I believe the bottom for silver is in. My vehicle of choice to play silver is the iShares Silver Trust Fund (NYSE: SLV). SLV has been in a long-term downtrend since touching an all-time high of $48 in 2011. Even so, I posit now could be the ideal time to buy SLV shares. The weakening dollar and inflation finally raising its ugly head are the primary culprits. These developments combined with several positive catalysts on the horizon lead me to believe the SLV has nowhere to go but up.
The Fed’s dovish tone
A strong U.S. dollar began to sell off courtesy of Federal Reserve’s dovish tone at its most recent meeting.
Furthermore, the Fed chair’s decision to not increase the trajectory of rising rates incited a strong bid for commodities and foreign currencies after leaving the forecasts for rate hikes in 2017 at two. I believe the Fed is playing it safe by maintaining such a dovish stance. This happens every time. The Fed always seems to tighten or loosen interest rates for long after they should have stopped.
This leaves the door open for inflation to spike even higher in the coming years. Basically, the Fed would rather fight off rising inflation in the future than be blamed for crashing the markets now. Fortunately, the SLV provides an ideal hedge. The S&P 500 and the SLV have shown a near perfect inverse correlation for the past few years.
S&P 500 vs. SLV Five-Year
The SLV serves to diversify one’s portfolio and protect against inflation, and/or deflation for that matter. On top of this, the silver to gold ratio is high at present. This indicates a reversion to the mean may be in order.
Gold to Silver Ratio High
Each time the gold to silver ratio has reached this level, the ratio has retreated significantly. Gold (NYSE: GLD) has vastly outperformed silver as of late. I expect a silver-to-gold catch-up trade to push the SLV significantly higher in the coming months.
Technical status strengthening
The chart pattern suggests that upward momentum will continue and the shares are positioned to move higher.
The stock has bounced off the bottom of the current downtrend channel and is now testing resistance at the 50 day sma. If the stock can break through resistance at the 50 and 200 day smas, there could be significant upside from here. My estimates suggest the SLV could rise to at least $26 over the next 12 months. This amounts to about a 60% gain from current levels. If you like to play it safe, wait for the SLV to break through resistance at the 200 day sma prior to starting a position.
The Bottom Line
The risk/reward equation favors long trades in the SLV. I expect the strong dollar will continue to unwind as the Fed seems bound and determined to remain dovish. These developments are very bullish for the SLV. Layer into the position and set a tight stop. What’s more, this is a decidedly contrarian call… enter at your own risk. Please use this information as a starting point for your own due diligence, and always consult an investment advisor prior to making and investment decisions.
Those are my thoughts on the matter. I look forward to reading yours. Do you think the SLV is a buy at current prices?
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Disclosure: I am/we are long SLV.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.