It’s been a rough start to February for investors in the silver space (SLV), with the metal down 3% to start the month, and the Silver Miners ETF (SIL) down over 4%. Unfortunately, this has left many speculators trapped without much ammunition to do any buying, given that we had exuberant levels of long exposure among speculators heading into this drop. As I noted, this was a negative development, and small speculator long contracts were higher than the levels we saw at the September top, suggesting that market participants are getting more bullish despite lower prices. The ideal setup is for speculators to get scared out of positions at lower prices and rethink their positioning, not start stacking ounces of silver and get even more leveraged. Based on this headwind in small speculator exposure, I believe the $18.45/oz – $18.80/oz level will continue to be a brick wall of resistance, and I am therefore in no rush to buy silver here.
(Source: Author’s Chart, CFTC Data)
While conventional wisdom might suggest that the more bullish market participants are, the higher an asset class will go, but this is not always the case. As we can see in the above chart of small speculator positioning (blue) compared to the silver price (grey), high levels of bullish positioning often coincide with tops shortly after, not bottoms, and multi-month highs in exposure is never a great sign. While we did see a slight drop off from the 68,900 long contracts last week, we still remain in nosebleed territory here, and this continues to be a headwind for silver on any rallies. The reason for this is that when everyone is bullish, there is less ammunition there to do any buying, and the herd is rarely correct anyways. Therefore, what the bulls are going to want to see is a plunge in small speculator positioning this week, as that would show that some overleveraged longs are finally being shaken out of their positions and losing conviction. Ideally, we are going to want to see long exposure drop below 50,000 contracts at a bare minimum, as this would suggest that we might finally be nearing a low.
(Source: Author’s Chart, CFTC Data)
While the significant low in silver prices came after a 2-month average that was in the negative for small speculator exposure, we often need a drop to at least 25,000 contracts on the 2-month average to hammer out a short-term bottom for silver. Based on the current 2-month average sitting near 60,000 contracts, we are quite a distance from what I would consider being ‘scared positioning.’ Therefore, this Friday’s report will be pivotal, as the last thing silver investors want to see would be only a minuscule drop in long exposure.
The good news for silver investors is that the big picture remains quite constructive, with the 20-month moving average finally trending higher (teal line). In addition, the metal continues to try and build out a new base above its long-term downtrend line, another positive development. The key going forward for the bulls to maintain this bullish tilt to the long-term chart will be defending $16.25/oz on a monthly close at all costs. Thus far, the bulls have been successfully defending this level, and I would continue to view any pullbacks below $17.00/oz in silver as buying opportunities as long as this area continues to show strong support.
While the long-term chart remains bullish for silver, small speculators remain overextended, with many likely sitting on losses given that exposure has been increasing near $18.50/oz. Based on this and exposure that remains elevated, I don’t see any reason to rush in and buy silver here or be aggressive. Instead, I would be watching to see how small speculator positioning shakes out in the week or two ahead, and only consider new long positions below $17.20/oz on silver.
(Disclosure: I remain long Silvercrest Metals (SILV) from $6.30 US)
The iShares Silver Trust (SLV) was trading at $16.47 per share on Wednesday morning, up $0.02 (+0.12%). Year-to-date, SLV has gained 3.00%, versus a 24.71% 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.