It’s been a volatile start to the start for most asset classes, with the Nasdaq 100 Index (QQQ) down more than 10% year-to-date, and most growth stocks also remain deep in negative territory. However, among violent correction, precious metals have been giving up ground grudgingly, with gold (GLD) and silver (SLV) in positive territory year-to-date. This relative strength is a great sign because both metals tend to perform better when they are above their monthly moving averages and outperform the major market averages. Let’s take a closer look below:
As shown in the chart above, the Silver vs. S&P-500 ratio retreated to a multi-year support level in Q4, and many commentators were quick to jump into the bear camp when the ratio of silver vs. the S&P-500 hit new lows in December. However, for anyone familiar with trading precious metals, they tend to see lots of false moves, and not only has this breakdown not seen any follow-through but it’s seen a complete reversal back above the key 0.005 support level.
Often, failed breakdowns can trap many shorts and leave most investors offside, and they’re one of the most attractive long setups for those that don’t mind volatility. A recent example was silver’s breakdown from a multi-year range in March 2020, which did not see much follow-through, and immediately reversed back up through support in late March. After regaining support, the metal doubled over the following six months. It looks like we could be seeing a similar setup in the Silver vs. S&P-500 ratio. Obviously, history doesn’t have to repeat itself, but this suggests we will see silver outperform the S&P-500 over the next 12 months.
If we look at sentiment in silver, this certainly supports a period of outperformance, both short-term and medium-term. This is because bullish sentiment for silver remains in the lower portion of its 3-year and 5-year range, with just one-third of market participants being bullish (35%). This compares to the S&P-500, where more than 70% of market participants remain bullish (average reading) over the past 90 trading days, even though the market has slid more than 10%. So, from a contrarian standpoint, things are lined up nicely for silver as well.
So, what’s the best course of action?
As shown in the daily chart of silver below, the metal continues to make higher lows and appears to be building the right side of a nearly 1-year base, a very constructive setup. The metal has strong support at $21.80/oz to $22.000/oz and no strong resistance until the $25.00/oz level within this setup. Given that the metal remains in a trading range, buying in the lower portion of this range is the best course of action, and it’s always wise to take at least some profits near resistance ($25.00/oz).
Given that silver is trading at $23.70/oz, this is not an ideal spot to be entering new positions. Instead, I favor buying dips to the $22.00/oz to $22.20/oz level, where the reward/risk ratio is much more attractive. Meanwhile, there are a few silver producers and developers that are trading as if the silver price were below $21.00/oz. These names offer a way to get leverage to the price of silver. One of these names is SilverCrest Metals (SILV) which owns one of the highest-margin projects globally and is ready to begin production this summer. Its Las Chispas Project has industry-leading grades and is expected to have 65% plus margins at current metals prices.
To summarize, while I don’t see silver or SILV as buys currently, I do believe both are great buy-the-dip candidates. Hence, for those interested in diversifying their portfolio, I would view dips below $22.20/oz on silver, and $7.50 on SILV, as low-risk buying opportunities.
Disclosure: I am long 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. 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.
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SLV shares fell $0.01 (-0.05%) in premarket trading Thursday. Year-to-date, SLV has gained 1.95%, versus a -6.58% 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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