It's been a volatile April for the metals markets, and silver (SLV) has managed to gain back some ground after falling off a cliff in March and registering a (-) 16% return for the month. Fortunately, this bounce is not being met with enthusiasm for the time being, as small speculators continue to shed their long positions, as we have now hit a new 9-month low for the 1-month moving average of long contracts. This is a significant step in the right direction from where we sat two months ago, as we've gone from a reading of extreme optimism to drifting towards more neutral levels as of the April 24th reading. This does not mean that investors should be starting positions in silver or silver miners here, but it does suggest that at the scales are finally beginning to tilt marginally in the bulls' favor. Let's take a closer look below:
(Source: CFTC.com, Author's Chart)
As we can see in the chart above, we have the silver price (gray line), as well as the 1-month moving average of small speculator positioning in the metal (blue line). Currently, we see an encouraging divergence in this indicator as we have seen the price of silver bounce more than 25% off of its mid-March lows near $12.00/oz, but small speculators continue to throw in the towel on their long exposure. This is a stark contrast from what we saw in Q4 and early Q1 in silver, as speculators were actually adding to their positions despite lower prices. Therefore, if this current backdrop can persist with small speculators selling more and more contracts despite higher prices, I would be more confident that any 10% to 15% pullbacks in silver from here would be buying opportunities.
(Source: CFTC Data, Author's Chart)
If we zoom into the chart above a little closer, we can see that small speculator positioning has been more than halved in just two months, from a high of 70,000 long contracts in mid-February to a current reading of 29,200 contracts for the 1-month moving average last week. While this is a significant drop, it's not quite to the levels where we see a considerable tailwind, which occurs when we head into negative territory. Obviously, there is no guarantee that we head back into negative territory in a time of near-unprecedented monetary stimulus, but this would be the ideal setup to suggest that silver might finally have bottomed out. The reason for this is that when the majority have thrown in the towel and given up on their bullish bets, the market tends to move higher to force everyone back in at higher prices.
So what is the best course of action here?
If we look at the chart above, we've got strong resistance at $16.70/oz for silver, and short-term support at $13.60/oz. Given that we're in the middle of this trading range and don't have small speculator positioning in the zone we want for a strong buying signal, I don't see any high probability trade here. However, if we continue to see small speculators shed their long positions and we head closer to negative territory, there's a good chance that the metal will find support at $13.60/oz on a weekly close if we do see a correction. For now, I continue to remain long gold (GLD) but have no interest in starting new positions in silver or silver miners here. While the bulls are disgusted, they're not panicking yet, and I'd prefer to see panic or at least more disgust to start a new position in silver.
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.Want More Great Investing Ideas? 9 "BUY THE DIP" Growth Stocks for 2020 7 "Safe-Haven" Dividend Stocks for Turbulent Times REVISED 2020 Stock Market Outlook- Discover why there is more downside ahead and the Top 10 picks for the bear market.
The iShares Silver Trust (SLV) was trading at $14.10 per share on Tuesday afternoon, down $0.11 (-0.77%). Year-to-date, SLV has declined -11.82%, versus a 8.31% rise in the benchmark S&P 500 index during the same period. SLV currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #14 of 33 ETFs in the Precious Metals ETFs category.
About the Author: Taylor Dart
It's been a strong start to the year for gold (GLD) as the metal was briefly derailed during the mid-March panic lows. However, gold has since recouped all its losses and is attempting to take out the $1,800/oz level. Unfortunately, for those hiding out in silver (SLV) that were hoping the metal might provide a sanctuary from the selling pressure, they've clearly miscalculated their bets. Not only has silver massively under-performed gold year-to-date with a negative 14% return, but it remains well below its 2019 highs. The only good news to come of this is that small speculators continue to shed their positions in silver, and they seem to be giving up on the metal finally, at a time when it is trying to stage a bounce. This is a continued step in the right direction for sentiment, though it's not an all-clear signal. Let's take a closer look below:
(Source: CFTC, Author's Chart)
As we can see in the above chart, we had a severe problem two months ago as silver was below its 2019 highs by more than 5%, but small speculators were continuing to build up their long positions in the metal. This was a massive negative divergence as the last thing one wants to see in a market they are trading is speculators accumulating significant positions and getting more and more bullish despite lower prices. The reason for this is that investors want to enter a market when levels of fear are high and people are nervous in general, not when people are becoming more bullish the lower that price goes. Since then, we've seen this negative divergence correct in a nasty way, as silver has fallen off a cliff, down 35% in just two months from its February high to its March low. The good news is that we've seen the 1-month moving average for small speculator positioning drop from 70,100 contracts to 36,200 contracts, a significant improvement from where we were in February. While this drop in positioning in small speculators is a good sign, we are still quite a distance from the net short readings we saw in May when silver was at similar prices. We can take a closer look at this below:
(Source: CFTC, Author's Chart)
If we look at the chart above, we can see that while small speculator positioning for silver is well below its previous highs, it's still well off of its prior 2019 lows. While silver was trading at $15.00/oz in May and June of 2019, we had a net short position from small speculators, indicating that they were bearish on the metal and on balance no one wanted to be long the metal. This pessimism was what allowed for a massive near 30% rally in the metal in just two months as there were tons of speculators left to buy once prices started trending higher. Currently, however, we have a medium-sized net long position, and 45,000 more contracts than in May 2019, despite the same silver price. This suggests that we do not have the same tailwind of net short positioning we did in May and June 2019 and that speculators are still quite bullish, even if sentiment has cooled down with some speculators throwing in the towel.
