While the major market averages continue to make new highs, the precious metals market has seen a sluggish start to the year. Fortunately, the metals have started off Q2 much better, but silver (SLV) is still underperforming the S&P-500 by more than 1000 basis points year-to-date. The good news is that the recent outperformance has led to many investors giving up on the trade, with sentiment mostly reset from its massive spike in February. This has put the conditions in place for a strong move higher if silver can get past resistance, and one of the best ways to play the sector is junior silver producer GoGold Resources (GLGDF).
(Source: Daily Sentiment Index Data, Author’s Chart)
As shown in the above chart, sentiment for silver has shifted dramatically from early February, with sentiment readings falling from 90% bulls to 30% bulls. As we can see, this has led to a significant improvement in silver’s long-term moving average for sentiment, given that this moving average has plunged from a reading of 79% bulls to 45% bulls. While this reading is not yet on a buy signal and would require further weakness to drop into the buy zone, it is a massive improvement, especially considering that silver made a new multi-year high last week.
Generally, markets that have made new multi-year highs rarely see sentiment slip below 50% bulls, let alone the recent readings of 30% bulls and the sharp drop in the sentiment moving average. Given this improvement in this sentiment moving average and the fact that we should begin to roll off the high readings from February next week, the reading for this indicator has shifted from cautious to neutral recently.
If we move over to a technical picture of silver, we can see that this 9-month consolidation seems to be wearing on the bulls, with many getting frustrated that the metal hasn’t broken yet. However, this consolidation has allowed the monthly moving average (teal line) to begin to play catch-up and is the best thing for the silver market currently. Typically, pullbacks to this monthly moving average present buying opportunities, which suggests a floor for silver near $22.00/oz, and the consolidation period for silver also continues to push lower conviction bulls out of the trade, which could push the sentiment indicator from neutral to bullish by early June. So, while this range and lack of upside momentum might be frustrating, that’s a great sign because it means that the consolidation period is working to shake out weaker hands.
As it stands currently, silver has no strong resistance overhead but does have some short-term resistance at $29.00/oz. As long as silver remains below this level, the choppy action is likely to continue. However, a decisive break above $29.00/oz would significantly increase the probability of a move to $35.00/oz within six months and would be a very bullish development. For now, the best course of action looks to be trading the range and buying dips below $24.00/oz.
For investors looking for leverage on the silver price, one name stands out, and this is GoGold Resources. While the name may be deceiving, the company is a small-scale silver producer in Mexico that generates over $20MM in free cash flow per year at current silver prices. However, the investment thesis is based on the company’s Los Ricos District properties. The company looks to have uncovered over ~180MM silver-equivalent ounces on its Los Ricos North and South properties combined, which would value the company at less than $3.00 per ounce. The company has strong insider ownership of ~20% and a track record of success in the sector, and the Los Ricos South Project alone could catapult GoGold Resources from being a ~2.5MM ounce producer per annum to a ~9.0MM ounce producer per annum by FY2023, which would translate to more than $225MM in revenue at current silver prices. With the stock already hitting new all-time highs and leading silver, it looks like the better bet to buy on dips.
In summary, I see no reason to pay up for silver here and see the best course of action as buying dips on higher growth names like GoGold Resources (GLGDF). This is because it’s shown it doesn’t need a higher silver price to make new highs, having made new all-time highs already. Looking ahead, I see no reason to lose faith in this being a new bull market for silver as long as the metal stays above $22.00/oz. If we were to see a dip to $23.90/oz, I would view this as a low-risk area to start a position in silver.
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.
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SLV shares were trading at $24.45 per share on Tuesday afternoon, up $0.15 (+0.62%). Year-to-date, SLV has declined -0.49%, versus a 12.07% 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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