $30.00/oz before May 2021.
Disclosure: I am long GLD, WPM, 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.
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SLV shares were trading at $24.44 per share on Tuesday morning, up $0.01 (+0.04%). Year-to-date, SLV has gained 46.52%, versus a 17.88% rise in the benchmark S&P 500 index during the same period.
About the Author: Taylor Dart
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. More…
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