It’s been a rough start to March for silver (SLV), with the metal significantly underperforming gold recently and the short squeeze movement not having as much effect as silver bugs had hoped. As of Monday’s close, silver is down 5% for the month, a 400-basis point underperformance vs. gold, with silver now back in negative territory for the year. However, despite this shift from a double-digit year-to-date return to a single-digit year-to-date decline, we haven’t seen any real fear from investors.

In fact, the 3-month sentiment moving average for silver remains above 70% bulls, suggesting that there are nearly three bulls for every one bear amid a 17% decline for the metal. Let’s take a closer look below:

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

As shown in the chart above of bullish sentiment for silver, we still haven’t seen any sign of even moderate fear from investors, even though silver has corrected more than 17% from its highs over the past seven weeks. In contrast, bullish sentiment for gold fell as low as 15% bulls after a similar-sized correction, with the long-term moving average for sentiment currently near 30% bulls. While a reading of 46% bulls for silver as of Monday’s close is not a warning sign by any means, lower readings would be ideal to suggest that investors are beginning to get nervous.

Generally, the most durable rallies for silver have begun from readings below 20% bulls and more than 80% of all occurrences when silver sentiment headed above 90% bulls (as it did on February 1st), sentiment fell below 20% bulls within the next six months. Obviously, this doesn’t have to play out similarly, but the odds suggest we have further to go in this correction, at least from a sentiment standpoint.

This could be achieved by lower prices which cause lower sentiment readings, or pessimism due to boredom even if silver remains above $25.00/oz. The latter scenario occurs less frequently unless we see multi-month consolidations. While a neutral sentiment reading does not mean that silver can’t head to higher prices in the next month or two, it does suggest that the better reward/risk profile is in gold, where sentiment remains in the gutter.

So, how does the technical picture look?

(Source: TC2000.com)

Similar to gold, silver has broken out of a multi-year base, but fortunately, silver remains above its base breakout and found immediate support after re-testing this breakout area at $22.00/oz. This has left silver on a bullish reading on its long-term chart, with silver set to remain on this reading as long as the $22.00/oz level is defended. However, bullish long-term readings do not preclude 15% to 30% corrections, with investors suffering through a 27% correction from the August high and a more than 15% correction currently. Therefore, while this bullish reading is helpful and suggests that sharp dips can be bought, it’s generally wiser to wait for at least a 20% pullback before starting new positions, given silver’s volatility. From the recent high at $30.00/oz, this would translate to a pullback below the $24.00/oz level.

So, what’s the best course of action?

With gold’s long-term sentiment moving average at 33% and silver’s long-term moving average at 73%, the reward to risk continues to be much better for investors in gold miners and gold in general. This doesn’t mean that gold miners or gold have more upside, but it suggests that the downside is more limited, with sentiment mostly washed out in the gold space.

Besides, most gold miners are trading for less than 12x FY2021 free cash flow and deals from a value standpoint, while most silver miners are trading for more than 30x free cash flow and nowhere near attractive from a value standpoint. Therefore, I continue to see the gold space as more compelling.

For investors looking to start positions in silver, I would be waiting for further weakness or a leg down in sentiment before rushing to start new positions. For investors looking for the best-valued stocks, Kirkland Lake Gold (KL) continues to be the most compelling idea in the gold space at less than 10x free cash flow, with Wheaton Precious Metals (WPM) being the most compelling idea from a valuation standpoint in the silver space with 75% margins and trading at barely 20x earnings.

Disclosure: I am long KL, GLD

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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