While the general markets have had a turbulent start to 2022, it's been a much better year for precious metals, which have flipped from massive underperformance to outperformance in 2022. This is evidenced by a 4% year-to-date return for gold (GLD) and silver (SLV) which translates to a more than 1500 basis point lead on the Nasdaq 100 (QQQ). Some investors might argue that this is merely temporary, and they may end up being correct. However, with key ratios appearing to be staging trend changes, this could be the year to own precious metals and high-quality miners.
(Source: TC2000.com)
The chart above provides a look at SLV vs. the Nasdaq 100 Index, and as we can see, the long-term moving average for this ratio (white line) has been in a steep downtrend for years. However, the moving average finally appears to be flattening out. While the SLV/QQQ ratio has not reclaimed this key moving average yet, it is getting close to only its second reclamation in years. The last time it reclaimed this moving average was in late July 2020, and while it was short-lived, silver's forward 6-month return came in at more than 10%, while its forward 6-month draw-up came in at more than 30%.
(Source: TC2000.com)
Before this occurrence, silver reclaimed this key moving average in December 2008 and enjoyed a forward 6-month return of more than 20%, with a forward 6-month draw-up of more than 30%. This ended up kicking off a major bull market in silver, with SLV increasing more than 250% over the following three years. Obviously, history does not have to repeat itself, but it is pretty clear that over the past 20 years, silver tends to perform much better when it's above this key moving average relative to QQQ.
Despite this recent outperformance, the fact that silver is one of the best-performing assets year-to-date and having registered a multi-year breakout, bullish sentiment sits at relatively subdued levels. This is based on just 2/5 of market participants being bullish based on silver's long-term moving average, which is what we witness in deep cyclical or secular bear markets. It's also worth noting that silver registered a rare sentiment buy signal in Q4 of last year, with just 1/5 of market participants being bullish.
Those familiar with the precious metals market know that it typically swings from one extreme to another, and from extreme greed to extreme fear. Given that investors were extremely bearish just six months ago, I would not be surprised to see a swing to extreme greed in the next 12-18 months, which would propel silver back above the $30.00/oz level. So, for investors looking for beaten-down companies, it's worth looking at producers with silver and gold exposure, or primary silver miners, and or the metal itself.
(Source: TC2000.com)
So, what's the best course of action?
As shown above, silver continues to have strong support at $22.00/oz - $22.40/oz and continues to make higher lows since its double bottom in December. With the metal having no clear trend on a medium-term basis, it makes sense to buy dips vs. chase rallies, so I do not see silver as a low-risk buy here at $24.40/oz. However, if the metal were to dip below $22.40/oz, I would view this as an attractive area to start a position in the metal.
If I were looking to get leverage to the silver price through a producer or a developer, I believe Skeena Resources (SKE) and SilverCrest Metals (SILV) are two attractive ideas. In Skeena's case, the company is looking to restart one of the highest-grade precious metals mines in history in British Columbia, and its project has an after-tax internal return north of 65% at current metals prices. Meanwhile, SilverCrest is set to become one of the highest-grade silver producers globally and will begin production this summer with 70% plus margins. Given that I see both as takeover targets, these are my favored ways to buy the dips vs. the metal itself.
Disclosure: I am long SKE, GLD
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 $22.34 per share on Tuesday afternoon, up $0.22 (+0.99%). Year-to-date, SLV has gained 3.86%, versus a -9.02% 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.
Silver Likely to Keep Trending Higher in 2022 StockNews.com
