It's been a frustrating year for investors in the precious metals space, with the price of gold (GLD) and silver (SLV) being two of the only asset classes that are negative for the year. This is especially frustrating for investors in silver than didn't take profits into the proclaimed silver squeeze earlier this year, which sent silver prices soaring overnight, but those gains were given up almost immediately.
Despite the pathetic year-to-date return, past performance is not indicative of future performance. In fact, the metals sector typically bottoms just when the majority have finally thrown in the towel and it's seen its worst performance in years on a trailing-1-year basis. This suggests that the bottom is likely already in for silver at $21.00/oz. Let's take a closer look below:
(Source: TC2000.com)
As the chart above shows, silver has been very volatile in 2021, trading in a range of $21.00/oz to $30.00/oz and finding itself at the bottom of this range to close out the year. Not surprisingly, this weak performance has put a major dent in bullish sentiment for silver, with sentiment dropping to a reading of 12% bulls earlier this month. This suggests that there was one market participant that was bullish for every six that were bearish in the first week of December. These extremes typically provide the conditions for durable bottoms.
(Source: Daily Sentiment Index Data, www.trade-futures.com, Author's Chart)
As the chart above shows, we have only seen readings this low on three occasions in the past three years: March 2020, September 2021, and May 2019. In all these instances, silver rallied at least 15% over the following six months, with a median forward 6-month return above 25% in these three instances and its worst return coming in at 17%. Based on this recent reading of extreme pessimism occurring at $21.40/oz, this would suggest that silver could trade above $25.00/oz before May if this played out like the weakest of the past three signals and would rally above $26.50/oz if it traded in line with the median signal.
Some traders and investors would be quick to point out that there's no need to go bottom fishing for any asset class, and I would argue that this is a very fair point. Typically, catching a falling knife in the commodity space does not play out well, and we often see commodities fall much further than expected. However, looking at a long-term picture of silver below, an apparent falling knife on the daily chart is actually a violent decline to a major support level on the yearly chart. This points to time-frame conflict, with the larger time frame holding much more weight.
(Source: TC2000.com)
As shown above, silver has simply back-tested a multi-year breakout level with its decline near $21.00/oz, and despite the two major corrections we've seen this year, silver has held the majority of its 2020 gains. Given its resiliency when defending its breakout level ($21.50/oz), I believe investors should be open-minded to the fact that we just saw a double bottom on the daily chart and that prices are heading higher from here.
So, what's the best course of action?
Based on silver's short-term trading range of $21.50/oz to $26.50/oz, the most attractive trade from a reward/risk standpoint is buying below $22.25/oz and taking profits on any rallies above $25.75/oz. This is because traders have a 5 to 1 reward/risk setup buying below $22.25/oz, with less than $1.00 to support and $4.00 in upside to potential resistance. The other attractive way to play the silver price is through takeover targets like GoGold Resources (GLDGF), which looks like it has a high likelihood of being acquired if it continues to make new discoveries at its Los Ricos Project.
To summarize, I remain long-term bullish on silver as long as $21.00/oz holds, and my favorite buy-the-dip candidate is GoGold Resources, a Mexican silver miner with two large development projects in Jalisco, Mexico. For now, I remain long GLD and GLDGF given that silver is outside its low-risk buy zone, but I would consider starting a position in silver below $22.25/oz.
Disclosure: I am long GLD, 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 unchanged in after-hours trading Tuesday. Year-to-date, SLV has declined -13.43%, versus a 29.25% 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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