Is Now a Good Time to Buy Silver?

It’s been an impressive start to Q1 for silver (SLV) as the metal has launched out of a multi-year base to new highs, catapulting over an area that’s been tough resistance in the past.

This multi-year breakout is an extremely bullish development long-term as it has improved silver’s relative strength across all other assets, and it’s also increased the probability that a move to $32.00/oz is on the table long-term. However, while the long-term picture has made significant strides over the past month, the short-term picture remains very over-heated.

This is because we have seen bullish sentiment hovering above 90% in silver for two weeks in a row, and we’ve got one of the most overbought conditions in silver in several years. This suggests while holding for higher prices is not a bad bet for long-term investors, adding exposure here above $24.50/oz is likely a bad idea. Let’s take a closer look below:

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

As we can see from the chart above of bullish sentiment, we remain in nose-bleed territory for silver as the long-term moving average is currently sitting well above 80% bulls. This has only happened on four occasions in the past decade, and every occasion was met by a 15% or larger correction within the next three months.

This does not imply that we must correct sharply to below $22.25/oz before the end of September from the recent highs at $26.00, but it does mean that the reward to risk is no longer favorable for entering new positions.

Typically, when we have this much bullish sentiment in a trade, it tells us that all the bulls are already in the trade, and it’s difficult for an asset to go higher when the majority have already taken their positions. In fact, when everyone is locked into a trade, the market often goes lower as it almost always delivers the most pain to the most people possible.

(Source: TC2000.com)

If we look at the daily chart above, this view that things are a little frothy is corroborated by the most overbought condition we’ve seen in almost a decade for silver. As is shown above, we have not only printed multiple red caution bars, but we’ve also printed orange bars which are short-term sell signals.

Similar to the above sentiment readings, there is no guarantee that these signals will be correct, but they certainly do not bode well for short-term upside. In the past four instances following these signals, we have corrected at minimum 13% over the following three months, suggesting a trade down to $22.60/oz is in the cards before the end of September.

So, is there any good news for the bulls?

(Source: TC2000.com)

Fortunately for the bulls, the massive breakout trumps both of these indicators, and it suggests that while a pullback is possible, it will likely provide a buying opportunity. Generally, multi-year breakouts will find support at their breakout point if we do see weakness, and I would expect the $21.00/oz level to be a brick wall of support on any pullbacks.

Therefore, while I am long-term bullish on silver following this breakout, I believe the best time to enter the trade will be on a correction to shake out many of the weak hands, not here, while retail traders are climbing over themselves to buy every silver miner they can find.

Based on this view, I believe any 15% pullbacks in silver towards the $21.75/oz level will be buying opportunities for leading silver miners and silver, but I would not be in a rush to chase the trade here. For now, I continue to hold a few of what I believe to the best silver miners, but I’ve taken some profits off the table the past week to re-balance my positions.

Disclosure: I am long SILV, PAAS, GLGDF

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 $22.71 per share on Tuesday morning, down $0.03 (-0.13%). Year-to-date, SLV has gained 36.15%, versus a 3.00% 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.