2021 was a year to forget for investors in silver (SLV), with the metal down 12% for the year and the Silver Miners Index (SIL) plunging nearly 20%. However, as we begin the new year, the outlook appears to be much better, with many silver miners improving from frothy valuations since the Q1 2021 silver squeeze and sentiment in the metal itself showing elevated levels of pessimism. In addition, while the metal remains well below its prior highs of $30.00/oz and in a volatile range, the long-term picture has rarely looked better.
(Source: TC2000.com)
Starting with the worst indicator first, the silver/gold ratio has continued to underperform over the past several months and has slid below its long-term moving average (white line). This is a negative development, given that the healthiest environment for silver with the most alpha is when silver is trading above this key moving average. Having said that, while we're below this moving average, the silver/gold ratio is still attempting to make a higher low vs. last year's levels. So, while we've seen a slight downgrade from a bullish reading to a neutral reading, the above indicator is still not showing any red flags.
Moving over to sentiment, we continue to remain on a slightly bullish reading, with far more market participants being bearish than bullish. The below chart evidences this, showing that bullish sentiment for silver is in the lower portion of its range and hit an extreme reading of 12% bulls last month. If we look at prior instances, dips below the 15% level have produced strong rallies in the coming months. So, as long as the majority remain pessimistic on silver, I would expect the metal to continue to make higher lows vs. the recent low at $21.50/oz.
(Source: Daily Sentiment Index Data, Author's Chart)
If we look at the technical picture, the bearishness among market participants is surprising, with more nearly three bearish market participants for every one bullish participant. This is because silver has broken out above its downtrend line, appears to be building the right side of a cup base, and is holding above pivotal $21.50/oz support. This shows that the metal is trying to begin a new uptrend and resume its cyclical bull market, which would be confirmed with a close above $27.00/oz.
(Source: TC2000.com)
Meanwhile, the long-term outlook could not be more bullish when looking at the bigger picture. Fundamentally, silver demand continues to rise due to electrification, and technically, this is being confirmed by a massive breakout from a multi-year base. The last time we saw a breakout from a multi-year base in silver was in 2004, and the metal consolidated for over a year to reset its overbought reading. It then rallied over 50% in 2006 following the consolidation period in 2005. Assuming we were to see something similar, this means that silver could easily take a run at the $29.00/oz to $30.00/oz level before year-end.
(Source: TC2000.com)
So, what's the best course of action?
As noted in previous updates, my favored way to play the silver is producers, with Pan American Silver (PAAS) and GoGold Resources (GLGDF) being two of the more attractively valued names with strong exploration upside. However, if I was only interested in playing the silver price, I believe the best plan is buying any dips below $22.00/oz, where the metal seems to find strong support. To summarize, I remain bullish long-term on the silver price, and I believe many investors may be caught off guard here, throwing in the towel on metals and miners despite silver getting ready for major another leg up in the next 12-18 months.
Disclosure: I am long 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. Given the volatility in the precious metals sector, position sizing is critical, so when buying precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.
SLV shares were trading at $21.33 per share on Tuesday afternoon, up $0.15 (+0.71%). Year-to-date, SLV has declined -0.84%, versus a 0.68% 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.
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