Precious metals bulls hoping for a stronger second half of the year have not been rewarded yet, with silver (SLV) sliding more than 16% in Q3, falling deeper into negative territory year-to-date. This horrid Q3 performance followed a sharp reversal and 6% drop in June, and it’s now up to the bulls to play strong defense as we Q4. The good news for investors is that silver seasonality is very strong in Q4, often finding a low in late Q3 or early Q4 and rallying into year-end. The other good news is that silver is the most hated it’s been in years, and when the scales are tipped too far in one direction for pessimism, we typically see snapback rallies. Let’s take a closer look below:

(Source: EquityClock.com)

Beginning with seasonality, we can see that silver followed its typical seasonality traits quite well to start the year, with a near parabolic rally out of the gate in January, though, it peaked earlier than expected in February vs. March typically. Silver then peaked again in Q2, which is typical of the metal, before wading through its seasonally weakest period: May to July. Unfortunately, the June softness persisted into Q3, which has caught several investors off guard. The silver lining, though, is that silver is now less than a week away from a period where it often makes it H2 low, with this low typically arriving in the 2nd week of October. If December 2021 is anything like December 2020, then the bulls should have a strong relief rally ahead, with silver up 15% last December and 12% in Q4. Obviously, there’s no guarantee that silver follows its seasonality traits. Still, the expected seasonal low is also arriving at the same time as a sentiment buy signal, placing more weight on a potential bottom.

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

Moving over to sentiment, we can see that bullish sentiment is sitting at its lowest levels in years, with silver registering a reading of just 9% bulls last week. This suggests that there were nine bears for every one bull in the market last week, which would indicate extreme pessimism after what’s been a painful 8-month correction. In fact, this was the lowest reading for bullish sentiment we’ve seen for silver since its March 2020 low, and prior to that, the September 2018 cyclical bottom. In previous instances when sentiment has been this bearish, we have seen positive 2-month, 4-month and 6-month forward returns, with average 6-month forward returns of 10% or higher over the past decade. This would suggest that silver could easily return to the ~$25.00/oz level by March of next year, which would line up with the next few months, which tend to much stronger from a seasonal standpoint. So, for investors anxious to invest in the metal, this looks like an opportune time to look at starting a position on weakness.

So, what’s the best course of action?

(Source: TC2000.com)

As the chart above shows, silver is sitting at a critical juncture, with support at $22.00/oz and no resistance until $26.00/oz. If the metal can hold this area on a weekly closing basis, a sharp rally is certainly possible, and leading silver miners like GoGold (GLGDF) should perform much better than the metal. Another way to look at gaining exposure to the metal is through Wheaton Precious Metals (WPM), a royalty company with meaningful exposure to silver that enjoys 70% plus margins due to its low-risk business model. Finally, if I were interested in playing the metal, I would be looking to buy any dips below $22.15/oz, with a stop below $21.00/oz. This would offer a 3 to 1 reward/risk for a potential trade back to $26.00/oz. However, given the impressive relative strength of GoGold Resources, I see this as the optimal way to play the silver price currently.

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 were trading at $20.91 per share on Tuesday afternoon, down $0.07 (-0.33%). Year-to-date, SLV has declined -14.90%, versus a 17.32% 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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