While it’s been a rough start to the year for the Silver Juniors Index (SILJ) with a (-) 13% return in less than 20 trading days, silver (SLV) is holding up relatively well, down just 3% despite a continued appetite for risk-on assets, which seems to be hurting the precious metals trade. Silver is currently building a new base on top of its prior multi-year breakout near $21.00/oz, and this bullish setup will remain in place as long as the $24.00/oz level is defended. Meanwhile, small speculator positioning is not overly extended yet, suggesting that it’s unlikely that the spike higher to $28.00/oz two weeks ago was an intermediate top. Let’s take a closer look below:
(Source: Daily Sentiment Index Data, Author’s Chart)
Beginning with sentiment data, we can see that bullish sentiment for silver just fell below the March lows on a 16-week average basis, even though prices were 80% higher than the March lows at each correction trough ($21.90/oz vs. $11.70~/oz). This is a bullish divergence, which suggested that investors were getting more bearish despite significantly higher prices, and we still don’t have any signs of complacency here. As shown above, bullish sentiment is currently sitting near 65%, which is 2000 basis points shy of the danger zone near 85% bulls, where investors have to start worrying about a medium-term top as we experienced in August. Therefore, while I certainly wouldn’t call this an overly favorable backdrop for silver sentiment with current sentiment levels showing two bulls for every one bear in the market, there are no conditions to suggest that we just saw a medium-term top at $28.00/oz.
(Source: CFTC Data, Author’s Chart)
If we move over to COT data to see how small speculators are positioned, we can see that there’s no clear sign of a medium-term top here either, with the most recent reading coming in at 51,000~ long contracts. As shown above, this indicator’s danger zone comes in at above 65,000 contracts, with price often making a final higher high even after this level is hit. While a rise to $30.00/oz or higher on silver could certainly coincide with a spike into this danger zone for small speculator positioning, there was no sign of extreme optimism recently that would suggest the recent spike was a top either. Like Daily Sentiment Index Data, this reading is not bullish for silver, and I would much prefer to see a final spike down below 40,000 contracts. However, it’s not bearish either by any means, so the upside case of a new high above $30.00/oz before Q3 remains on the table.
Fortunately, when it comes to the technical picture, silver has a very solid setup in place, with a 25-week cup & handle base being built on top of the recent yearly breakout. The great sign about the recent correction we saw is that the metal never re-entered its prior base, which would have been a bit of a red flag as strong breakouts do not fall back below their breakout levels. We saw a similar instance for gold (GLD) in Q2 2019, with the metal breaking out of a multi-year, never re-entering its base, and then continuing much higher in the following year after 3-month digestion.
While there’s no guarantee that silver repeats this pattern and continues to the upside and new highs like gold did, I continue to remain bullish long-term as long as silver remains above $21.50/oz. The key for silver to exit this short-term correction is to get above $26.55/oz with increased volume and hold above this area.
So, what’s the best course of action?
While I don’t see any reason to be aggressive currently in silver miners because many names are trading at relatively expensive valuations to their peers, I do see Wheaton Precious Metals (WPM) and Pan American Silver (PAAS) as two names worth keeping an eye on.
Both of these names are trading at deep discounts to their peers in the silver producer & metals royalty place, and I see a fair value for both stocks of $52.00 and $38.00, respectively. Therefore, the current pullback looks like a low-risk buying opportunity for both names. For now, I remain overweight gold miners relative to silver miners due to their more attractive valuations, with my favorite idea being Kirkland Lake Gold (KL), where I see a conservative fair value of $60.00. While this correction has been messy in silver, I see no reason to abandon the long-term bullish outlook.
The key to regaining upside momentum is a move above $26.55/oz on increased trading volume, and this would be an opportunity to add to positions.
Disclosure: I am long GLD, KL, WPM
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 $23.73 per share on Tuesday morning, up $0.18 (+0.76%). Year-to-date, SLV has declined -3.42%, versus a 2.84% 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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