2021 was a year to forget for investors in silver (SLV), with the metal down 12% for the year and the Silver Miners Index (SIL) plunging nearly 20%. However, as we begin the new year, the outlook appears to be much better, with many silver miners improving from frothy valuations since the Q1 2021 silver squeeze and sentiment in the metal itself showing elevated levels of pessimism. In addition, while the metal remains well below its prior highs of $30.00/oz and in a volatile range, the long-term picture has rarely looked better.
Starting with the worst indicator first, the silver/gold ratio has continued to underperform over the past several months and has slid below its long-term moving average (white line). This is a negative development, given that the healthiest environment for silver with the most alpha is when silver is trading above this key moving average. Having said that, while we’re below this moving average, the silver/gold ratio is still attempting to make a higher low vs. last year’s levels. So, while we’ve seen a slight downgrade from a bullish reading to a neutral reading, the above indicator is still not showing any red flags.
Moving over to sentiment, we continue to remain on a slightly bullish reading, with far more market participants being bearish than bullish. The below chart evidences this, showing that bullish sentiment for silver is in the lower portion of its range and hit an extreme reading of 12% bulls last month. If we look at prior instances, dips below the 15% level have produced strong rallies in the coming months. So, as long as the majority remain pessimistic on silver, I would expect the metal to continue to make higher lows vs. the recent low at $21.50/oz.