© Reuters. Silver: Time For Bulls To Play Defense
Silver (SLV) has underperformed for nearly a year despite low rates and rising inflationary pressures. It seems that silver is trading like inflation will be transitory. Taylor Dart explains why silver needs to rally soon.While the S&P-500 (SPY) has easily shrugged off its mid-month weakness, the precious metals have been unable to reverse course, continuing to hover near their recent lows, with silver (SLV) slightly weaker than gold (GLD (NYSE:)). This underperformance continues to weigh on sentiment for the precious metals, with bullish sentiment for silver plunging to nearly 20%, an area where we have seen buyers step up in the past. The slightly negative development, though, is that this recent weakness is beginning to weigh on the gold/silver ratio, and we do not want to see this ratio climb above 80, which would be a change of character. Given that silver continues to remain above its yearly breakout with no breakout yet in the gold/silver ratio, I continue to remain bullish. Let’s take a closer look at the bull and bear case below:
(Source: Daily Sentiment Index Data, Author’s Chart)
As shown in the chart above, bullish sentiment for silver has slid significantly from February levels, down from a reading of 90% bulls when a herd of investors was briefly convinced that WallStreetBets was going to corner the silver market. Given the Hunt Brothers’ lack of success in this same endeavor, it should have been quite obvious this wasn’t likely to work, and the price has retreated considerably since. The good news is that this 18% correction in SLV has taken a massive bite out of sentiment, with bullish sentiment falling 6500 basis points in 4 months, from 90% bulls to barely 20% bulls. While low readings on sentiment do not guarantee bottoms, they do create the conditions for bottoms to be formed, and we typically see buying support on any further weakness. This suggests that sentiment has finally tilted in favor of the bulls, and we have entered a low-risk buy zone for a starter position in silver.
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