It's been a turbulent start to the year for the major market averages, with the Nasdaq-100 Index (QQQ) down nearly 10% from its highs and the S&P-500 (SPY) also in negative territory for the year. However, one asset that has held up quite well among the volatility is the price of silver (SLV), which is down just 2% year-to-date, massively outperforming most other assets/ETFs. This relative strength is a positive sign for the metal, as is the fact that last week's pullback has put a significant dent in bullish sentiment. Let's take a closer look below:
(Source: Daily Sentiment Index Data, Author's Chart)
Looking at the chart above, we can see that silver was in a difficult position in mid-January, given that bullish sentiment has risen from 10% to 58%, which can often be a slight headwind to performance. The metal often sees sharp pullbacks when it comes back in favor, with gold and silver being very emotional trades. However, the recent pullback in the metal has put a massive dent in sentiment, with bullish sentiment finishing last week at 27% bulls.
While this is not yet in the ideal buy zone below 20% bulls, this sharp pullback in silver appears to have taken some of the froth out of the market. With this sentiment reset, silver is now in a much better position than two weeks ago when it sat above $24.50/oz. Based on last week's readings, the reading for this indicator has improved from cautious (excess bullish sentiment) to neutral.
(Source: TC2000.com)
From a bigger picture standpoint, we can see that silver has massively underperformed the S&P-500 over the past several years, with silver's relative strength vs. the SPX making a new low recently. This has led to many analysts chiding the metal for its supposed haven status, and while this is a fair point, we often see major bottoms when assets are being ridiculed for their negative performance/traits. In silver's case, I would argue that this looks more like a double bottom and failed breakdown than a breakdown in the Silver/SPX ratio, given that there's been zero follow through to the downside.
In fact, the best bullish setups are often multi-year breakdowns that fail to fight momentum following the breakdown, suggesting a massive bear trap and placing all of the bulls and bears offside in a vulnerable position. In silver's instance, no one wants to own the metal after a year of underperformance. In the S&P-500's instance, it is over-owned in most portfolios, as are stocks, given that most investors are subject to recency bias. However, for an investor looking to be a contrarian, I would argue that there's never been a better time to be optimistic on silver over the past decade, given its sustained underperformance.
(Source: TC2000.com)
Most trend-followers would disagree with this assertion and argue that just because something has underperformed for years doesn't mean it won't continue to underperform, which is an excellent point. However, in the case of silver, it is not in a bear market and appears to be in the early innings of a new bull market. This is evidenced by the above 10-year chart, which shows silver breaking out of a massive base in 2020 and spending the past 15-18 months consolidating atop its prior resistance level.
Back-tests of previous multi-year resistance zones are not bearish and actually make for low-risk entry points. So, at the same time as silver's relative underperformance has made it hated, its chart has rarely ever looked better. In my view, this bullish technical picture combined with low sentiment readings is a reason to be bullish on silver both medium-term and long-term.
So, what's the best course of action?
With silver continuing to trade in a volatile range, the best play is buying the violent dips and looking to take partial profits above $25.00/oz. With silver currently sitting at $21.70/oz, this is slightly above the ideal buy zone. However, if silver were to dip below $21.20, I would view this as a low-risk buying opportunity for an initial tranche in the metal. For those preferring leverage to the metal, my preferred way to gain exposure is GoGold Resources (GLGDF), a small producer that could quadruple production over the next five years after a major discovery in Jalisco State, Mexico.
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. Given the volatility in the precious metals sector, position sizing is critical, so when buying precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.
SLV shares were trading at $20.91 per share on Tuesday afternoon, up $0.11 (+0.53%). Year-to-date, SLV has declined -2.79%, versus a -5.27% 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.
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