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Silver stocks showing relative strength during miner consolidation

Commentaries & Views

Silver investors have been taken on a rollercoaster ride this year, as the highly volatile metal has recently corrected by almost $8, or 36% since peaking in early August. The drop to just below $22 after gaining over $19 from a spike low below $12 has brought the silver price back to less than half its all-time high.

Once this highly volatile metal became extreme overbought, downward pressure from the recent bounce in an oversold U.S. dollar, along with an uptick in U.S. real yields, took silver down to support at its rising 18-week moving average quickly.

However, since the flash-crash from silver’s high-consolidation of its recent gains in mid-September took place, the Global Silver Miners ETF (SIL) has been showing relative strength in the SIL/SLV ratio. In fact, both SIL and the higher-risk junior silver stock ETF (SILJ) have been trending higher in relation to the silver price.

In contrast, during the previous 9-year bear market in silver, the equities related to this highly volatile metal were vigorously sold during strong silver sell-offs.

Meanwhile, the gold/silver ratio is an excellent longer-term indicator of silver’s value relative to gold. This closely followed barometer is in the process of rolling over after closing below the key level of 80.

During peak marketplace panic into the U.S. dollar by mid-March, the gold/silver ratio reached an all-time high of 126. Once the global central bank printing presses went into hyper-drive in an attempt to save locked down global economies, the ratio has undergone a rapid mean reversion by dropping quickly to 70, before bouncing recently back above 80.

Since silver is such a tiny market compared to gold, the metal’s moves tend to leverage gold moves in both directions as silver inflows are relatively larger. With the precious metals complex recently entering a technically confirmed second phase of a secular bull market, which began at the turn of the century, looking at silver price history during the last bull run can be a good guide as to what we can expect during this new up-leg.

In Phase One of silver’s secular bull market from 2001 to 2011, which saw the metal go from roughly $4 to nearly $50, gold’s little sister underwent several sizeable price corrections. In fact, silver experienced four corrections of 20% or more, with the largest correction being a sizable 57% in the midst of the 2008 financial crisis, and not unlike its Q1 2020 false move lower. But silver went on to rise fivefold from that 2008 low to its 2011 peak. Needless to say, panicked speculators were kicking themselves, while patient and informed investors were very happy.

Based on Phase One history, we could easily see silver come back down to test its breakout level in the $20 region before resuming its Phase Two bull market up-leg. Unless we see silver futures, basis December, move back above $27 soon, more consolidation of recent out-sized gains down towards the 200-day moving average currently at $19.50 and rising is likely.

While late-comers to the recent precious metals party have been panicking out of positions during this correction, seasoned resource investors are taking this opportunity to accumulate quality silver equities.

The recent consolidation of out-sized gains in this tiny sector is presenting an opportunity for investors underweight junior silver stocks. If you require assistance in choosing quality junior silver equities to invest and would like to receive my research, newsletter, portfolio, and trade alerts, please click here for instant access.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.