Is Silver on the Verge of a Breakout?

NYSE: SLV | iShares Silver Trust News, Ratings, and Charts

SLV – Silver (SLV) has started to show signs of life following a poor start to the year. Taylor Dart explains why its fundamentals continue to improve and point to a strong second half.

It’s been a volatile month in the markets, and fortunately, for the silver bulls, this volatility has been to the upside. In an abrupt change of events, silver (SLV) has easily outperformed the S&P-500 (SPY) over the past month, up 7% for the month of May vs. the S&P-500’s 1% return. This outperformance bodes well for the precious metals complex, but the bears have managed to keep a lid on silver, for the time being, playing strong defense at the $28.90/oz to $29.30/oz resistance level. If this resistance level is broken on a monthly close, silver has lots of room towards the $35.00/oz level. However, until we have a clear breakout, the best course of action looks to be trading the range or holding best of breed miners like GoGold Resources (GLGDF).

Chart, histogram Description automatically generated

(Source: TC2000.com)

As shown in the chart above, SLV continues to struggle with the $26.35 – $26.70 zone, and the price of silver has been unable to get through the corresponding $28.90/oz to $29.30/oz resistance zone.  The good news is that the metal does not have caution bars (orange and red bars) as it approaches this strong resistance area for the fourth time in the past two years, suggesting that the next major test of this resistance level near $29.00/oz could lead to a successful breakout. This view is corroborated by sentiment, which is shown below.

As we can see, bullish sentiment for silver is closer to a cycle low than a cycle high, which has been an impediment to breakouts over the past year. As long as investors don’t get overly bullish in the next month, this sentiment setup suggests that there’s enough fuel for silver to get to $34.00/oz if it does breakout. The key is that silver must breakout above $29.30/oz in a clear manner because until this happens, we will continue to trade in this frustrating range between $22.00/oz and $29.00/oz.

Chart, histogram Description automatically generated

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

Over the past two years, pullbacks this deep in the sentiment moving average for silver have provided decent buying opportunities, and any further weakness has provided a buying opportunity. As the chart below shows, though, while silver sentiment remains in a favorable spot, silver is stuck between resistance just overhead and support roughly 10% below. For this reason, I don’t see silver as a low-risk buy here and would be waiting for a dip closer to upper support at $24.75/oz to add new exposure.

Chart, histogram Description automatically generated

(Source: TC2000.com)

While many investors are focused on trying to time silver, I continue to see the best way to play the silver market being GoGold Resources (GLGDF). GoGold is a Mexican silver producer that uses its free cash flow from its Parral Project to finance the delineation of two major discoveries it’s made in the past two years. Currently, GoGold is sitting on a resource of 70 million silver-equivalent ounces [SEOs] at its Los Ricos South Project, but it’s looking like the company might have an additional 100 million SEOs at Los Ricos North.

Either of these two projects has the potential to more than triple GoGold’s current production profile, and with a market cap of just $600MM, GoGold is valued at just $3.15/oz based on a resource that I expect to grow to 190MM SEOs by Q1 2023. This valuation does not include its operating Parral Mine, which generates more than $25MM in annual free cash flow. Assuming the company can move a second mine into production by Q3 2023, I would not be surprised if GoGold commanded a valuation closer to $1BB.

Chart, line chart Description automatically generated

(Source: TC2000.com)

As the chart above shows, GoGold has broken out to new all-time highs, while silver still remains more than 40% below its all-time highs near $50.00/oz. This suggests that GoGold does not need the silver price to perform, given that it has broken out without new highs in the silver price. So, if the weight does come off the silver price and silver can get through key resistance, GLGDF should be able to make a move to its next target at US$3.00. For investors looking to play the silver price, I would view any pullbacks below $24.75/oz as low-risk areas to add exposure. For investors interested in leverage on the silver price with arguably one of the most exciting discoveries in the silver space, dips below US$2.05 on GoGold Resources should provide low-risk buying opportunities.

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.

 


SLV shares fell $0.04 (-0.16%) in premarket trading Thursday. Year-to-date, SLV has gained 4.60%, versus a 12.55% 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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