It’s been a volatile week thus far for the markets, and while gold (GLD) has performed quite well, silver (SLV) has taken a backseat, down 2% for the week and unable to hold onto upside momentum. The good news is that the silver/gold ratio continues to remain in bullish alignment, with silver making a new high this year while gold has been unable to get back above $2,000/oz. However, we are going to want to see the silver bulls begin playing defense soon. This is because while pullbacks to oversold levels are a reason to be bullish like we saw two weeks ago, an inability to rally from oversold levels can suggest that a lower low is needed to capitulate the bulls. Let’s take a closer look below:
Silver’s fundamental backdrop continues to remain the strongest it’s been in decades, driven by demand from the automotive sector and associated infrastructure, continued demand from the solar industry, and 5G broadband cellular networks. This increase in industrial demand combined with what could be reduced investment in one of the largest silver-producing nations due to higher taxation (Peru) could translate to a deteriorated supply/demand picture over the coming years. This should place a strong bid under the silver price and is likely why the metal has performed so well in the face of gold’s weakness this year. The other factor, of course, is that silver tends to outperform gold if a new secular bull market has indeed begun, which the gold price is pointing to, given its new all-time high breakout last year. However, while this bodes well for the bigger picture, short-term momentum remains neutral, and the key to preventing it from turning negative is the bulls playing defense at $24.75/oz.
As shown in the chart above, silver has found strong support near its 250-day moving average since this new bull market began last year and has found strong buying support near $24.50/oz on the sharp corrections we saw in January and March. In order to keep this pattern intact, we will want to see the bulls begin to step up and start playing defense near $25.50/oz at the 250-day moving average to force a higher low on the chart. If this level fails, the $24.75/oz level is pivotal to prevent further weakness. Presently, the metal is sitting 3% above its 250-day moving average and 5% above key support.
I don’t see any reason to lose any sleep in terms of the bigger picture, and the current setup is actually very bullish. This is because silver continues to build a base-on-base pattern after a massive breakout last year, and the bulls will get the benefit of the doubt as long as the metal stays above $23.00/oz. Looking at the previous bull market in silver, the setup is actually quite similar, with the metal pausing for just over a year and a half and making three higher lows before exploding higher and gaining 70% over the following 12 months. If we were to trade similarly to this analog, silver would be headed above $42.00/oz by the end of 2022, and the metal should be finding a low soon in this pattern.
History does not repeat, but it often rhymes, and with a similar setup in place to the one we had in the early 2000s, I see no reason to give up on the silver trade here. However, the bulls will want to play defense at $24.75/oz to prevent further downside, with a loss of this level potentially leading to a re-test of the lows of the current 12-month base. For now, I continue to remain bullish on silver and have started a position recently after the metal registered its first buy signal of 2021 at $24.00 on SLV.
Disclosure: I am long GLD, SLV
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 $24.00 per share on Thursday afternoon, down $0.24 (-0.99%). Year-to-date, SLV has declined -2.32%, versus a 16.14% 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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