It’s been a volatile couple of months for the price of silver (SLV), but the asset continues to outperform the S&P-500 (SPY) and gold (GLD) over the past 12 months, which is generally a very good sign for the precious metals complex. While new investors to the silver trade might be getting shaken out by the whipsaws over the past few months, it’s important to note that the long-term picture looks the best it has in several years, and the fundamental picture also remains quite bullish.
This is because real rates continue to their plunge to well below 4.50% heading into the Federal Reserve meeting this week, and precious metals also perform their best when there’s no opportunity cost holding them. Based on this strong fundamental and technical setup, sharp pullbacks should provide buying opportunities.
We’ve finally seen a strong bid return to the silver market over the past couple of months, but the trade has remained quite volatile, with silver trading within a nearly 20% range since its April low. While most of this volatility has been to the upside, further weakness is possible as silver heads into a seasonally weaker period between mid-June and month-end.
Obviously, seasonality has been all over the place this year, but preparing for potential downside volatility is always wise, even if there’s no guarantee that seasonality does play out this year. The good news is that strong inflation numbers in the most recent CPI report and near-record low 3-month Treasury Yields have made both silver and gold strong buy-the-dip candidates. This means that dips should be bought up relatively quickly if we do see weakness over the next few weeks.
(Source: EquityClock.com)
(Source: TC2000.com)
If we look at the daily chart of silver, one would conclude that there’s clearly strong resistance at $28.90/oz, but buyers have been eager to come in below $25.00/oz. This suggests that the best trade is buying in the lower end of this range in case this sloppy range continues. In previous early-stage bull markets, the consolidation phase for silver has lasted up to 15 months, and we’re currently at month 11 of this consolidation. The good news is that we have strong support at $24.75/oz, where the metal would hit short-term oversold levels, and this looks like an ideal spot to buy the dip if silver does take a rest before what looks to be an inevitable breakout.
(Source: TC2000.com)
The encouraging news is that silver is currently building a base-on-base setup, and these setups are typically very bullish, with this breakout targeting a move to at least $35.00/oz on silver. This would dramatically affect silver producers’ margins for the better and would point to more than 30% upside for silver from current levels. Therefore, the best trade is buying silver producers if one is looking to get leverage on the metal or looking to buy the dip on silver if we do see a retracement closer to $25.00/oz. However, regardless of what happens over the next few months, the key is to be cognizant of the big picture and not get shaken out on the lower time frames. The last time we saw a base this impressive in the precious metals market was nearly two decades ago, and bull markets out of these bases can continue for years. This suggests while investors can have confidence in a 12-month target of $35.00/oz if we get above $28.90/oz on a monthly close, the eventual target is likely to be much higher.
As it stands currently, silver continues to have trouble with the $28.90/oz level, and this suggests that selling ¼ of one’s position as we approach this level is the prudent move, just in case the metal does decide to retest the lower end of its range ($23.00/oz to $29.00/oz). However, with this resistance level now being tested multiple times, a breakout before year-end looks quite likely, and I would not be surprised to see silver finish the year above $30.00/oz. Based on this outlook, dips towards the $24.75/oz level should provide low-risk buying opportunities, and as long as silver is above $23.00/oz, corrections can be treated as noise in the bigger picture.
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 $25.62 per share on Tuesday morning, down $0.22 (-0.85%). Year-to-date, SLV has gained 4.27%, versus a 13.84% 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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