Silver Fundamentals Pointing to Higher Prices
Silver (SLV) has outperformed over the past quarter. There's increasing evidence that its move is not a bounce but rather the resumption of a bullish trend. Taylor Dart provides more insight below.
It’s been an incredible Q2 thus far for precious metals, with the price of silver (SLV) up 18% thus far, clawing back all of its previous year-to-date losses. Notably, the metal continues to outperform gold (GLD) and the S&P-500 (SPY). The significant outperformance for these key ratios is generally a very good sign for not only silver but the precious metals complex as a whole. As long as this outperformance continues, we should see dips continue to get bought for silver, and the prominent silver miners and GoGold Resources (GLGDF) continues to look to like one of the best small-cap names to play the sector. Let’s take a closer look below:
As shown in the chart above, silver has rallied back towards its highs, where it reversed sharply in early February, but this time around, the stock does not have caution bars just yet (red bars). This is because the stock spent the past two months correcting and wringing out the bullish speculators, with bullish sentiment now sitting at much lower levels despite higher prices. This suggests that silver might be able to re-test its early February high before year-end, and the continued outperformance in the Silver/Gold Ratio and Silver/S&P-500 ratio is a great sign as well. This is because it’s confirming that silver is leading when it comes to these two key ratios, typically denoting a bull market stance and a buy-the-dip environment.
If we look at the chart above, we can see that silver has woken up relative to the S&P-500 and reclaimed a multi-year moving average, and the recent pullback did not break this moving average (white line). This is a rare occurrence, and the last time we saw this was in 2010. In terms of the Silver/Gold ratio, we continue to see the ratio make higher lows and higher highs and give up little ground despite the strength we’ve seen in gold over the past few weeks. When silver is leading, we still can get very sharp pullbacks, but they typically make great buying opportunities. The bullish posture in these two ratios suggests this is a healthy bull market for silver and that any 15% pullbacks from the highs will provide buying opportunities.
If we move over to the technical picture, silver continues to find support in the $24.00/oz region, which is just above the key trendline that lies in that area. However, we are now approaching a key resistance level at $28.80/oz to $29.40/oz, and this could be a tricky area to get through. If the metal can get through this area with ease, I would not be surprised to see a move to $31.50/oz before summer. However, a failure in this area would suggest that silver is still stuck in the multi-month range between $22.00/oz and $29.00/oz, which is why I’ve suggested trading the range and buying dips close to support and selling into resistance. With silver now approaching resistance, taking some profits above $29.00/oz looks like a prudent trade, just in case the metal falters as it has in the past.
So, what’s the best course of action?
I continue to believe that any dips below $24.00/oz will provide buying opportunities, and I would view any rallies above $29.00/oz as an area to trim long exposure. Obviously, it’s possible that the silver price finally breaks through $28.90 - $29.40/oz resistance, but the metal is known for being volatile, and trading around the core of a position is often the best move. One of my preferred ways to play silver is GoGold Resources, which has shown it does not need silver to hit new all-time highs for it to march to new highs. As shown above, the metal broke to new all-time highs last year and continues to make new highs despite the recent consolidation we saw in silver.
Contrary to the name, GoGold Resources is a silver miner based out of Mexico. The company is sitting on one of the most significant discoveries of the past few years, with the potential for up to ~180 million silver-equivalent ounces at its Los Ricos District. A production decision would allow the company to triple its production profile and command a significant re-rating, and the company is working to fast-track its smaller Los Ricos South Project. I continue to remain long the stock and prefer its leverage to silver vs. silver itself, and I would view any 20% pullbacks in the stock to be low-risk buying opportunities.
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.
SLV shares were trading at $26.03 per share on Wednesday morning, down $0.12 (-0.46%). Year-to-date, SLV has gained 5.94%, versus a 9.30% 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 Fundamentals Pointing to Higher Prices appeared first on StockNews.com