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Time to Buy Silver?

Stock MarketsOct 15, 2021 03:00PM ET
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© Reuters. Time to Buy Silver?

Silver (SLV) is down for the last 9 months but is finally showing signs of life. Fundamentals remain positive with inflation and loose monetary policy. Taylor Dart explains why you should consider buying.It’s been a torturous 9-month stretch for investors in the silver (SLV), but periods of significant underperformance often set up the conditions for violent reversals, and this is what the bulls are finally enjoying as we begin Q4. While the S&P-500 (SPY) is up 3% for the month, silver has gained 6%, and the Silver Miners Index (SIL) is up 11%, with leaders like GoGold Resources (GLGDF) sitting just shy of new 52-week highs. Typically, a 10% rally in less than ten trading days would be a reason to take some profits into strength. However, with sentiment for silver hitting its worst levels in years last week, I see no reason to rush to take profits. Instead, I think we could be in the early innings of a multi-month rally for silver, which should translate to the significant upside for the best names in the sector. Let’s take a closer look below:

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

As the chart above shows, bullish sentiment for silver spent more than three weeks below the 25% level in September, suggesting that there were three bears for every one bull in the market. Bullish sentiment finally plunged to a reading of 10% last week, denoting a reading of nine bearish market participants for everyone that was bullish, and these extreme readings often become at the tail end of bear markets. While nothing is guaranteed, extended periods of pessimism have typically preceded multi-month 20% plus rallies in the silver price, with any pullbacks providing buying opportunities. So, while some investors that bought the dip might be anxious to take profits into strength, I believe the best silver miners are heading much higher from here over the next six months. This is because silver is nowhere near a sell signal, and the earliest we could get a sell signal for silver would be January, based on how depressed the readings have been over the past nine months. For reference, the last time market participants were this bearish was in September 2018; silver gained 22% over the next 12 months, while the Silver Miners Index enjoyed a 40% plus rally.

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Time to Buy Silver?
 

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