Trading Silver: Why I Prefer This Stock Over Silver ETFs

It’s been a much better start to May for the silver bulls (SLV), as the metal has erased nearly all of its March losses and is finally beginning to act like the safe haven that investors hoped it might be in times of crisis. After Monday’s advance, the metal is up 15% thus far this month and has massively outperformed gold (GLD), and regained its key monthly moving average. Despite all this, the small speculators continue to trim their bullish bets. This is an extremely positive sign, and quite a rare signal, and while this doesn’t mean that silver has to go straight up from here, it does suggest that sharp pullbacks are likely going to find solid support. Based on the continued disinterest in silver among small speculators during this advance, I believe any 12% pullbacks to the $15.00 level will likely be buying opportunities.

(Source: TC2000.com)

If we take a look at the above monthly chart of silver, we can see that we had a near breakout in Q3 of last year, but this rally was derailed as sentiment hit the highest level in several years at the peak of this advance. This spike in optimism became a major headwind for the metal, unfortunately, the same bulls that thought we might have a run of the mill pullback were battered in March after silver traded down to a new multi-year low. The good news is that this massive shakeout through the bottom of this 5-year range seems to have eroded most of smaller traders’ interest in silver, which is evidenced by small speculator positioning remaining at 9-month lows despite this 35% advance. As noted in previous updates, this positioning is not at extreme levels like we saw in May, but we’re getting close to those levels despite a silver price that is 15% higher. When higher prices make people less bullish and more cautious, this is generally a good sign. Let’s take a look below at small speculator positioning:

(Source: CFTC.com, Author’s Chart)

As we can see from the chart above of small speculator positioning (blue line), and silver price (yellow), the metal continues to charge higher off of the mid-March lows, but small speculator positioning continues to trend down, inching lower each week. The 1-month moving average for small speculator positioning finished last week at just 25,000 contracts, a new 9-month low, and bullish positioning is sitting at the same level it was when silver was trading at $15.00/oz. Therefore, unlike last summer, when higher prices resulted in small speculators plowing into the sector at full speed, we now have the exact opposite, small speculators showing complete disinterest despite the recent trend change we’ve seen. As long as this trend continues, I believe sharp pullbacks are going to provide buying opportunities as small speculators will likely begin to get a fear of missing out when they realize they’re offside at the wrong time.

(Source: TC2000.com)

The problem up until recently, unfortunately, is that silver was stuck beneath its key monthly moving average (teal line). This was a warning sign for me, as I don’t like holding assets that are below this long-term trend barometer. The good news, however, is that silver’s spike in the past week has pushed it back above this crucial level, and we are on track for a bullish reversal in this indicator if silver can finish the month above $17.00/oz. Therefore, we now have a combination of disinterest among small speculators and a recent trend change that’s a positive development, and this made the metal much more attractive. This does not mean that silver is headed straight to $25.00/oz like the perma-bulls might suggest, but it does indicate that there’s a very high likelihood of a higher low in silver near $15.00/oz if we do see pullbacks. For this reason, I believe investors should be watching closely to take advantage of weakness to buy the dip.

So, what’s the best way to play silver?

While the potential shift to bullish on the monthly chart for silver is a great sign, I prefer SilverCrest Metals (SILV) to the silver price, as it’s one of the highest-grade silver miners in the market currently. The company is sitting on over 120 million silver-equivalent ounces in Mexico and a $180 million cash position, making its mine fully funded for construction. Based on the company’s average grades of over 1000 grams per tonne silver-equivalent, or an equivalent gold grade of nearly 1/3 of an ounce per tonne, I believe the company is a very likely takeover target. However, the best thing about the stock is that it’s trading at all-time highs, so it does not have overhead resistance to weigh it down as silver does. Therefore, I would view pullbacks below $9.00 as buying opportunities.

(Source: TC2000.com)

In summary, while I’m finally warming up to silver, my preferred way to play it currently is Silvercrest Metals Inc. (SILV). If the price of silver could pull back to the $15.00/oz level over the next few weeks, I would gladly start a metal position as well. You rarely get higher prices coupled with less excitement, but currently, we see this occurring in the silver market, which bodes well for silver prices as long as this persists. To embolden the bullish picture for silver, we are going to want to see a monthly closing above $17.50/oz for May.

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 $16.22 per share on Tuesday afternoon, up $0.43 (+2.72%). Year-to-date, SLV has gained 1.44%, versus a 11.03% 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.