Silver Setting Up to RALLY

It’s been a rough month for the precious metals market as we’ve seen gold (GLD) and silver (SLV) extend their declines after a sharp reversal from multi-year highs in August. The one issue that we’ve had since this downtrend in silver began is that we’ve continued to see a high level of complacency in the metal, with only moderate fear despite a 27% slide from the $30.00/oz level.

Fortunately, we’ve finally seen a change in character in this regard, with the bulls starting to throw in the towel last week.

This is evidenced by a reading of 17% bulls last week for the silver market, suggesting that there’s less than one bull for every four bears in the market. Let’s take a closer look below:

(Source: Daily Sentiment Index Data, Author’s Chart)

As shown in the chart of sentiment above, it’s been a rollercoaster ride for investors in the silver market over the past year and a half. We saw extreme pessimism last summer, followed by another bout of despondency in March, but this quickly shifted to the most optimistic reading for silver in nearly a decade as we headed into August.

Generally, an asset class that’s seeing sentiment print new multi-year highs is in for a rocky road ahead as there’s no one left to buy when everyone is bullish, and that’s precisely what we’ve seen since August. However, just last week we headed back near the extreme pessimism zone, with silver touching 17% bulls on Friday’s close.

(Source: TC2000.com)

The strange thing about this reading is that it’s over 1000 basis points below the 31% bulls reading at the panic low on September 23rd, yet silver is 5% higher in price. This suggests that speculators are not only more bearish despite slightly higher prices, but they’re staying bearish, with two weeks in a row with readings below 30% bulls.

This is a large step in the right direction because it suggests we could be seeing the first signs of capitulation. Obviously, there’s no rule that sentiment can’t get worse, and it certainly can head to 10% or lower if we see a lower low in silver vs. September 23rd, but this shift to prolonged pessimism vs. a single day or two of pessimism is a great sign for the bull camp.

The other piece of good news we have is that the bulls showed up right where they needed to for silver last week, with buyers coming in right near the green line in the above daily chart. If we zoom out, we can see that this coincides with the multi-year breakout level at $21.50/oz, which tells us that the bulls are defending the breakout area for the time being.

As long as the bulls can continue to play defense in this area and ensure that silver does not put in a monthly close below $21.50/oz, there’s no reason to abandon the long-term bullish picture for SLV.

(Source: TC2000.com)

So, what’s the best course of action?

While we are still not entirely out of the woods yet, the recent pessimism combined with a higher low for silver suggests that the worst is likely over for this decline. Therefore, I don’t see any issue with beginning to nibble on the largest and most profitable silver names like Pan American Silver (PAAS) below $30.00 and Wheaton Precious Metals (WPM) below $39.00.

For investors wondering what it will take to turn around the silver market, the first sign of a material change in character would be a weekly close above $26.55/oz. This would significantly increase the probability the correction is over and would be an opportunity to add to positions. For now, I continue to favor gold and gold miners given their more attractive valuations, but I may look to start a position in WPM if we see a re-test of the recent lows at $38.00.

Disclosure: I am long 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.

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SLV shares were trading at $22.11 per share on Tuesday morning, up $1.06 (+5.04%). Year-to-date, SLV has gained 32.55%, versus a 15.41% rise in the benchmark S&P 500 index during the same period.

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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