Silver: No Bull Market Until This Indicator Changes

We’ve seen an impressive start to the year for gold (GLD) as the metal has chalked up the best performance among nearly all asset classes with a 13% return year-to-date, outperforming the S&P-500 (SPY) by roughly 3000 basis points in just four months. Silver (SLV), however, has been a different story, and the calls for $25/oz silver last fall now seem like a distant memory and a valuable lesson for those that based their investment decisions off of headlines. Despite the yellow metal’s best start to a year in a decade, silver has put up a pathetic performance and is down 15% year-to-date. While many analysts continue to chant that the gold/silver ratio can only get pushed so far and that it’s the last opportunity to accumulate silver below $20.00/oz, the charts are suggesting something else. Based on the continued underperformance in silver, I see no reason to chase the metal and continue to view gold as a better investment and store of value.

As we can see from the 40-year chart below, we’ve seen a volatile relationship between gold and silver, and each metal takes its turn outperforming the other every decade or so. In the 1980s, silver underperformed gold massively, and one would have missed out on tremendous gains by holding that the industrial metal would play catch-up. In the 1990s, silver finally caught a bid vs. gold, but these periods of outperformance tend to be much shorter. Currently, we’re in a clear period of underperformance and guessing when this trend will end rarely pays off. As previous downtrends have shown, they can last for more than a decade, and this period of 8 years of underperformance is still relatively young when compared to the 11-year downtrend in silver vs. gold in 1980 to 1991. Therefore, we need an indicator to tell us when this trend might finally be ending, and that indicator is a clear higher low, coupled with a move above the 20-month moving average. Let’s see how that indicator looks currently:

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As we can see in the zoomed in chart below, the 20-month moving average (yellow line) has almost perfectly called all of the tops in the silver price the past four years, as any rallies to this area have immediately broken down. Currently, we are quite far away from the moving average and this would suggest some mean reversion is possible, though there’s no reason to believe that this mean reversion will last until we get two monthly closes above this key moving average. Based on how far away we are from this moving average, this is going to require a drop below $1,500/oz on gold in which silver holds its ground, or a rally above $19.00/oz in silver where gold lies relatively flat. Neither of these are likely scenarios in the next couple of months, and this would suggest that this indicator is likely to remain on a bearish reading for silver until into the fall at a bare minimum. If and when this indicator finally does reverse, however, it will be time to start going overweight silver vs. gold, and time to start overweighting the top silver miners in one’s portfolio.

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For those skeptical that this indicator is cherry-picked or simply curve-fitted, one needs to look no further than the chart below. For anyone that’s looked at a chart recently, it is evident that gold broke out of a multi-year range above $1,360/oz. Meanwhile, silver is still stuck in the bottom half of a multi-year base and is stuck in a downtrend. If this is not proof enough that the metal is massively underperforming and acting bearish when compared to gold, then I don’t know what is. Therefore, the first sign that silver is at least holding its own would be if it could breakout above $22.00/oz and move into new high ground.

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So what’s the best way to play this?

I continue to view gold as the more attractive metal, and I believe investors would be wise to use any 12% dips in the metal to add to their positions. This would line up with a drop to the $1,580/oz level or lower. Meanwhile, as long as silver continues to underperform gold on its long-term chart based on the silver/gold ratio, I would view rallies to the $17.00/oz level as opportunities to lighten up positions. Silver’s time will eventually come and the analysts will eventually proclaim they were right, but guessing when that happens is a massive opportunity cost, and for now, the only bull market out there in the precious metals space worth being overweight is gold.

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Investors Beware: It’s Still Really Bad Out There!

The iShares Silver Trust (SLV) was trading at $14.10 per share on Thursday afternoon, up $0.01 (+0.07%). Year-to-date, SLV has declined -11.82%, versus a 5.21% 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

taylor-dartTaylor 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.