It's been a solid start to the year for the precious metals space, with the price of gold (GLD) up more than 5% year-to-date and silver (SLV) stealing the show, up 8.2%. This incredible performance from these two assets is despite a volatile overall market, with geopolitical tensions in Ukraine keeping a lid on the major market averages. Given the relative strength of the two metals, it could be a very solid year for gold and silver, which favors buying dips and maintaining exposure to gold and silver miners. Let's take a closer look below:
(Source: TC2000.com)
As shown in the chart above, silver has continued to march higher since February, making a higher high above $25.00/oz and continuing its trend of higher lows. If we combine this with a backdrop of negative real rates, this has created an environment where it pays to hold precious metals, given that there's no opportunity cost from a rising market, and there is a cost to holding cash, due to low rates and runaway inflation. This backdrop favors higher prices for gold and silver.
Having said that, precious metals are known for being volatile, and they rarely rise in a straight line. If we look at the below chart, we can see that this rally in silver has pushed bullish sentiment above the 70% level, a far cry from a reading of 12% bulls in December which led to a bottom in the metal. This reading is nowhere near a sell signal, but there is clearly a sharp increase in bullish sentiment over the past week.
(Source: Daily Sentiment Index Data, Author's Chart)
In past instances, readings above 70% have led to choppier price action over the next 4-6 weeks, which favors being patient for a dip before adding exposure to gold or silver. Obviously, this time could be different, but with sentiment in silver continuing to rise, I do not see this as the time to be rushing to add exposure to either silver or silver mining stocks.
While it's important to be mindful of the short-term picture for metals, given that chasing rallies can lead to drawdowns, it's also essential to not lose sight of the forest for the trees. As silver's monthly chart below shows, the metal is building a massive multi-year base-on-base pattern, and the past 12 months have allowed silver to relieve its previous overbought condition. Typically, base-on-base patterns are very bullish and based on silver's constructive price action; I would not be surprised to see silver above $32.00/oz in the next 18 months.
So, what's the best course of action?
(Source: TC2000.com)
Based on silver having strong support at $22.00/oz to $22.50/oz, I continue to see the best course of action to hold existing positions and leave orders to add on any dips below $22.90/oz. This allows for a strategy of maintaining exposure if silver goes higher but only increases exposure close to a key support area when the risk is lower, and the metal is oversold.
For investors looking to get leverage to silver, my preferred way to increase exposure is through GoGold Resources (GLGDF) or Skeena Resources (SKE). Both have significant exposure to silver and are takeover targets for gold and silver producers. After recent rallies, neither are in low-risk buy zones, but they would enter low-risk buy zones below US$2.10 and US$9.70, respectively. For now, I remain long GoGold and Skeena, two of my favorite stories in the sub $1.0BB market cap space, and would consider going long silver below $23.00/oz.
Disclosure: I am long GLD, GLGDF, SKE
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 small-cap precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.
SLV shares were trading at $23.32 per share on Thursday afternoon, down $0.05 (-0.21%). Year-to-date, SLV has gained 8.41%, versus a -8.48% 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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