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Silver Miners: Time to Take Profits

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We’ve seen a surge in demand for silver miners over the past few weeks and the Silver Miners ETF (SIL) continues to climb the ranks, now the 7th best-performing ETF year-to-date. The rush into the sector has come as a result of silver (SLV) overtaking gold (GLD) as the best performing precious metal in 2020, and speculators are anxious to get their hands on miners that provide leverage to the metal.

However, while the recent advance has been a positive sign with many miners hitting new 52-week highs, the past two days we’ve seen panic buying in many silver miners as well as the metal, and this suggests that the trade is now beginning to get crowded. Based on this, I believe investors would be wise to take some profits in both silver and the silver miners, as the reward to risk is now the worst it’s been in nearly a year.

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As we can see in the above chart of the Silver Miners ETF, the index is trying to make a new multi-year high, and briefly traded above strong resistance at $45.00 this week. However, we will need a monthly close in July above $45.00 to confirm this breakout, and it’s looking like this might be a difficult task for the bulls.

This is because the index has raced higher by more than 195% in less than 100 trading days, barely taking a rest along the way. In most cases, rallies of this size rarely hold onto their gains short-term, even if this is a positive change of character for the index. Therefore, while a breakout above $45.00 for July is possible, I remain skeptical that the bulls will be able to hold onto all of these gains.

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If we take a look at a short-term chart below of the Silver Miners ETF, we can see that the index continues to have positive momentum, but the red bars shown above suggest that this momentum has gone a little too far. This is because the index is currently more than 25% above its 20-day moving average, a significant extension short-term that generally leads to correction over the following week.

This is further evidence that we’ve seen panic buying among the miners, and it’s never a good idea to be a buyer when the crowd is also rushing to get into a trade. It’s typically a good idea to do the opposite and begin taking some profits. While there’s no guarantee that we need to pull back, I would not be surprised to see a 7-10% pullback in the Silver Miners ETF from the $47.00 level we hit yesterday.

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Finally, if we take a look at the daily chart of silver, we’ve also got a big issue, and that’s the fact that silver is now more overbought than it’s been in nearly a decade. The current overbought condition (orange bar) exceeds that of the one we saw in August 2019 and August 2016, and both of these signals led to short-term and medium-term tops.

There’s no reason to believe that this time has to be the same, though I would argue that there’s a high probability that we will pull back over the coming week or two after hitting parabolic levels as of Wednesday’s close. This corroborates the view that the Silver Miners ETF could be in for some volatility, yet another reason to think about booking some profits in silver miners.

While everyone is plowing into the silver miners trade and discussing $35/oz silver before year-end, we now have the most complacency we’ve seen in nearly a decade, as well as the most overbought condition in nearly a decade, and this rarely ends well for those chasing the metal.

Therefore, while the Silver Miners ETF has made significant progress and could register a multi-year breakout before year-end, I do not think this is the time to be adding new exposure to silver miners. Instead, I think it’s time to go against the herd and start selling.

For now, I continue to remain long several silver miners like Pan American Silver (PAAS) and Silvercrest Metals (SILV), but I have taken quite a bit of profit this week in anticipation of a pullback. The time to be greedy is when others are fearful, and when the Robinhood traders are plowing into SLV at break-neck speed, it’s time to be fearful and that this upside move might be about to run out of momentum.

Disclosure: I am long GLD, SILV, PAAS

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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The Global X Silver Miners ETF (SIL) was trading at $46.32 per share on Thursday morning, down $0.43 (-0.92%). Year-to-date, SIL has gained 40.15%, versus a 2.48% rise in the benchmark S&P 500 index during the same period.

SIL currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #10 of 34 ETFs in the Precious Metals ETFs category.

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