Silver: Is it Still a Bull Market?

It’s been another rough month for the precious metals bulls, with the price of silver (SLV) down another 2% this month and nearly 15% year-to-date. However, while the precious metals continue to massively underperform other asset classes, sentiment is finally in a zone where we often see durable bottoms. Meanwhile, we saw a sharp reversal at a key level following the Federal Reserve meeting, suggesting that the low might finally be in for the industrial metal. Assuming the low is in, we should see meaningful upside for two of the best silver names in H1 2022, with these two names being SilverCrest Metals (SILV) and GoGold Resources (GLGDF). Let’s take a look below:

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

Looking at the chart above, we can see that silver has spent several weeks since August below the 20% bulls level, suggesting that there are four bears for every one bull when it comes to the sentiment among market participants for an extender period. If we look back over the past three years, this is quite rare, with most trips below the 20% level being very short-lived. This makes the recent bout of persistent pessimism encouraging, given that these periods of extreme pessimism often push most investors offside and out of a trade at exactly the wrong time.

With many investors throwing in the towel on both silver and miners recently, this has created fuel to convert a significant portion of market participants back to bulls if the trade reverses. This is how most multi-year bottoms occur in the precious metals space. As of early December, this reading also hit a very rare reading of 12% bulls, near the same levels as we saw in March 2020 despite a decline that’s much less severe, suggesting that investors are more fearful now than they were when silver was at $14.00/oz during the COVID-19 crash. This is evidence that this correction through time and price has been more effective in setting up the conditions for a major bottom vs. the correction through price in March 2020 in silver.

(Source: TC2000.com)

Moving over to the technical picture, we can see that silver has been finding support at the $22.00/oz level, and this level was finally broken in a big way this week. However, this sharp correction below $22.00/oz appears to have been a bear trap, with the decline immediately reversing to the upside and finding support right at the back-test area of silver’s downtrend line. There are no guarantees that this was the bottom, but failed bottoms are one of the most attractive long setups, with many weaker-handed bulls giving up their positions at the lows and being replaced by buyers with much stronger hands.

(Source: TC2000.com)

Finally, if we look at a weekly chart of silver, we can see that key oscillators for silver have also dropped to depressed levels, in line with the Q4 2016 bottom, the Q3 2018 bottom, and the Q1 2020 lows. While the metal has not yet triggered a buy signal based on this indicator, we are very close, suggesting that further weakness should present a buying opportunity. Having said that, while this indicator has yet to trigger a buy signal, two of four indicators are pointing to a buy signal for silver at $21.70/oz or lower.

So, what’s the best course of action?

While silver is the obvious way to play the metal, I generally prefer to play the miners, given that they offer more leverage, with similar volatility. If we look among the silver space, there are several low-margin miners that are seeing their margins pinched recently. This is because inflationary pressures are driving costs higher, while the silver price is not compensating for this due to its recent weakness. However, SilverCrest is one name that’s expected to graduate to producer status next year and should enjoy costs below $8.00/oz, translating to ~65% margins at a $23.00/oz silver price.

These margins are more than double the sector average, making SilverCrest arguably the best way to play the sector from a defensive standpoint. In an upside case for silver, SILV will also benefit massively, enjoying 70% plus margins above $25.50/oz. Meanwhile, unlike SILV’s peers, the company has a mine life of nearly ten years based on reserves and what looks like a 13+ year mine life when adding in a high likelihood of resource growth over the next two years. This means that SILV does not need to spend a massive portion of its budget and eat into margins to extend its mine life, nor does it need to complete M&A to maintain its production profile.

Elsewhere in the sector, GoGold Resources is one of the best exploration stories in Mexico, recently announcing a total resource base at its Los Ricos District of more than 200MM silver-equivalent ounces [SEOs]. This makes GoGold a possible takeover target for silver producers looking to grow their production profiles, especially when we factor in that GoGold still has multiple untested targets in the district. So, for investors preferring to play the sector through equities vs. the metal, SilverCrest and GoGold look like two very attractive names among the silver miners with high-quality management teams and incredible properties in Mexico.

To summarize, I believe we are nearing a major low in silver, and while further weakness is possible, the reward/risk has rarely been better for the metal and miners. Given that tax-loss selling has exacerbated this weakness among miners, they look like the much better bang for one’s buck. For this reason, I believe investors should keep a very close eye on GoGold Resources and SilverCrest Metals, with any further weakness likely to provide buying opportunities.

Disclosure: I am long GLGDF, 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.

SLV shares were trading at $20.77 per share on Thursday afternoon, up $0.36 (+1.76%). Year-to-date, SLV has declined -15.47%, versus a 26.23% rise in the benchmark S&P 500 index during the same period.

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.

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