It’s been a turbulent start to the year for the major market averages, with the Nasdaq-100 (QQQ) down 3% year-to-date and growth stocks getting pummeled, evidenced by the Renaissance IPO ETF (IPO) down 7%. Despite the carnage, precious metals have been giving up ground grudgingly, with silver (SLV) down 2% year-to-date despite recent rate hike chatter.
This strength in the face of a more hawkish stance from the Federal Reserve can be attributed to the fact that the initial rate hike is typically a buy the news event for precious metals, and the fact silver has sold off sharply on the rumor already, down 20% from its highs. Let’s take a closer look at the metal and some of the best ways to gain exposure:
(Source: YCharts.com, Author’s Chart)
The chart above shows that real rates continue to sit deep in negative territory following the most recent inflation readings, which is typically a very bullish backdrop for precious metals. This is because there is no opportunity cost to hold the metals. In fact, holding the metals provides protection against losing one’s purchasing power. However, with Bitcoin and other digital assets being in vogue, neither gold nor silver responded how they should have, causing many to abandon the trade altogether.
While abandoning an under-performing trade makes some sense given that it’s a temporary opportunity cost, the flight out of gold and silver by many speculators has contributed to a massive decline in most gold/silver miners, with valuations the most attractive they’ve been in years. So, it might be time to re-enter the trade for those who rushed out of the trade, especially with this being the best seasonal period to own silver and miners, with the metal typically bottoming in mid-January before a steady 3-month rally into April.
Looking at the chart below, we can see that while seasonality is positive for silver, the technical picture has also begun to improve. This is because silver appears to be trying to make another higher low vs. its September and December lows, recently finding strong support at $22.00/oz and appearing to be the right side of a massive cup base. It’s also worth noting that the next strong resistance level doesn’t come in until $25.00/oz, pointing to nearly $2.50 in upside to resistance and less than $0.70 in potential downside vs. multi-year support at $22.00/oz.
Finally, if we look at the bigger picture, silver has rarely ever looked better. This is because it’s currently re-testing a 6-year breakout level after making new multi-year highs in mid-2020. This third test of this breakout level likely has some worried that it will break down into the base, but to date, the metal seems to be making higher lows on each re-test. The recent price action suggests that investors should remain optimistic, with base-on-base patterns like this typically being continuation patterns, meaning that a visit with $30.00 – $31.00/oz in the next 12-18 months looks likely.
So, what’s the best course of action?
As discussed in previous updates, the lowest-risk way to play the silver price is buying below $22.00/oz, which is right up against key support. However, another way to play the silver price is with GoGold Resources (GLGDF), a takeover target in the silver space that is exploring for gold & silver in the Los Ricos District in Jalisco State, Mexico. To date, the company has one small mine in operation and has the potential to grow to 3 operations (Los Ricos North, Los Ricos South, and Parral) over the next 4-6 years.
Assuming the company is successful, its annual silver-equivalent production would increase to more than 16MM silver-equivalent ounces [SEOs] per annum, translating to the potential to generate annual revenue of $385MM per year at a $24.00/oz silver price by 2026. The company should be able to self-fund its third operation with cash flow from Los Ricos South and based on discoveries to date; its resource looks like it is set to grow significantly with multiple untested targets. Given that the stock has recently pulled back to just above its 400-day moving average, this looks like a low-risk area to start a position in the stock near US$2.05.
To summarize, buying dips in silver continues to make sense, and while the past year has seen disappointing returns, I see a much better year ahead in 2022. Given that I prefer to trade in uptrends and gain leverage to the silver price, my favorite idea is GoGold Resources, which I remain long. I would not be surprised to see the stock trade above $3.10 per share in the next 18 months, translating to 50% upside from current levels.
Disclosure: I am long GLD, 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 $21.07 per share on Tuesday afternoon, up $0.31 (+1.49%). Year-to-date, SLV has declined -2.05%, versus a -1.21% 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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