It’s been a slow start to the year for silver (SLV), with the metal being flat year-to-date, significantly underperforming the yellow metal (GLD). However, this hasn’t stopped small speculators from continuing to stack long contracts, with long exposure to silver now at a new 18-month high at over 68,000 contracts. Generally, when the small speculators are their most bullish, it’s not the best time to be adding new positions. Therefore, while several long-term indicators continue to improve for silver, I see the best course of action as patience short-term and using dips to add exposure, not chasing above $18.10/oz.
As we can see in the chart below, which shows small speculator positioning, there is a significant amount of bullishness currently, with long exposure rising five weeks in a row to a new 18-month high. While the small speculators are not always wrong in their bets, and we do sometimes see these bets pay off, I’ve found it’s better to hold when the small speculators get overly bullish, but not add any new positions. The best times to be aggressively long silver over the past year have been when long exposure was declining week over week, and especially when it heads into negative territory as we saw in Q2 2019. Given that we see both rising exposure and a new 18-month high, it’s hard to justify being aggressive at current levels. Ideally, investors in the metals space are going to want to see small speculators pare back their exposure a little as we head into February. If we don’t see this occur, I would expect the $18.40/oz – $19.00/oz level to be a tricky spot for silver to get through while long exposure remains this high.
(Source: Author’s Chart, Investing.com)
The silver lining, however, for the bulls, is that Daily Sentiment Index data is not confirming this, and bullish sentiment is relatively neutral currently. The death knell for the silver rally came in September 2019 when we had long exposure at multi-month highs and sentiment also at multi-month highs. Currently, we have only one of these indicators showing a complacent reading, suggesting that while it’s not time to be an aggressive buyer, we’re not in nosebleed territory here from a sentiment standpoint. Therefore, as long as bullish sentiment data can stay relatively subdued, a rally of 3-5% is possible. Still, I wouldn’t call this a strong reward to risk setup either for silver with a reading of 64% for sentiment.
(Source: Daily Sentiment Index Data, Author’s Chart)
Finally, from a price standpoint, there is a reason for optimism, with the Silver to S&P-500 (SPY) ratio making higher lows for the first time since 2016. While the 2016 rally did not materialize how most silver investors hoped, I would argue that this setup has a higher probability of working, given that gold broke out of its range so forcefully. The key to confirming this setup would be a breakout above $21.25/oz for silver, or a breakdown below 3000 for the S&P-500 with silver above $19.00/oz. Either of these scenarios would confirm new multi-month highs for this indicator and would be a step in the right direction from the current setup, which is just showing higher lows and a broken downtrend.
To summarize, while silver continues to gain strength against the major market averages and its technical chart continues to improve, we have small speculators pushing their bets a little too much recently. This suggests that while positions in silver miners can be held, there is a higher risk of adding much new exposure at current levels above $18.00/oz for silver. Based on this, I have no position in silver currently, but continue to hold my position in Silvercrest Metals, the most attractive takeover target in the sector, from $6.35 US. If we were to see Silvercrest Metals drop below $6.20 US or if we saw the price of silver drop below $17.25/oz, I would consider adding exposure. Until then, however, I believe the best course of action is sitting tight until the small speculators become impatient and sell off some contracts.
(Disclosure: I am long Silvercrest Metals from $6.35 US)
The iShares Silver Trust (SLV) was trading at $16.84 per share on Friday afternoon, up $0.16 (+0.96%). Year-to-date, SLV has gained 5.32%, versus a 21.45% rise in the benchmark S&P 500 index during the same period.
About the Author: Taylor Dart
Taylor Dart has over 10 years of experience in active & passive investing specializing in mid-cap growth stocks, as well as the precious metals sector. He has been writing on Seeking Alpha for four years, and managing his own portfolios since 2008. His main focus is on growth stocks outperforming the market and their peers. In addition to looking at the fundamentals, he uses different timing models for industry groups, and scans upwards of 2000 stocks daily to identify the best fundamental opportunities with the timeliest technical setups. Taylor is a huge proponent of Trend Following and the “Turtles” who enjoyed compound annual growth rates of over 50 percent per year.