Investors have witnessed a significant change in character for silver (SLV) over the past month, with the metal outperforming the S&P-500 (SPY) by over 1300 basis points in December and nearly 500 basis points to start the new year.
This is a sharp improvement from the 1500 basis point lag in November and very positive news because the strongest bull markets in precious metals occur when silver is outperforming gold (GLD), as well as the major market averages. In fact, this is precisely what we saw in mid-2010 when silver began to lead both the S&P-500 and gold, setting up a banner year for precious metals.
Based on this continued outperformance, the long-term picture continues to look bright for silver. Let’s take a closer look below:
As shown in the chart above, SLV has continued to outperform GLD to start 2021 and is on track to make a new high relative to the yellow metal in January. This is a massive sea-change from what we saw in 2019 and most of 2020 when there was reason to be a little cautious given that silver continued to underperform gold.
Assuming we can see SLV hit a ratio of 0.15 vs. GLD, this would translate to a new high for this indicator and confirm the recent outperformance. There’s no guarantee that we’ll see a repeat of the incredible 82% annual return for silver we saw in 2010 when this ratio began to shift materially in favor of silver, but it looks likely that silver could put up another year of double-digit year-to-date returns.
Silver is currently building a new cup base and is trying to break out above key resistance at $26.55/oz. We will need a weekly close above $26.55/oz to confirm the breakout. If the bulls can accomplish this, we have a clear path to taking out the August 2020 high for silver, suggesting that silver could trade above $30.00/oz before this summer.
This would translate to a significant boost in margins for many silver miners like Pan American Silver (PAAS), which is currently producing silver for less than $12.75/oz. Therefore, if we see some sharp corrections in the space over the next month, this would likely present a buying opportunity.
(Source: Daily Sentiment Index Data, Author’s Chart)
Finally, if we look at sentiment, bullish sentiment hit 85% this week, which suggests that there are a lot of bullish investors out there currently. This can be a short-term headwind and often leads to a pause in the metal or a short-term correction. However, if we look at the big picture, we can see that the sentiment moving average remains near its lowest levels in the past year, and at similar levels to the March 2020 bear market.
This suggests that the metal has a lot of room to run if it can get back above $26.55/oz on a weekly close, and it would likely require a rally above $30.00/oz at a bare minimum to push this indicator back to a sell signal. For this reason, while I remain neutral short-term on silver, I remain very bullish long-term (9-18 months).
So, what’s the best course of action?
Given that silver is up over 20% in the past 30 trading days, I don’t see any reason to rush to start new positions here. This is because the metal could easily pull back 4% to 7% to build more structure to its base, and this would likely result in many silver miners dropping by up to 10%.
However, the good news is that any sharp pullback in leading silver miners like Wheaton Precious Metals (WPM) and Pan American Silver is likely to be a buying opportunity. Therefore, if we see WPM trade below $42.50 or PAAS below $31.50, I would view this as an opportunity to add to positions. The same is true of silver, and I would expect the $24.50/oz level to be the new floor going forward if we can confirm a breakout above $26.55/oz.
As we head into the new year, the probability continues to increase that the metal will break through key resistance at $26.55/oz on a weekly close. This will align all of the time-frames to bullish and increase the probability of 12% pullbacks being buying opportunities. For now, I see most silver miners as a Hold due to being short-term overbought, but I may look to start some new positions if we see a sharp pullback between now and month-end.
Disclosure: I am long GLD, WPM
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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WPM shares were trading at $45.22 per share on Tuesday afternoon, down $0.04 (-0.09%). Year-to-date, WPM has gained 8.34%, versus a -0.90% 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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