It’s been another rough month for the precious metals sector, with the price of silver (SLV) plunging 5% to re-test the $22.50/oz level and the miners taking another leg down, testing new 52-week lows across many indexes. This relentless selling pressure continues to put a massive dent in sentiment, with despondency across the sector. This is evidenced by bullish sentiment sitting at its lowest levels in nearly three years and many investors exiting the sector for greener pastures. While extreme pessimism alone does not guarantee a bottom is on the horizon, it does increase the probabilities, but the key will be how the silver/gold ratio acts over the coming weeks. Let’s take a closer look below:

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

As shown in the chart above, bullish sentiment for silver has finally flipped to a short-term buy signal as of Wednesday’s close, with the long-term moving average for bullish sentiment dipping to 20%. This is the lowest reading we’ve seen in over two years for this indicator and is a complete 180 from the sentiment picture we saw in late February, a reading of 78% bulls on the back of an attempted silver squeeze by the WSB community. The last time sentiment was this low was the fall of 2018, which marked the low for the precious metals sector, with the Gold Miners Index (GDX) rising more than 60% over the next 11 months. The price of silver rose 30% in the same 11-month period, and this marked the low for silver over the next two years (excluding the March 2020 crash). History does not have to repeat itself, but with the previous signal having a forward 12-month drawdown of ~6% and a forward 12-month draw-up of ~30%, this was an excellent time to begin building a position in the metal.

(Source: TC2000.com)

Looking at the silver/gold ratio, this indicator continues to have a bullish posture, sitting above its long-term moving average (white line). This is the opposite of what we saw during late 2011, a secular top for the precious metals market. Given that the silver/gold ratio is still holding above its recent low, this suggests that this is merely a cyclical bear market and a major shakeout in the miners and metals. However, this is contingent on the silver/gold ratio holding near current levels and the gold/silver ratio not breaking above the 85 level. A breakout above the 85 level would be a negative development and suggest that gold and silver could be in for further pain ahead. For now, this indicator remains on a moderately bullish reading.

(Source: TC2000.com)

Finally, if we look to the technical picture for clues, silver is sitting at an important juncture, holding right at the support level within a multi-year base-on-base pattern. Base-on-base patterns are very bullish setups when they show continuation to the upside, but it’s not clear yet whether silver will break up or down out of its $21.50/oz to $30.00/oz range. If the bulls can hold this support zone near $22.00/oz and reverse above $24.00/oz, this would be a positive development and would increase the probability of a breakout in the next 12 months. However, if the $21.50/oz level is lost, this would be a negative development, and would likely coincide with a breakout in the gold/silver ratio, also a negative sign. Therefore, the bulls must play defense here in silver.

So, what’s the best course of action?

(Source: TC2000.com)

One low-risk way to play silver is to start a position below $22.50/oz, with a stop loss order at $21.35/oz, risking $1.15 if the metal invalidates its base-in-base pattern. The upside in this trade is more than $4.00 to the next resistance level, which comes in near $26.50/oz. However, my preferred way of playing silver is GoGold Resources (GLGDF), a Mexican silver producer that is currently using its small Mexican mine to finance exploration on a large silver district, Los Ricos. To date, the company has proven up over 70MM silver-equivalent ounces on the property (Los Ricos South) and is set to release a maiden resource for its Los Ricos North Project later this year. Based on my estimates, we should see Los Ricos’ total resource come in above 200MM silver-equivalent ounces, making it one of the largest silver projects in Mexico. This would make the company a top takeover target for silver producers in the region and would lead to a material re-rating in the share price to the upside.

As the chart above shows, GoGold is acting much stronger than the price of silver and actually made new all-time highs this year without the price of silver. This suggests that it’s a much better bet from a relative strength standpoint than betting on the silver price, which continues to remain in a steep intermediate downtrend. In summary, I would view sharp pullbacks in GoGold Resources as low-risk buying opportunities and pullbacks below $22.50/oz in silver as low-risk buying opportunities as well. However, my preference to play the silver trade is GoGold Resources.

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 $21.01 per share on Thursday afternoon, up $0.02 (+0.10%). Year-to-date, SLV has declined -14.49%, versus a 19.92% 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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