It’s been a strong start to Q3 for silver (SLV) as the metal is up nearly 5% on the back of an incredible 30% return in Q2, solidifying the metal as the 3rd strongest asset for Q2, just behind the Software Index (IGV) and E-Sports ETF (ESPO).
Despite this outperformance, we still have to squint to find any bulls interested in the trade. Positioning among small speculators remains near 9-month lows, barely recovering from the wash-out in March, and sitting below 40,000 contracts.
This continues to be a bullish divergence for the metal, as there is nothing more bullish than an asset that continues to rise with a minimal amount of speculators interested in getting involved. Based on this, the path of least resistance continues to be higher for silver. Let’s take a closer look below:
(Source: Author’s Chart, CFTC.com)
As we can see from the chart above, silver (white line) has continued to rise at a rapid pace since it fell off a cliff in mid-March, yet the 1-month moving average of long positions for small speculators (blue line) is inching higher at a snail’s pace. If we take a look at prior instances when the silver price was above $18.00/oz, we had a trade that insanely crowded with speculators crawling over themselves to get into the trade, evidenced by long contracts above 57,000.
However, this time around, we’re sitting at a reading that is 35% lower at just 36,000 contracts, and the new contracts added each week is showing a modest increase of barely 1000 the five-week winning streak for silver. Therefore, as long as small speculator positioning remains below 40,000 contracts, I would expect any corrections in silver to be short-lived. This is because there are tons of neutral and bearish speculators left to convert to bulls, whereas previously, everyone that wanted to buy was already in, and the metal quickly ran out of steam.
(Source: TC2000.com)
If we take a look at the technical picture, there’s a lot to like here as well, with silver’s short-term moving average (teal line) crossing above its long-term moving average (pink line) this month. The last time this occurred following a prolonged base was in late 2009, and the metal paused for a few months before doubling over the next two years.
While there’s no guarantee that we get a repeat of this scenario this time around, it is quite encouraging to see this trend finally flip to bullish. Generally, any pullbacks to these moving averages will be bought following a bullish crossover like this, and therefore, I would expect any 10% dips to meet strong buying pressure.
(Source: TC2000.com)
Finally, from a relative strength standpoint, we also have a silver lining. As we can see above, the silver to gold ratio has yet to reclaim its long-term moving average (white line), but can we see a clear trend of higher highs and higher lows (blue line) in this ratio. This is a significant change of character and suggests that while we’re still quite a distance from breaking through the moving average, this rally might be different.
As we can see from previous rallies in this ratio going back to 2017, there was no real structure, and they limped higher in an excited fashion before the uptrend fell apart in 3 months or less. While it’s too early to tell if this rally might finally allow the silver to gold ratio to reclaim its moving average, this is a definite step in the right direction.
Based on the fact that we have an improvement in the silver to gold ratio, a bullish crossover on the monthly chart for silver, and limited interest in this trade, there’s a lot to like about silver currently. However, we are a pivotal level at $18.95/oz, and it’s up to the bulls to prove themselves by breaking above $19.00/oz on a weekly close. If the bulls can achieve this, there is no meaningful resistance until the $22.00/oz level where multi-year resistance sits.
For now, I continue to see silver as a Hold, but I believe that any 10% pullbacks towards the $17.00/oz to $17.25/oz level should provide buying opportunities. I prefer to focus on the silver miners as they give the most leverage, so I remain long Silvercrest Metals (SILV) and Pan American Silver (PAAS).
Disclosure: I am long GLD, SILV, PAAS
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 $17.55 per share on Thursday morning, up $0.06 (+0.34%). Year-to-date, SLV has gained 5.22%, versus a -1.40% rise in the benchmark S&P 500 index during the same period.
SLV currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #21 of 34 ETFs in the Precious Metals ETFs category.
About the Author: Taylor Dart
Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More…