It's been a turbulent start to the holiday-shortened week for the major market averages, with the S&P-500 (SPY) down nearly 1.7% for the week and the Nasdaq-100 (QQQ) sliding more than 2%. However, one asset class that is not giving up any ground this week is silver (SLV), which is not only positive for the week but up nearly 2%. This outperformance vs. gold and the S&P-500 is a very positive sign and is what we often see at major bottoms for precious metals. Let's take a closer look below:
(Source: TC2000.com)
As shown in the chart above, silver has been massively underperforming gold (bottom pane), and the S&P-500 (top pane) over the past several months, locked in a steep downtrend with any rallies running into immediate selling pressure. However, this changed dramatically last week, with silver making a higher low vs. gold and the S&P-500 and regaining its key moving averages. This week, silver is gaining even more ground on a relative strength basis and has now broken its downtrends against both gold and the S&P-500.
(Source: Daily Sentiment Index, Author's Chart)
Given the poor track record of previous rallies, many likely expect this rally to be short-lived. However, given the extreme pessimism among sentiment readings over the past year, the ingredients are in place for this time to be different. This is because metals typically bottom when the majority have finally thrown in the towel, and this is what we saw five weeks ago, with bullish sentiment for silver hitting a reading of 12% bulls. This means that over a 3-day period, more than six market participants were bearish for every one that was bullish, often marking a buy signal.
(Source: TC2000.com)
The surprising thing about this reading is that silver remains above its multi-year breakout level, and the technical picture suggests that there are absolutely zero reasons to be bearish. In fact, back-tests of multi-year breakouts are one of the lowest-risk entry points that an investor can ask for, given that those that bought the initial breakout are likely out of the trade, and the market is able to reset its overbought reading. The fact that we are seeing extreme pessimism at a pivotal area on the long-term chart suggests that silver could be one of the best performers in 2022, with this being confirmed temporarily by its relative strength year-to-date.
So, what's the best course of action?
I typically prefer to avoid asset classes that are in ranges, given that they can be quite volatile in both directions, with no clearly defined trend. However, there are some silver producers that remain in long-term uptrends, which actually made new all-time highs last year while silver was still 40% below its 2011 high. These producers include GoGold Resources (GLGDF) and SilverCrest Metals (SILV), which I see as two top takeover targets in the silver producer space. So, if I were looking for exposure to my silver, this would be my preferred way to play the sector.
When it comes to SilverCrest, it is set to become one of the top-3 highest-grade silver producers once it commissions its Las Chispas Mine this summer. Assuming the mine performs as planned, SILV will be producing ~10 million silver-equivalent ounces per annum over a 10+ year mine life at all-in sustaining costs below $8.00/oz. This will give the company 60% plus margins even at a $23.00/oz silver price, and judging by solid infill drilling results and exploration upside on the property; the mine life could easily increase by 3-4 years as the company builds its reserve base.
Meanwhile, GoGold Resources looks to be sitting on over 350 million silver-equivalent ounces at its Los Ricos District in Jalisco, Mexico, one of the largest silver discoveries made in the past few years. This should make the company a takeover target, with many silver producers looking for growth outside of their existing portfolio. The good news is that even if the company is not taken over, it has over $70MM in cash to continue drilling, with its producing asset Parral helping to pay for exploration. This means that investors are getting resource growth with no share dilution, contributing to meaningful resource growth per share.
If I were only able to invest in the metal, I see the most attractive buy point as $22.50 or lower, given that this is just 2.5% above silver's strong support at $22.00/oz. So, while I am long-term bullish on silver given its multi-year breakout, I am short-term neutral here, with the metal trading 4% above this key support. Hence, if I were looking for silver exposure, I would be placing bids in the $22.40/oz - $22.50/oz range or buying SILV instead.
Disclosure: I am long GLD, SILV, 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 $21.63 per share on Tuesday afternoon, up $0.43 (+2.03%). Year-to-date, SLV has gained 0.56%, versus a -3.88% 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 Outperforming in a Tough Market StockNews.com