So what is the best course of action here?
Based on the fact that sentiment remains neutral for silver and we are now 25% off of the lows, I see no reason to do anything this moment. This is because this 25% rally has done nothing to improve the technical picture, given that we're still trading below vital support. Based on this, I remain on the sidelines for silver, and I have zero interest in initiating a new long position here. If silver trades above $17.00/oz before June, I would view this as an opportunity to book some profits.
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.Want More Great Investing Ideas? 9 "BUY THE DIP" Growth Stocks for 2020 7 "Safe-Haven" Dividend Stocks for Turbulent Times Investors Beware: It's Still Really Bad Out There!
The iShares Silver Trust (SLV) was trading at $14.34 per share on Thursday morning, down $0.15 (-1.04%). Year-to-date, SLV has declined -10.32%, versus a 4.95% rise in the benchmark S&P 500 index during the same period. SLV currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #14 of 33 ETFs in the Precious Metals ETFs category.
About the Author: Taylor Dart
It's been a strong start to the year for gold prices (GLD), and the metal is one of the few asset classes that are not only positive year-to-date but up double-digits. Unfortunately, for the bulls, we are now seeing the $2,500/oz and $3,000/oz price targets trotted out, and this is generally a bad time to be adding any new exposure to the group. Also, to make matters worse for gold, the metal has run up in nearly a straight line towards its first real resistance level since recording a multi-year breakout last year. While there are no guarantees, it's likely we might have some trouble in this area. Based on this, while I continue to hold my position in gold, I have zero interest in adding any new exposure to the Gold Miners Index (GDX) or gold itself here.
As we can see in the chart above, it's been a busy year and a half for gold, and the metal has shot higher following a clean breakout above the $1,380/oz level, a multi-year resistance level at the time. While it's trended higher with ease following this breakout, we're finally heading into the first potential pit stop for the metal near $1,800/oz, and this is an area that the bears might scramble to play some defense finally. If we look at the chart above, we can see that this area was a tough spot for gold on three separate occasions in 2011 and 2012, and the metal ultimately rolled over from this area and began a new bear market. While I am not expecting a similar thing to happen this time around as I believe we're in the early innings of a new bull market, I would be surprised if the bears did not put up a fight at this level on the first test. Therefore, given that futures are trading just shy of $1,800/oz currently, the reward to risk is terrible for new gold positions at current levels.
Some investors might argue that the bazooka of liquidity from the Fed means that this time is different, but this time is never different, it just feels different when the bull herd is busy bidding up prices. As we can see from a sentiment standpoint below, this is exactly what we're seeing, as bullish sentiment for gold has closed above 90% for three out of the past ten trading days, and is now nearing its August peak. This reading is not as worrisome as the August 2019 reading, which derailed gold temporarily, but it does suggest that we may be getting close to a short-term top, and it's best to curtail one's short-term bullish expectations a little. If we were to see a rally above $1,850/oz for gold, we would very likely trigger a sentiment sell signal. Typically, sentiment sell signals lead to 5-10% corrections in the metal on average.
(Source: Daily Sentiment Index Data, Author's Chart)
While the quarterly and yearly charts for gold and the fundamental backdrop are as bullish as ever, I always get a little nervous when the crowd starts talking about price targets 30% higher. This is what we're beginning to see as gold approaches the $1,800/oz resistance level, and this means it might be a wise move to trim some miner positions if one is overweight. It can pay to chase in the market, but the key is to chase prices early when everyone is in disagreement after a major low, not chase late when the herd has come to the same consensus. There is no guarantee that gold has to stall out at $1,800/oz, but I see a terrible risk to reward for starting new positions. I plan to add to my gold position this year, but I see no basis for doing so at current levels at $1,790/oz.
(Disclosure: I am long GLD)Want more great investing ideas? Is This a “Suckers Rally”? Free Access Pass to Wealth365 Online Summit– Join many of the world’s top investors to learn strategies to not just survive, but actually thrive in the midst of this bear market. Reitmeister Total Return portfolio – Learn Steve Reitmeister’s strategies and current picks that work in bull and bear markets alike.
The SPDR Gold Shares (GLD) was trading at $161.14 per share on Wednesday afternoon, down $1.54 (-0.95%). Year-to-date, GLD has gained 30.32%, versus a 3.84% rise in the benchmark S&P 500 index during the same period. GLD currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 33 ETFs in the Precious Metals ETFs category.