Silver Prices are at a Pivotal Juncture

It’s been yet another busy week in the markets with jobless claims topping 2 million yet again and the equity markets putting together two massive back-to-back advances the Memorial Day Weekend. While the equity market strength has taken a little of the shine off of gold (GLD), with the metal tumbling nearly 2% yesterday at its lows, it’s done nothing to affect the price of silver (SLV), which is working on its 4th consecutive weekly gain in a row. This strength in the silver price continues to be encouraging, and especially it’s relative strength against the yellow metal, as the best gains for the precious metals come when silver finally begins to outperform. It’s too early at this juncture to say we have clear outperformance, but the past couple weeks are encouraging, as is the fact that small speculators still have minimal interest in the metal. The strongest bull markets start on disinterest and slight pessimism, which is what we’re seeing in silver for the time being, despite an 18% return for May thus far. Let’s take a closer look below:

(Source: CFTC.com, Author’s Chart)

Beginning with the small speculator positioning in silver, we continue to see a massive divergence here, as should be quite apparent to those looking at the chart above. Over the past twelve months, the silver price rarely ever crosses up through the 1-month moving average of small speculator positioning (blue line), but, currently, we have long positioning among small speculators moving sideways while silver has seen a relentless bid under it the past few weeks. This suggests that there is minimal interest in this rally for silver thus far, explained by the fact that the small speculators were delivered a severe blow in mid-March as the price of silver plunged. Worse, this occurred while small speculators were holding their most significant long position in nearly two years. These fresh wounds are likely deterring them from rushing back into the trade, and this is allowing the smart money to accumulate while the small speculators stay on the sidelines nursing their injuries. Ultimately, though, these small speculators will return, as they always do, and this will provide fuel for the next leg higher in silver.

While some might believe that a lack of participation in silver from small speculators is a bad thing as we want to see lots of buying from smaller traders, it’s, in fact, the opposite. Instead, we want to see the small traders sidelined as long as possible, as they’re often wrong at the turning points, and they often create the tops and bottoms. As long as these small speculators remain on the sidelines, as they did last week with the 1-month moving average staying below 27,000 contracts, those long silver can remain comforted that we could very well head over $20.00/oz before year-end.

(Source: TC2000.com)

If we move over to the technical picture, we’re at a pivotal juncture here, as silver is testing its long-term downtrend line near $18.50/oz. The good news is that the metal has jumped back above its long-term moving average (teal line) on a weekly close, and this is the fourth test in less than a year of this long-term downtrend line. Generally, the more times a level is tested, the more likely it is to break, and while we may not break out here, a breakout through this downtrend in the next few months looks inevitable. This would be a very bullish development for the bulls as it would move the monthly chart back to bullish alignment from neutral currently. It would also be a big deal for the silver miners themselves, as the average all-in sustaining costs among silver miners are near $12.00/oz. A move above $20.00/oz would be a massive tailwind to their after-tax profit margins, which remain razor-thin currently.

So, what’s the best way to play this?

While I wouldn’t be rushing to pay more than $18.50/oz for silver, I do believe that any 8-12% pullbacks in silver are likely to provide buying opportunities, and I continue to watch the leaders in the silver space for new entries. Currently, I remain long Silvercrest Metals (SILV), the first silver stock to head to new all-time highs, and I would be very interested in going long silver if we could see a pullback closer to $16.40/oz. For now, I see the metal as a Hold. There are few things more bullish than a market that continues to trend higher with limited participation from small traders, and this is what we continue to see for the fourth week in a row in silver. For investors interested in accumulating the metal, corrections below $16.40/oz are likely to be buying opportunities, and there’s no reason to fear a drop below $15.00/oz as long as the small speculators continue to remain disinterested in this trade from the long side.

(Disclosure: I am long Silvercrest Metals (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.

Want More Great Investing Ideas?

9 “BUY THE DIP” Growth Stocks for 2020

Beware 3,000 on S&P?

7 “Safe-Haven” Dividend Stocks for Turbulent Times

The iShares Silver Trust (SLV) was trading at $16.25 per share on Thursday morning, up $0.10 (+0.62%). Year-to-date, SLV has gained 1.63%, versus a 14.74% 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 34 ETFs in the Precious Metals ETFs category.