Silver Continues to Confirm Bullish Trend

It’s been a great year thus far for investors in the S&P-500 (SPY) and Nasdaq-100 (QQQ), but unfortunately, investors in the precious metals space (SLV) have been left in the dust. This is evidenced by a 20% plus return for the S&P-500 and Nasdaq and a pathetic (-) 9% return for silver. However, while the returns have been disappointing this year, they’ve created the conditions for a new bull market to emerge, with some of the lowest bullish sentiment readings we’ve seen in several years in the precious metals space. Meanwhile, even though the S&P-500 continues to make new highs, silver is not making new lows relative to the S&P-500 and looks to be trying to bottom out currently. This is a reason to remain optimistic, as is the fact that silver continues to make higher lows vs. the gold price (GLD). Let’s take a closer look below:

(Source: TC2000.com)

Just over two months ago, we had concerning readings for the silver/gold ratio and the silver/S&P-500 ratio, with the latter in free fall and the former looking like it would make a new 1-year low and break below its key moving average. However, the bulls stepped up exactly where they needed to for silver, holding the critical $21.50/oz - $22.00/oz support zone and recently breaking out of a short-term downtrend. As the chart above shows, this allowed the silver/gold ratio to make a higher low relative to Q4 2020 levels, and it has also contributed to the silver/S&P-500 ratio not making a new low and continuing to hold above its 2018 lows, in the depths of that violent bear market. Generally, outperformance in silver vs. the gold price suggests that both metals remain healthy and that violent pullbacks should be treated as bull market corrections, not the start of new bear markets.

Meanwhile, though some improvement in the S&P-500/silver ratio would be ideal, the fact that this indicator is sitting near despite an extremely robust rally in the general markets suggests that there is no reason to be overly concerned with the underperformance. The key, however, is that the silver/S&P-500 ratio does not make a new low and ideally breaks out of its short-term downtrend. For the gold/silver ratio, the key will be staying below a reading of 85 to 1. A rise above 85 to 1 or a breakdown in the silver/S&P-500 ratio would dampen the medium-term outlook for silver.

Given that silver just came out of a multi-year bear market and has essentially gone nowhere since 2014, a change in character and the beginning of a bull market would point to significant gains ahead. Already, we’ve seen silver break out of a multi-year base which is the first hint that a new bull market might be beginning, and for the time being, silver’s prior multi-year resistance ($22.00/oz) looks to be new support, more proof of a change in character. Assuming this is the case, we are likely in the first 2-3 innings of a new bull market, and a double in the silver price over the next couple of years would not be surprising, suggesting a rise above $40.00/oz.

So, what’s the best course of action?

As shown below, silver is now sitting at one of its most oversold readings in the past six years, with its 9-month rate of change dipping sharply into negative territory. This doesn’t mean that the metal has to bottom out here, but if history is any guide, the metal is likely much closer to a bottom than a top currently. Therefore, any pullbacks below $23.50/oz to re-test the recent downtrend line break should present low-risk buying opportunities for SLV. For investors preferring silver miners to gain leverage to the metal, I see Pan American Silver (PAAS) as a solid bet, assuming it falls below $24.00 per share, where it would trade at less than 12x FY2022 earnings estimates. For now, I remain GLD and prefer gold producers, given that they are trading at higher free cash flow yields than most silver miners.

(Source: TC2000.com)

Silver’s performance this year may be disappointing due to its negative return, but a sharp pullback should not be surprising after a 47% return last year. This is because precious metals never go up in straight lines, and they often buck off most of the weak hands before the real bull market begins. So, with sentiment being the worst it’s been in years and silver now short-term oversold, I would expect further weakness below $23.50/oz to present a low-risk buying opportunity. My favorite ways to play the metal are PAAS below $24.00 per share, and Skeena Resources (SKREF), below US$10.00 per share.

Disclosure: I am long GLD, SKREF

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 $22.49 per share on Tuesday afternoon, down $0.16 (-0.71%). Year-to-date, SLV has declined -8.47%, versus a 26.09% rise in the benchmark S&P 500 index during the same period.

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.

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