It's been a volatile week for global markets, which has certainly been the case for precious metals. After an impressive rally to start the month, gold (GLD) and silver (SLV) have backed off due to short-term profit-taking, with sentiment swinging a little too far in one direction. The good news is that given the bullish long-term picture for both metals, further weakness should provide a buying opportunity.
As I noted last week, bullish sentiment for silver had pushed into nosebleed territory, with sentiment for silver hitting a reading of 90% bulls. This suggested that 9 out of every ten market participants were expecting higher prices, and these readings typically lead to outsized volatility to the downside. Unfortunately for investors in silver, this is precisely what followed, with the metal sliding from $27.00/oz to just below $25.00/oz.
(Source: Daily Sentiment Index Data, Author's Chart)
The good news is that sentiment has cooled off a little following the nearly 10% correction. The other major good news was that the Federal Reserve has finally decided to hike rates for the first time in years, providing a bullish backdrop for precious metals. Contrary to popular belief, rising rate environments have typically led to outsized gains for gold and silver, assuming that real rates are in negative territory. This is the setup we have currently, meaning that there is still no opportunity cost to holding the metals, given that inflation is well above interest rates.
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So, what's next for the metal?
If we look at the long-term picture, silver continues to carve out a base-on-base pattern: a pattern that typically leads to upside follow-through. This suggests that dips to the lower bound of this base can be bought, with a high likelihood that the $29.00/oz to $30.00/oz level will be tested within the next 12 months. In fact, if we see a confirmed breakout, the upside target could lie north of $33.00/oz.
(Source: TC2000.com)
Moving over to the short-term picture, silver continues to make higher highs and higher lows, and if we are in a metals bull market, I would expect another higher low for silver. This would suggest that investors have a decent reward/risk ratio buying at $24.30/oz or lower if this pullback continues. Assuming the metal fails to make a higher low, stops can be used at $21.80/oz, which would invalidate the medium-term picture.
While silver may be an ideal trading vehicle for some, I prefer owning the highest-quality silver miners or hybrid developers with gold and silver exposure. One name that stands out among its peers is Skeena Resources (SKE), which owns the high-grade Eskay Creek Mine in British Columbia. The company had already proven up a resource of more than 5 million gold-equivalent ounces [GEOs]. Following recent discoveries, I would not be surprised to see this figure north of 7 million GEOs by 2025 (resource categories), making this one of the most attractive projects in Canada.
As it stands, Skeena hopes to produce upwards of 350,000 GEOs per annum over a 10-year mine life at industry-leading costs of $700/oz. I believe this makes the company a takeover target for larger producers and a very profitable miner (post-2024) even if it is not acquired. Given that the stock is technically stronger than silver and sitting just shy of all-time highs, it is my preferred way to get silver exposure.
(Source: TC2000.com)
For investors who prefer to own the metals themselves, I continue to see the best strategy as buying dips, and I would view pullbacks below $24.30/oz on silver and $1,880/oz on gold as buying opportunities. However, for those comfier going out a little on the risk curve, one of my preferred ways to get exposure to silver is through Skeena Resources, and I see a fair value for the stock at more than US$14.00 per share.
Disclosure: I am long GLD, SKE
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. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.
SLV shares were trading at $23.56 per share on Thursday morning, up $0.45 (+1.95%). Year-to-date, SLV has gained 9.53%, versus a -8.32% 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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