It’s been a tough start to the year for the precious metals space, with the Gold Miners Index (GDX) down 8% year-to-date and the price of gold (GLD) down over 7%. However, silver (SLV) has been the shining star among the precious metals, up 3.50% year-to-date and massively outperforming gold.

This continued outperformance is a great sign for the yellow metal because it suggests that this deep correction in the miners and gold is more likely a nasty correction vs. the beginning of a new bear market. However, the key to keeping this thesis intact is silver holding onto its key support at $24.00/oz. Let’s take a closer look below:

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

If we look at the sentiment chart above, we can see that silver sentiment is actually quite optimistic, which we expect to see when an asset class is in a bull market. Currently, sentiment for silver is sitting at a reading of 75% bulls, with three bulls for every one bear in the market, and the long-term moving average has also moved up to 75% bulls. This is good news because it shows that investors are getting more bullish on the metal, but we do not want to see sentiment continue higher in the coming weeks because too much bullish sentiment can suggest a crowded trade.

So, while this indicator was previously on a bullish reading with relatively low optimism in January and the first half of February, we have switched to a neutral reading, with a healthy amount of bulls in the market. This is not an issue, but a further increase in bullish sentiment would be concerning, so we want to see bullish sentiment either rise or stay at current levels, even if silver does head higher in the coming weeks.

(Source: TC2000.com)

Moving over to the silver/gold ratio, we continue to have a bullish outlook, with silver undervalued relative to gold and making new highs against the metal. Generally, it’s best to have a positive outlook on the precious metals space when silver is outperforming gold, and it’s best to be very cautious when silver is significantly underperforming gold.

Until 2020, we had silver underperforming gold and unable to break out from its multi-year base. However, with the metal breaking out of a multi-year base, outperforming gold, and not making new lows, the outlook for silver continues to be bullish. This bodes well for investors in the miners because this increases the probability of this correction being temporary and not the beginning of a new bear market.

So, how’s the technical picture look?

(Source: TC2000.com)

As shown above, silver continues to trade above a massive breakout level, above its key weekly moving average, and the metal continues to build a 25-week cup & handle base, with a breakout level of $28.90/oz. A breakout is not necessary for the big picture to remain bullish for silver, but we do want to see the $24.00/oz level defended on any weakness. So far, the bulls have played defense where they need to, so the outlook remains positive for now. Given how far the silver/gold ratio has run recently, some outperformance by gold would not be surprising in the short-term. However, if this occurs, we want to see silver remain above its weekly moving average near $24.00/oz.

So, what’s the best course of action?

Silver should outperform in a precious metals bull market, but optimism remains high for silver and silver miners, making silver miners less exciting of a value proposition here. Meanwhile, gold miners are being thrown away despite many trading at less than 12x FY2021 free cash flow, and some like Newmont (NEM) paying 3.70% yields.

Elsewhere, when it comes to value, Kirkland Lake Gold (KL) trades for less than 9x FY2021 earnings estimates vs. a previous average earnings multiple of 16. So, while silver miners are the more obvious trade and certainly have more margin expansion in FY2021, they are priced in for this, it seems, with some names trading at premium valuations like First Majestic (AG) at over 30x earnings estimates. Therefore, I continue to see the best value being gold miners, but I would get interested in silver if it dips below $24.00/oz. Going forward, the bullish outlook will stay intact for silver as long as it holds above $24.00/oz, but we do want to see sentiment cool off if this rally continues.

Disclosure: I am long GLD, NEM, KL

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.