Investors in the precious metals sector have had a very disappointing year thus far, watching the price of silver (SLV) crumble from a high of $30.00/oz in Q1 to just $23.75/oz week. This has hurt the silver producers, with the Silver Miners ETF (SIL) down nearly 40% from its year-to-date highs, given the margin pressure that they’ve experienced. However, while performance has been quite weak year-to-date, the metal looks like it’s trying to turn around, and with sentiment at its worst levels in years, this looks more like a buyer’s strike due to disgust with silver’s performance rather than a seller’s market. Let’s take a closer look below:

(Source: TC2000.com)

As shown in the chart above, the performance of the SIL has been horrendous since earlier this year, with the ETF plummeting from a high above $50.00 to below $34.00 before seeing a bit of a relief rally recently. In a highly emotional sector that rarely trades on fundamentals short-term, catching falling knives is rarely wise. However, there comes a point where fear in the market and pessimism morphs into extreme pessimism and complete capitulation, and this looks like what we may have seen last month for silver and many silver producers. This is evidenced by bullish sentiment falling to its lowest levels in more than three years in October based on its sentiment moving average, with the last occurrence (September 2018) being a major bottom for the precious metals complex. History does not have to repeat itself, but if there were ever a time to be open-minded to buying the dip, we’re getting very close to that point.

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

As the chart above shows, while silver has bounced from a low in the $21.50/oz range, sentiment continues to lay dormant just above its major buy zone, with barely one investor being bullish for every four that are bearish. If we combine this with a clear inflationary environment with wholesale food prices seeing their highest annual percentage changes since 1980 and mid-single-digit CPI readings, there is certainly a fundamental backdrop that would support much higher prices for hard assets like silver. Let’s take a look at the technical picture below:

(Source: TC2000.com)

As we can see from the above chart, silver has a major support level at $21.00/oz - $22.00/oz, given that this was a multi-year resistance level that was reclaimed just over a year ago. Typically, prior resistance levels become new support levels, and buying at these levels provides a defined risk, given that this level should hold as support on any future retracements. To date, silver has found support in this zone where it had to last month, and the reward/risk ratio has improved to closer to 3.3 to 1, based on support at $22.00/oz and resistance at $28.00/oz ($1.40 in downside, $4.60 in upside). So, if we see further weakness in the silver price closer to the $23.00/oz level, this would set up a low-risk trade with a stop below the recent low at $21.40/oz.

For Wheaton Precious Metals, the company is not getting hit by the same inflationary pressures due to its royalty model that producers are, given that it buys royalties in advance for a cash payment but does not do the mining itself. This allows it to benefit from higher metals prices without exposure to rising prices for consumables, materials, and labor. The differentiator relative to silver producers makes it a superior pick in the precious metals space, and the stock currently trades at less than 25x FY2022 earnings estimates despite enjoying 75% plus margins. Given that the stock is approaching a major support zone between $36.55 and $37.00, I would view pullbacks below $37.00 to present low-risk buying opportunities.

(Source: TC2000.com)

It’s easy to be pessimistic on the precious metals space, but the chart above shows that silver has broken out of its downtrend, and a pullback to $23.00/oz would not be shocking, which would simply be a back-test of this downtrend. Given that we seem to have seen a clear-cut case of capitulation last month and continue to see some of the worst sentiment readings in years for the space, a back-test of this downtrend should present a buying opportunity. In summary, I remain bullish on silver long-term, and I see a low-risk buy zone at $23.00/oz. For Wheaton Precious Metals, I would view pullbacks closer to $37.00 as low-risk buying opportunities. Having said that, my bullish view on silver is contingent on the metal not breaking below $21.00/oz.

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.

SLV shares were trading at $21.80 per share on Tuesday afternoon, down $0.43 (-1.93%). Year-to-date, SLV has declined -11.27%, versus a 24.75% 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.

More...