Silver Sentiment Shows More Downside Possible

While the major market averages continue their ascent into the stratosphere following a contested election, the precious metals have remained out of favor, sitting only a few percent off their recent lows. Unfortunately, a contested election has pushed out the prospects of further stimulus for the time being. This seems to be trumping seasonality, which is generally great for the precious metals starting in November. This has left silver (SLV) nearly 20% from its year-to-date highs, with the metal struggling to regain its footing. Meanwhile, despite this dismal performance short-term, the sentiment is still not showing any clear signs of capitulation yet. Let’s take a closer look below:


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

Beginning with bullish sentiment for silver above, we can see that we came close to heading into the extreme pessimism zone three weeks ago, but sentiment has since turned higher, and we’re sitting at 45% bulls. This is not an ideal reading after a correction like we’ve just seen, as it suggests that bulls are eager buyers and shifting back to the bull camp after the first sign of upside momentum in the metal. Generally, I prefer to see a move into the capitulation zone when we’ve seen a 15% plus correction. The last thing I want to see is a move back above 50% until the metal has recovered a significant amount of its decline. This is precisely what we have seen in gold (GLD) in the chart below, and sentiment actually fell to lower levels despite a smaller decline.

However, when it comes to silver, the metal was much more overbought than gold, and this means that silver might need longer to digest before it can make a run at new highs above $30.00/oz.

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


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(Source: Author’s Chart, CFTC.com)

If we move over to small speculator positioning, which tells us what small traders are doing (blue bars), we can see a similar picture. While silver (grey line) has been declining and going sideways the past few weeks, speculators have been increasing their exposure, which is not ideal. The best sign for higher prices is when speculators are dumping positions while the metal is trying to bottom, or at a bare minimum, exposure is not increasing.

This is what we saw on the left side of the chart in mid-2019 as silver tried to bottom out of a correction, and positioning actually fell into negative territory with speculators going net short. Given that the metal is up over 30% year-to-date, I would not expect speculators to move to net short as they did in June of last year. However, I would prefer if we did not see bullish positioning increasing every week while the metal continues to consolidate. While this time could be different, this generally suggests that speculators remain quite bullish as they’re anxious to keep buying despite no real upside progress.

Let’s take a look at the technical picture:


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(Source: TC2000.com)

Looking at the daily chart above, we can see that silver is nearly 10% off its lows now, but we have not seen any real traction to date. While the metal is making higher lows, it’s struggling to make any higher highs and is simply consolidating below its broken uptrend line from this year’s rally. While the bulls have successfully defended monthly support at $21.50/oz, they continue to run into a brick wall near $26.00/oz. Until the bulls can get through $26.55/oz, there’s no reason to believe that this correction is finally over.

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So, what’s the best course of action?

While silver has shown no clear signs that this correction has ended, we continue to have miners that are leading the metal because they remain in strong uptrends. A couple of these names are Pan American Silver (PAAS) and GoGold Resources (GLGDF). For investors anxious to start new positions in the space, I believe these are two better ways to play the sector as they offer leverage on the metal but are much stronger technically than silver currently. For now, I see no reason to be aggressively buying, but if we do see a breakout above $26.55/oz for silver, I will be looking to buy any sharp pullbacks.

Disclosure: I am long GLGDF, GLD

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 $22.84 per share on Tuesday afternoon, down $0.18 (-0.78%). Year-to-date, SLV has gained 36.93%, versus a 13.92% 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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