Here's Why You Should But the Next Dip in Silver

It’s been a great start to Q3 thus far for the silver price (SLV), with the metal gaining 9% in barely 20 trading days, helping to claw back some of its significant year-to-date losses. However, silver is still down more than 7% year-to-date, which is contributing to very bearish sentiment surrounding the metal and the Silver Miners Index (SIL). The bad news is that investors parking their money in silver miners have had a lost year to follow up a lost decade in the silver producer space. The good news is that these poor returns are forcing many long-time investors and newcomers to the space to throw in the towel, creating enough bearish sentiment to increase the probability of a durable bottom and a multi-quarter rally in the metal. In addition, while the correction has been violent, no real technical damage has been inflicted. Let’s take a closer look below:

(Source: TC2000.com)

Beginning with the sentiment picture, we have to go back more than three years to see a similar level of pessimism as we are seeing currently, with the long-term moving average for silver diving off a cliff and currently sitting near 20% bulls. This is a massive sea change from where sentiment sat just over nine months ago during a poorly orchestrated silver squeeze attempt when bullish sentiment sat near 80% bulls. This means that we have transitioned from a market with four bullish market participants for every one bearish market participant to a market with four bearish market participants for every one that’s bullish. When everyone is a bull, and the sky is the limit for an asset class, the asset class typically corrects sharply, given that everyone is bullish and there’s no one left to buy. Conversely, now that the majority, there is almost no one interested in buying, with significant firepower if prices begin to head higher and investors decide they want to build up exposure.

Obviously, there are no guarantees that this time will play out similarly to previous sentiment buy signals, but the last one marked a major multi-year bottom for silver, with silver gaining 15% the following year and 35% in less than 12 months from its sentiment buy signal. If we were to see a repeat, this would place the silver price close to $29.50/oz before the end of 2022, which would likely translate to new highs for the Silver Miners Index given the margin improvement among these companies. In summary, while it’s easy to be bearish when this is the sentiment du-jour, I believe it’s better to be open-minded to the possibility that the lows are already in at $21.50/oz.

(Source: TC2000.com)

If we look at the technical picture, we can see that while most investors have given up on silver, the bigger picture really hasn’t deteriorated at all over the past year. In fact, all we’ve seen to date is silver begin to build a massive base-on-base setup, which is typically a bullish continuation pattern. This means that silver is likely to resolve to the upside out of this pattern, and a breakout above $30.00/oz would target a move closer to the $40.00/oz level. It’s important to note that this $40.00/oz target is contingent on a quarterly close for silver above $30.00/oz.

Therefore, I see no reason to believe we’ll be seeing $40.00/oz in the next 12 months. Having said that, with silver having a very clearly defined base between $21.50/oz and $30.00/oz, any pullbacks below $23.00/oz should provide low-risk buying opportunities, with limited downside to the bottom of the current range and a favorable reward/risk profile. In summary, I believe investors should remain bullish on silver as long as it does not drop below $21.00/oz, which would invalidate its base-on-base setup.

So, what’s the best course of action?

While many investors prefer to play the silver price for leverage or buy the most beaten-up silver producers, I prefer to buy those producers that have resisted the decline the most. This is because any silver miner that has remained in an uptrend and hit new all-time highs during this correction is likely being accumulated by large investors since this is the only way that it would be able to trend higher during this sector-wide carnage. One name that fits this profile is GoGold Resources (GLGDF). Not to be fooled by the name, GoGold is a silver producer in Mexico that’s currently drilling out a new district, Los Ricos.

To date, the company has proven up more than 60 million silver-equivalent ounces [SEOs] in this district at its Los Ricos South Project, but it’s looking like Los Ricos North could be twice the size, and a resource estimate is due in the next six months. Based on my belief that the two projects hold upwards of 225 million SEOs long-term, this leaves GoGold trading at a very reasonable valuation of ~$3.25/oz based on its enterprise value of ~$725 million. So, while I am not adding to my position here, I continue to hold, and I would view any pullbacks in the name below the US$2.15 level as low-risk buying opportunities.

(Source: TC2000.com)

With silver the most hated it’s been in years, this looks to finally be a market suited for buying dips, with GoGold Resources being one way to play it and the silver price being another way, assuming we get another pullback below $23.00/oz. For now, I continue to remain long GLD and GoGold Resources but would consider buying SLV if the silver price were to see a final decline below the $23.00/oz level.

Disclosure: I am long GLD, 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.

SLV shares were trading at $22.06 per share on Friday morning, down $0.21 (-0.94%). Year-to-date, SLV has declined -10.22%, versus a 23.51% 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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