Silver Showing Signs of Capitulation

NYSE: SLV | iShares Silver Trust News, Ratings, and Charts

SLV – Silver (SLV) has been a major underperformer in 2021 despite expectations that a dovish Fed and large deficits would cause a big breakout in prices. Taylor Dart provides an update on the sentiment picture, and why investors should consider buying on weakness.

While the month started off bad for precious metals investors, it’s gotten much worse, with many investors thrown from the frying pan into the fire. Following the opening of futures on Sunday, silver (SLV) slid by more than 8% and tested the $22.00/oz level, one of its worst one-day declines since early January. Fortunately, the metal did close well off its overnight lows but remains below its prior support level at $24.75/oz and is still down more than 4% for the week. This is a negative development and a lower low within the base-on-base pattern, and if the bulls can’t start playing defense soon, the long-term chart could flip from bullish to neutral by month-end. One of my preferred ways to play the metal is GoGold Resources (GLGDF). Let’s take a closer look below:


Before this week’s sell-off, silver continued to act very well within its base-on-base pattern and was following what looked to be a similar analog to 2004-2005, with two higher lows in a base-on-base pattern, and a major breakout that followed. However, with silver breaking down below its prior low near $24.00/oz, this pattern has morphed and has increased the probability of retesting the low of this consolidation area at $21.70/oz. The silver lining is that the metal remains above its key monthly moving average (white line), keeping silver in a bull trend for the time being. Having said that, a breakdown below $22.70/oz on a monthly close would be a negative development, with a breakdown below $22.00/oz being a significant red flag. So, while the bulls are hanging in there, for the time being, further weakness without immediate buying support could become an issue.

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The one piece of encouraging news is that the sharp sell-off to start the week has battered sentiment, with bullish sentiment sliding from a reading of 90% bulls in March to just 12% bulls as of Monday’s close. This means that the market has gone from having nine bulls for every one bear five months ago to now having 8 bears for every one bull. This extreme shift in sentiment is quite rare, and it typically leads to bottoms in the metal. It’s important to note, though, that sentiment often leads price, and we often see a lower low or retest of the lows following a capitulation in sentiment. Based on this, a retest of Sunday’s low near $22.50/oz is not off the table and is certainly possible over the coming weeks. The key will be if the bulls can play immediate defense here and keep silver above $22.00/oz on a weekly closing basis.

So, what’s the best course of action?

With sentiment at its worst levels since March 2020, the ingredients are in place for a bottom in the silver miners and a bottom for silver as well. However, just because the ingredients are in place doesn’t mean we have to bottom immediately, and it will be important to see if the bulls can put together a meaningful bounce. Having said that, one name that continues to show positive price action and hold up well during the sector-wide carnage is GoGold Resources, a Mexican silver miner that hit a new all-time high this year. This relative strength was quite impressive given that silver and the silver miners basket were unable to make new highs, making GoGold my preferred way to play the sector. This is because it is clear that GoGold does not need new highs to perform well, with the stock making new all-time highs well ahead of the silver price and its peers. As shown below, GoGold has strong support at US$1.85 – US$1.90, and any dips to this level should provide low-risk buying opportunities.

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With many new and old investors finally giving up on the silver, it’s time to be open-minded to a bottom. A sign that momentum is shifting would be if silver can get back above $25.00/oz on a monthly close, which would open up a retest of the prior highs near $30.00/oz. However, given the shift to bearish momentum, I have exited my position in silver for a small loss, in favor of names still in uptrends like GoGold Resources, which I continue to hold. For now, I continue to remain bullish long-term on silver, but this is contingent on the metal holding above $22.00/oz, and ideally $22.70/oz on a monthly closing basis.

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 $21.72 per share on Wednesday morning, up $0.10 (+0.46%). Year-to-date, SLV has declined -11.60%, versus a 19.36% 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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