It’s been a tough start to the month for the silver producers, with the Silver Miners ETF (SIL) diving 10% for June, helping to cool off the speculative activity in smaller names we saw last month. Meanwhile, silver (SLV) has held up reasonably well, given that it gained 55% in 50 trading days and has been giving up ground grudgingly since its peak on June 1st. Thus far, the metal is down just 3% for the month of June, following consecutive double-digit gains in April and May, and looks to be building a new base in the $17.00/oz to $19.00/oz zone. Despite the impressive performance following the March shakeout, small speculators still have minimal interest in the metal, with positioning sitting at 9-month lows, a stark contrast from the levels we saw last time silver was above $17.50/oz. As long as this divergence remains, I remain constructive on the metal, and I would expect 12% plus pullbacks towards $16.40/oz to be buying opportunities for leading silver miners.
(Source: Consolidated Zinc Limited)
(Source: CFTC.com, Author’s Chart)
If we take a look at the chart above, we can see that the silver price (white line) is clearly trending up, but long positioning among small speculators remains subdued, with the 1-month moving average sitting at 32,900 contracts. This level of long positioning among small speculators remains at the lowest levels in the past nine months and well below what we’re used to with $17.50/oz silver. As we can see on the left side of the chart, the last time we had only 32,500 long contracts in silver, the metal was sitting at $16.25/oz in early July. Therefore, higher prices are not leading to more bullishness, and this is typically a positive sign. The last thing investors want to see is silver rising or going sideways and bullish bets piling up, which is what we saw in late August 2019 before a significant pullback. Currently, we have the opposite, rising prices and minimal excitement.
(Source: Daily Sentiment Index Data, Author’s Chart)
The one short-term issue we have, however, is that bullish sentiment for silver remains a little elevated and hit exuberance levels two weeks ago. This is likely what led to the recent pullback, and some sideways trading or further weakness would be healthy to allow these readings to cool off. We’re sitting at 79% bulls currently, down from 95% bulls, and this is a step in the right direction. I would prefer to see a drop closer to 50% bulls to have more confidence that the lows are in for silver. Let’s see what the technical picture is saying:
As we can see from the monthly chart of silver, the metal has been rejected at its long-term trendline again near $19.00/oz but is not giving up much ground. This is a positive sign, as is the fact that the metal remains above its key monthly moving averages for the time being. Therefore, while I wouldn’t expect any fireworks in the silver miners or the meta until we can overcome multi-year resistance at $22.00/oz, this setup remains quite constructive as long as the bulls continue to defend $16.00/oz on a monthly close. Meanwhile, on the daily chart, the first real test for the bulls is at $18.95/oz, and getting through here will be pivotal to regaining momentum on the daily chart. For now, it looks like the metal might be building a handle to its cup base, and this is healthy after the strong run we’ve seen. However, the key to this correction remaining healthy is holding above the $16.00/oz level. A breakdown through $16.00/oz on a weekly close would be a significant red flag.
While I see no reason to rush into silver or silver miners here, I continue to believe that pullbacks will be buying opportunities, and I continue to focus on the leading names in the sector. Therefore, while I am not long silver, I have started a small position in Pan American Silver (PAAS) and continue to hold an older position in Silvercrest (SILV) Metals from $7.20. If we could see sentiment drift lower over the next week or two, or silver pulls back closer to $16.40/oz, I believe this would present an opportunity to add some exposure to silver. This correction and sharp reversal from $19.00/oz might be frustrating for investors, but a pause in the uptrend was to be expected following such a strong move off of the mid-March lows. Therefore, as long as the bulls defend $16.00/oz, 12% to 15% pullbacks in silver should present buying opportunities.
(Disclosure: I am long PAAS, SILV)
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.
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The iShares Silver Trust (SLV) was trading at $16.23 per share on Thursday morning, down $0.10 (-0.61%). Year-to-date, SLV has declined -2.70%, versus a -2.58% 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. More…