It’s been a volatile second half of 2020 for the Silver Miners Index (SIL), with investors staring down significant unrealized gains in August before a massive bite was taken out of year-to-date profits beginning in September. This sharp correction in the miners was driven by a waterfall decline in the price of silver (SLV), with the price of silver sliding from $30.00/oz to just $22.50/oz in a matter of days. Given that many miners have an average all-in cost of $14.00/oz, this translated to their margins being halved ($8.50/oz vs. $16.00/oz) over the course of just a week.

However, with the price of silver finally beginning to firm up over the past week, the miners are beginning to show signs of life, with one miner, Couer Mining (CDE), racing to new 52-week highs. This change of character is a welcome development for the sector, suggesting that sharp pullbacks of 14% or more should be buying opportunities going forward. Let’s take a closer look below:

(Source: TC2000.com)

As shown in the chart above, the Silver Miners Index flashed several warning signals in August, with nine caution bars in a span of just 12 trading days, highlighting irrational exuberance over the short-term. However, we saw an accumulation bar showed up (green) on the Silver Miners Index in late September, and the bulls have done a great job defending this area over the past three months.  In fact, while we did drop below this level on two occasions, both of these drops now look like they were merely shakeouts, with the price trading 10% higher than the late September low.

Besides, we’ve now got a clear pattern of higher highs and higher lows in place on the Silver Miners Index, and the 150-day moving average has been able to play catch-up, which is typically a floor for the index during bull markets. Based on the significant buying pressure we’ve seen since the November 30th low, the odds have increased considerably that the lows are now in.

(Source: TC2000.com)

If we move over to a quarterly chart of the index that spans over a decade, the big picture could not be more bullish if the index can get above $50.00 on a quarterly closing basis. Given that this is unlikely to occur in the final trading days of 2020, the first real chance at confirming a breakout will be the end of Q1 2021. Assuming the index can get above this level, we would have an 8-year breakout on our hands and the first confirmation from the miners that they are following the breakout we saw in silver this summer. Based on this base’s size and the fact that there’s minimal resistance overhead if the index chews through the $50.00 level, the first target for this breakout is near $65.00.

So, what’s the best course of action here?

While the Silver Miners are beginning to carve out a new uptrend, we have quite a few names in the index that remain overbought after a 30% rally in less than 20 trading days. However, even if silver doesn’t rally any further from current levels, most silver miners will enjoy 40% plus margins even at $24.00/oz silver, a massive improvement from the low double-digit margins last year. This suggests that the sector is fundamentally undergoing a massive change as we head into FY2021, as long as the silver price can stay above $24.00/oz. The safest way to play the sector is through the producers. They generate significant free-cash-flow, are beginning to pay dividends, and some even have organic production growth over the next two years. Having said that, the index remains extended short-term, so aggressively starting new positions above $45.00 on SIL probably isn’t the best idea – the time to start scaling in was two weeks ago.

Instead, for investors looking to start positions in the Silver Miners Index, the best move looks to be leaving low bids in place to buy any sharp pullbacks while maintaining existing exposure. The first strong area of support for the index is at $41.00, and this would be a very low-risk opportunity to pick up some miners on sale. One of the best run names in the sector is Pan American Silver (PAAS), with the best smaller producer being GoGold Resources (GLGDF). I believe these are the two safest ways to play the sector from a low-risk but high-reward standpoint, and I would view any sharp pullbacks in these names over the next couple of weeks as buying opportunities. For now, I remain long GoGold Resources and gold (GLD) but have not started a position in PAAS just yet.

Disclosure: I am long GLD, GLGDF

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SLV shares were trading at $23.79 per share on Thursday morning, down $0.01 (-0.04%). Year-to-date, SLV has gained 42.63%, versus a 16.59% 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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