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Silver Market Approaching Important Buy Levels

·5 min read

Silver (SLV) has fizzled in recent weeks as it's given back the bulk of its move higher. However, fundamentals remain supportive as the metal should rally with low rates and budding inflationary pressures.

It’s been a rough finish to Q2 for the precious metals complex, and neither gold (GLD) or silver (SLV) have been a sanctuary from the relentless selling pressure. This has pushed gold’s year-to-date return back into negative territory at (-) 6%, with silver not far behind at (-) 2% near $26.00/oz.

While this negative reaction to lower real rates and a still very dovish Federal Reserve is discouraging, it’s important not to lose sight of the big picture and be mindful of how a key ratio is acting. Thus far, both price and this key indicator remain on bullish readings, and the violent correction is now pushing sentiment closer to a bullish reading as well. Let’s take a closer look below:

Chart Description automatically generated
Chart Description automatically generated

(Source: TC2000.com)

One of the most important ratios to watch is the silver/gold ratio for the precious metals complex, and as shown above, this indicator continues to show higher highs for silver vs. the price of gold. For those calling a top in the precious metals complex, this seems unlikely, given that we are seeing the exact opposite from this ratio as we were back in 2011. If we look above, we can see that gold made a new high in Q3 of 2011, but at the same time, the silver/gold ratio had plunged, making a lower low and lower high. This ratio is making higher highs and is nowhere near making a lower low in the current case. So, as long as the gold/silver ratio remains below 85 and in an uptrend, I don’t see any reason to get overly concerned.

A picture containing text, linedrawing Description automatically generated
A picture containing text, linedrawing Description automatically generated

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

Moving over to sentiment, bullish sentiment continues to drop over the past week, now sitting at a reading of just 25% bulls. While this is not on a bullish reading, and this indicator often heads lower, we are getting closer to a contrarian bullish reading at current levels. This is a massive improvement from late February when everyone was rushing into the silver trade hoping to force a squeeze and a healthy improvement from May when we still had a significant amount of bulls in this trade. Based on the current reading of 25% bulls, we are near the lowest readings year-to-date, with just one bull for every three bears based on this reading. The ideal situation would be a further decrease in this indicator despite no lower low for silver.

Chart, line chart Description automatically generated
Chart, line chart Description automatically generated

(Source: TC2000.com)

Finally, looking at the technical picture, silver flashed a rare oversold signal this week, with the first green bar since last September. While these green bars do not always lead to immediate upside, they do typically provide low-risk entries to start a position in the metal, and I have started a small position for this reason. The key to confirming this signal would be a trade above $27.00/oz which would reverse a portion of the June 17th and 18th selling pressure and suggest that buyers have not only come into the trade but are also able to overcome the resistance we’ve seen near $26.40/oz over the past two weeks. It’s also worth noting that while this pullback has dented the short-term picture, the long-term picture remains intact, with silver comfortably above its long-term moving averages.

While we have only 2/3 indicators on bullish readings for silver currently, further weakness should push sentiment onto a bullish reading as well, which would set up a very low-risk buy if the metal dropped below $24.75/oz. For now, I see a decent entry into the metal on this weakness below $26.00/oz, so I have started a small position. It’s easy to get discouraged after two weeks of violent selling pressure, but it’s important to embrace these corrections as they help wash out sentiment and occur a couple of times per year. So, for investors looking to buy low now that the weaker silver bulls have been pushed out of this trade and are beginning to give up, this looks like a decent opportunity to begin buying the dip.

Disclosure: I am long GLD, SLV

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 fell $0.26 (-1.07%) in premarket trading Tuesday. Year-to-date, SLV has declined -1.47%, versus a 15.08% rise in the benchmark S&P 500 index during the same period.


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.

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