It’s been a volatile couple of weeks for silver (SLV), and we’ve seen a significant amount of damage done to the metal’s long-term chart following this volatility. While the price of gold (GLD) has solidified itself above a multi-year resistance level and found immediate buying support on any dips, silver has broken down beneath a multi-year support level. Therefore, while this would typically be an opportunity to start buying silver, the deterioration in the technical picture suggests that buying silver above $15.00/oz may not be the best idea short-term. For this reason, I continue to favor gold as it is the strongest metal, and I have minimal interest in starting positions in silver producers as they are likely to see margin contraction in FY-2020.
One of the best ways to analyze the health of the silver price is by watching the gold to silver ratio, and looking for cues of when this ratio is either breaking out or breaking down. The conventional way to use this indicator is to buy when the gold to silver ratio gets the most stretched, but I see little use for this strategy as there is no reason that a ratio has to mean revert just because it’s had trouble with an area in the past. The silver bulls have been pounding the table to buy since we were at a ratio of 85 to 1, and we’re currently knocking on the door of 120 to 1, a disastrous trade over the past year. Instead, investors should be watching to see if silver is outperforming gold, and if it’s making a meaningful move against the yellow metal. The chart below shows the strongest signals over the past decade.
As we can see from the chart above, the last time silver gave a strong buy signal was in January of 2010, when the metal was near $20.00/oz. The metal ended up gaining nearly 150% in less than 18 months from this signal, before putting in a long-term top. Since that time, however, we have not seen a single meaningful breakout in the silver vs. gold ratio, suggesting that gold has been the preferred metal from an investment standpoint. If we have a trend in place of gold being in favor vs. silver, it makes little sense to fight this trend, and the better move is instead to embrace the trend and stay long gold and avoid silver. As we can see, silver actually gave three sell signals over the past ten years, with the first coming in early 2013, the second coming in early 2017, and the third showing up just four weeks ago. All of these sell signals led to 25% plus declines in the silver price over the 18 months, and they often marked the top for the metal for the next 12 months as well. Given that we’ve declined more than 25% from the $17.00/oz trigger for this sell signal, it is certainly possible that the lows are at $12.00/oz. However, this would suggest that the highs might be in for the year at $18.00/oz now.
As we can see from the chart above, if we did see sharp rallies over the next year following these sell signals (red dashes), these bounces typically led into significant selling pressure at the area where these sell signals triggered, or within 5% above this level. Therefore, if this sell signal triggered at $17.00/oz, we would expect to see an avalanche of selling pressure in the $17.00/oz – $18.00/oz area if we head back there this year. Unfortunately, this means that while short-term traders might do well by buying silver at below $13.50/oz and selling closer to $17.00/oz, those traders buying at $15.00/oz have a balanced reward to risk at best, and could be sitting with dead money this year. This is a significant opportunity cost given that gold has no resistance overhead until its 2011 highs near $1,900/oz.
So what is the best trade at this time?
I see the best trade currently as staying long gold and avoiding paying more than $15.00/oz for silver, given that silver’s next meaningful support level is closer to $10.00, and we have strong resistance overhead at $16.60/oz. This does not mean that silver has to head to $10.00/oz, but this is the next area where we would expect to find massive buying pressure. While silver could continue its rally over the next few days and push back towards its prior base, I would view any rallies above the $16.50/oz level as selling opportunities. This is because the long-term picture for silver remains under pressure, and a 20% bounce to remove oversold conditions is not going to fix this. Silver may seem low, and we may finally have investors fearful, but I am much less interested in buying fear in a bear market as there is always a bull market somewhere else to take advantage of in some asset class. Currently, that asset class is gold.
(Disclosure: I am long GLD)
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 $13.08 per share on Tuesday afternoon, down $0.08 (-0.61%). Year-to-date, SLV has declined -18.20%, versus a -2.27% 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.