Silver Trade Getting Crowded, Time for Caution

It’s been a strong start to Q3 for silver (SLV) with the metal up 7% in just ten trading days, outperforming every other asset class.

This significant outperformance has contributed to the metal’s relative strength in Q2 vs. the gold price (GLD), further emboldening the view that it might finally be silver’s turn to play catch-up and break out of a multi-year base.

However, we’ve seen a plethora of articles the past week on $30/oz silver, the explosive move that’s coming, and some analysts even slapping $35/oz price targets on silver before year-end. When this occurs, it’s often time to be cautious and, at a bare minimum, not be in a rush to add to new positions.

This is because most of the metals bugs wander out of the woodwork to call for grandiose price targets at the worst possible times, typically at the same time that things are getting a little frothy. Let’s take a closer look below:

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(Source: Author’s Chart, CFTC Data)

As I’ve shared for several weeks, we continue to see a positive divergence in the price of silver vs. small speculator positioning with silver closing at its highest levels in two years, but speculative exposure remains quite low. This positive divergence remained in place last week, and this has emboldened the argument that sharp pullbacks in silver will be buying opportunities.

This is because there are still tons of market participants left to convert to bulls, the complete opposite of last August when we had speculators crawling over each other to get into the silver trade, with sentiment being a massive headwind.

Therefore, from this indicator alone, there’s no reason to be overly cautious, even if small speculator exposure is trending up marginally.

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(Source: Daily Sentiment Index Data, Author’s Chart)

However, my second gauge for judging sentiment moved onto a caution signal yesterday, with the long-term moving average for silver pushing above the 80% bulls level.

This suggests that there are eight bulls for every two bears over the past six weeks, which is generally not a great sign for the metal short-term. As we can see, the last time this occurred was in August 2019, and it marked the top for silver within one week. Just because the metal fell apart the last time this indicator hit this reading does not mean we have to see a medium-term top this time around, nor that we have to correct 20% like we did last time.

However, it does suggest that any further rallies from here are likely to run into selling pressure, and I would expect the $20.00/oz to $20.30/oz area to be a brick wall short-term if this rally does continue.

So, what’s the best course of action here?

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As we can see from the technical picture, silver is currently trading above long-term resistance at $18.95/oz, but this resistance must be broken on a weekly close to be invalidated.

While a breakout would be a bullish development, the excessive optimism suggests that the breakout might not be as explosive as some are expecting, as too much optimism tends to put a lid on prices.

This does not mean that silver can’t rise another 5% to 7% in the next month, but it does mean that any move above $20.25/oz will likely be a profit-taking opportunity. This is because it’s rare that silver holds onto its gains when the trade is already crowded.

Therefore, I see the best course of action here as taking as being patient to add any new exposure, and taking some profits if we do head closer to $20.00/oz. For now, I have no positions in silver, but I remain long Pan American Silver (PAAS), GoGold Resources (GLGDF), and Silvercrest Metals (SILV), my three favorite plays on the silver price.

Disclosure: I am long GLD, GLGDF, 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) fell $0.25 (-1.38%) in premarket trading Thursday. Year-to-date, SLV has gained 7.37%, versus a 0.33% rise in the benchmark S&P 500 index during the same period.

SLV currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #4 of 34 ETFs in the Precious Metals ETFs category.

About the Author: Taylor Dart

taylor-dartTaylor 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…