© Reuters. Silver: Time for cops to play defense
Silver (SLV) underperformed for almost a year, despite low interest rates and rising inflationary pressures. It appears that silver is trading as if inflation is temporary. Taylor Dart explains why silver needs a rally soon. While the S&P 500 (SPY) was able to shake off its weakness in the middle of the month, the precious metals were unable to reverse their course and continue to hover near their recent lows, with silver (SLV) being slightly weaker than gold (GLD (NYSE :)). That underperformance continues to weigh on sentiment in precious metals, with bullish sentiment falling to nearly 20% in silver, an area where buyers have rallied in the past. The slight downside, however, is that this recent weakness is starting to weigh on the gold / silver ratio and we don’t want this ratio to go above 80 which would be a character change. Given that silver continues to break above its annual breakout without the gold / silver ratio breaking out yet, I remain bullish. Let’s take a closer look at the bull and bear case below:
(Source: Daily Sentiment Index Data, author’s chart)
As can be seen in the graph above, bullish sentiment for silver is significantly lower from February levels, from 90% bulls when a herd of investors briefly believed WallStreetBets was cornering the silver market. Given the Hunt Brothers’ lack of success in this endeavor, it should have been pretty obvious that this probably wasn’t going to work, and the price has come down significantly since then. The good news is that this 18% correction in the SLV has massively weakened sentiment, with bullish sentiment falling 6,500 basis points in 4 months from 90% bulls to barely 20% bulls. While low sentiment levels do not guarantee lows, they create the conditions for lows to form, and we usually see buy support for any further weakness. This suggests that sentiment has finally turned in favor of the bulls and we have entered a low risk buy zone for a starting position in silver.
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