Is Now the Time to Initiate a Position in Silver?

It’s been a volatile April for the metals markets, and silver (SLV) has managed to gain back some ground after falling off a cliff in March and registering a (-) 16% return for the month. Fortunately, this bounce is not being met with enthusiasm for the time being, as small speculators continue to shed their long positions, as we have now hit a new 9-month low for the 1-month moving average of long contracts. This is a significant step in the right direction from where we sat two months ago, as we’ve gone from a reading of extreme optimism to drifting towards more neutral levels as of the April 24th reading. This does not mean that investors should be starting positions in silver or silver miners here, but it does suggest that at the scales are finally beginning to tilt marginally in the bulls’ favor. Let’s take a closer look below:

(Source: CFTC.com, Author’s Chart)

As we can see in the chart above, we have the silver price (gray line), as well as the 1-month moving average of small speculator positioning in the metal (blue line). Currently, we see an encouraging divergence in this indicator as we have seen the price of silver bounce more than 25% off of its mid-March lows near $12.00/oz, but small speculators continue to throw in the towel on their long exposure. This is a stark contrast from what we saw in Q4 and early Q1 in silver, as speculators were actually adding to their positions despite lower prices. Therefore, if this current backdrop can persist with small speculators selling more and more contracts despite higher prices, I would be more confident that any 10% to 15% pullbacks in silver from here would be buying opportunities.

(Source: CFTC Data, Author’s Chart)

If we zoom into the chart above a little closer, we can see that small speculator positioning has been more than halved in just two months, from a high of 70,000 long contracts in mid-February to a current reading of 29,200 contracts for the 1-month moving average last week. While this is a significant drop, it’s not quite to the levels where we see a considerable tailwind, which occurs when we head into negative territory. Obviously, there is no guarantee that we head back into negative territory in a time of near-unprecedented monetary stimulus, but this would be the ideal setup to suggest that silver might finally have bottomed out. The reason for this is that when the majority have thrown in the towel and given up on their bullish bets, the market tends to move higher to force everyone back in at higher prices.

So what is the best course of action here?

(Source: TC2000.com)

If we look at the chart above, we’ve got strong resistance at $16.70/oz for silver, and short-term support at $13.60/oz. Given that we’re in the middle of this trading range and don’t have small speculator positioning in the zone we want for a strong buying signal, I don’t see any high probability trade here. However, if we continue to see small speculators shed their long positions and we head closer to negative territory, there’s a good chance that the metal will find support at $13.60/oz on a weekly close if we do see a correction. For now, I continue to remain long gold (GLD) but have no interest in starting new positions in silver or silver miners here. While the bulls are disgusted, they’re not panicking yet, and I’d prefer to see panic or at least more disgust to start a new position in silver.

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 $14.10 per share on Tuesday afternoon, down $0.11 (-0.77%). Year-to-date, SLV has declined -11.82%, versus a 8.31% 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.