It's been an impressive start to the year for the precious metals space, with gold (GLD) surpassing the 2,000/oz level, and silver (SLV) up more than 12% year-to-date. These solid performances are even more impressive given the turbulent global market environment. This is because double-digit corrections in the S&P-500 (SPY) often lead to short-term weakness in gold/silver, like Q1 2020. However, investors should be cautious with sentiment becoming a little frothy for silver. Let's take a closer look below:
As the chart above shows, silver continues to act very constructively, making higher highs and higher lows while developing the right side of a multi-month base. However, while the metal is acting perfectly from a technical standpoint, the recent move above $27.00/oz had pushed the majority of traders into the bull camp, with sentiment soaring to a reading of ~90% bulls as of Monday's close.
(Source: Daily Sentiment Index Data, Author's Chart)
This elevated reading suggests that more than 8 out of every 10 market participants now expect higher prices for silver short-term. While this doesn't guarantee a correction, this is certainly a massive sea change from what we saw in December 2021, when 9 out of 10 market participants were bearish. In fact, the reading is the exact opposite. Generally, when we see massive swings like this in sentiment from one extreme to another in a short period of time, the metal is in for some short-term turbulence.
So, what's the best course of action?
If we zoom out to silver's monthly chart below, we can see that silver has built a launchpad for much higher prices, with a huge base-on-base pattern in place. These patterns typically resolve to the upside, and I would not be surprised to see silver surpass the $32.00/oz by summer 2023, given the current setup.
Given the long-term bullish picture and the fact that we appear to be in a new bull market, investors should exercise patience when it comes to profit-taking. This means that holding core positions appears to be the best plan, with the ideal period to take profits being 9-18 months from in a later portion of the cycle.
(Source: TC2000.com)
Having said that, with the short-term outlook being foggier, I do not believe that this is the time to be adding any exposure to silver. In fact, if I were overweight the metal or silver miners, I would be looking to book some profits into strength. Looking ahead, I continue to remain bullish silver medium-term and long-term, but I see the best move being adding exposure on 12% plus corrections, not at current levels.
Disclosure: I am long GLD, AEM
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 $24.43 per share on Tuesday afternoon, up $0.73 (+3.08%). Year-to-date, SLV has gained 13.58%, versus a -11.40% 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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