Gold (GLD) and silver (SLV) have continued to take a beating as we near the end of Q1, and the previous sanctuary against the decline on a relative basis, silver, has shown it’s not entirely bulletproof this week. While the industrial met was up for the week on continued bullish sentiment related to electrification, it’s fallen back into negative territory for the year as of Thursday, with a 3% decline this week. This has pushed the metal back below the key $26.55/oz level, which was prior resistance, and getting back above this level will be critical to regaining short-term momentum. Let’s take a closer look below:

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

Before digging into the technical picture, it’s worth examining sentiment, which has been quite ebullient for silver over the past three months. In fact, sentiment has gone from just shy of a buy signal in early December to within a hair of a short-term sell signal as of Monday’s close, given that bulls have been flooding into the trade on the back of excitement about a silver squeeze. This has not transpired to date, and all we’ve seen is a two-day pump & dump for silver and the silver miners, with many more than 50% off their February 1st highs.

One piece of good news about this week’s correction is that it has cooled off sentiment a little, but the long-term sentiment moving average is still in an area that suggests some caution, with three bulls for every one bear in the trade over the past 3 months.

Ideally, investors want to see silver hold its ground or head higher, but sentiment around the metal cool off. With the silver squeeze movement banging their drums daily, cooling off the metal’s sentiment won’t be easy, but it would be preferred. This is because if silver does hit new highs, this indicator will likely trigger a sell signal and stymie the rally. For now, sentiment remains on a neutral reading for this indicator, with no sell signal in place, bulls heavily outnumbering bears.

(Source: TC2000.com)

Moving over to the technical picture, we can see that silver spent several weeks struggling to reclaim the $26.55/oz level, but it shot above this area with ease in late January. Unfortunately, silver has now dipped back below this level, suggesting that this could be a failed breakout we’ve seen. As noted in prior updates, as long as silver remained above $26.55/oz, short-term momentum would remain up. However, with silver back below this level, the short-term picture is now a little muddled. However, while messy, this cup and handle setup is still intact and not invalidated yet.

(Source: TC2000.com)

The good news is that while the short-term outlook is less clear, silver continues to hold up extremely well vs. gold and is sitting above its multi-year breakout and above its key monthly moving average. As long as the $22.00/oz breakout area is defended, silver’s long-term chart will remain bullish, and 20% pullbacks should provide buying opportunities. Based on the recent highs of $30.15/oz, this means that any pullbacks below $24.00/oz would provide a low-risk entry for investors.

So, what’s the best course of action?

Silver remains the stronger metal and seems to have a stronger fundamental outlook due to the electrification trend. However, the silver miners are not cheap as a whole, with many trading above 25x earnings. So, while buying the silver miners is a great way to get leverage on the metal, there’s no real margin of safety currently in most miners. One name that does offer gold and silver exposure with industry-leading margins is Wheaton Precious Metals (WPM).

One name that offers organic growth potential in the small-cap space is GoGold Resources (GLGDF - Get Rating). These two names look like solid bets on the sector with great stories and reasonable valuations, with the latter working to uncover two massive silver deposits in Mexico. Going forward, I see no reason to give up on the silver trade, given that the long-term picture remains bullish. Having said that, the best way to play the metal is through names that are reasonably valued, not chasing the hot names and top short squeeze candidates like First Majestic (AG) that trade at nearly 40x earnings.

Disclosure: I am long GLD, GLDDF

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 $24.27 per share on Thursday afternoon, down $0.01 (-0.04%). Year-to-date, SLV has declined -1.22%, versus a 2.46% 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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