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This Indicator Says that Gold and Silver are Still in a Bull Market

Precious metals started the year with some weakness, and investors are wondering if the sector's uptrend remains intact. Taylor Dart gives insight on the silver/gold ratio, and why it's indicating that investors should buy the dip.

Investors in the silver (SLV) market have had to endure a rollercoaster ride in 2020, with the metal starting the year as one of the top-performing assets before derailed by a 12% correction. This price action is quite surprising given the developments we’ve seen recently, with a $1.9 trillion relief plan announced.

Besides, we should see even more demand for solar with green energy being more encouraged under Biden’s new Green Plan. However, while short-term corrections can be frustrating, and price action can often seem detached from reality, it’s important to focus on the bigger picture. From a big picture standpoint, the outlook for silver remains very bright, with the long-term chart continuing to firm up and the silver/gold (GLD) ratio remaining in a strong uptrend. Let’s take a closer look below:

 

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(Source: TC2000.com)

As shown above, the silver/gold ratio was in a massive downtrend for several years but finally broke out in H2 of last year. Generally, metals bull markets begin with gold leading. Then silver takes the baton after a few years, and this confirms the presence of a potential secular bull market vs. an ephemeral cyclical bull like we saw between February and August 2016 in silver. The fact that we’ve finally seen silver begin to participate is great news for the bulls, as is the fact that the silver/gold ratio remains near its highs during this correction.

The one massive red flag in late 2011 was that the silver/gold ratio plunged and broke its uptrend, which decreased the probability of gold eclipsing its 2011 high at $1,920/oz. However, we see the opposite of this currently. This makes the calls that we’ve seen peak gold confusing. If we had seen peak gold prices at $2,050/oz, we are seeing a bizarre setup from the silver/gold ratio, which says we’re heading much higher. Therefore, as long as the silver/gold ratio remains below 80, I see no reason to worry about the health of this precious metals bull market.

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(Source: TC2000.com)

From a technical standpoint, it’s very encouraging that silver has finally broken out, with the metal sitting above a multi-year base after a 5-year breakout confirmed by the 2020 yearly close. Typically, the metals perform much better when silver is leading, so the fact that silver has broken out to new highs with the silver/gold ratio also in an uptrend checks two key boxes for the bullish picture. Meanwhile, if we zoom in on the weekly chart, we can see that silver is building a near-perfect cup & handle base on top of its prior resistance level. This is a very bullish setup and would be confirmed by a weekly close above $28.00/oz for silver. Assuming silver can get through the $28.00/oz level, there’s no meaningful resistance on the metal until $34.00/oz.

So, what’s the best course of action?

As noted a few weeks ago, it was time to begin nibbling on silver miners like Pan American Silver (PAAS) and Wheaton Precious Metals (WPM), given that they were trading at deep discounts to prior valuations and are projected to see material margin expansion in FY2021. I continue to see these stocks as holds, and I would view any sharp pullbacks below $24.00/oz on silver as opportunities to add exposure. In terms of silver, I would prefer to see a pullback below $24.00/oz to go long, but there’s no guarantee we get a correction to these levels. So, for the time being, I remain long GLD and WPM.

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(Source: TC2000.com)

It’s easy to be negative on silver after the sharp correction we’ve seen, but I see no reason to lose sight of the bigger bullish picture as long as the silver/gold ratio is below 80.  Multi-year breakouts rarely fizzle out after a 3-month advance, and this suggests that higher highs above $30.00/oz are in store for silver this year. For this reason, I believe investors should stay the course and use any dips below $24.00/oz as an opportunity to add exposure to the best silver miners and or SLV.

Disclosure: I am long GLD, WPM

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.

 

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SLV shares fell $0.16 (-0.67%) in premarket trading Thursday. Year-to-date, SLV has declined -2.85%, versus a 2.67% 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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