Sprott Physical Silver Trust: Still Bullish, A Technical Dip Is Possible (NYSEARCA:PSLV)

Back in early October, I covered the Sprott Physical Silver Trust (NYSEARCA:PSLV) and made the case that investors consider backing up their second truck for this Silver derivative. The second truck was necessary because the first truck was already filled with Sprott Physical Gold Trust (PHYS). Since the Sprott Silver article, the fund shares have appreciated by 15% vs an S&P 500 that has gained a little under 4%. It’s been a solid call in an otherwise difficult year for risk markets.

I want to take a moment to update my thinking on PSLV as 2022 comes to a close. First, let me make it very clear that I’m still very bullish Silver and by extension most Silver derivatives like PSLV long term. Despite that bullish long term outlook, I think investors should be prepared to buy a potential technical dip in the shares. In this article, I would like to share the technical setup in Silver as I see it and explore what I think it means for PSLV shares in the shorter term.

Technical Viewpoint

In my last PSLV article, I shared a weekly chart of Silver that showed the metal holding a level that I viewed as long term support. In that chart, I provided two additional levels to consider as part of the long term trend channel as I see it. This week Silver nearly kissed the top of the middle trend line of that channel before starting to slightly reverse:

We can see this middle trend line has served as support and resistance in the multi-year trend channel going back to 2007. The last time Silver rose from the bottom of the channel, it took out the middle line and cruised all the way to the top of the trend without looking back. That could happen again this time, but I think we would rather see a back test of the 200 week moving average first before the metal heads higher. That level is currently a little over $21.

Observing the daily chart, we can see an indication of bull exhaustion with the bearish RSI divergences that have formed from higher highs in price coupled with lower highs in RSI on December 13th and December 21st. This is generally an indication that a pullback could be coming in Silver. The $22 level is one that I think could conceivably be retested as early as this coming week if not in early January.

Taking a wider view with Silver, the monthly chart shows how explosive Silver can be when it breaks above a resistance range as it did in summer 2020. There was a diagonal trend that served as resistance in July 2016, September 2019, and again in February 2020 before breaking out and ripping higher in July 2020. We can see a similar trend forming with tops in February 2021 and March of this year. That trend is now being tested again. I do think it will break out higher but that break out likely won’t come until the metal has back-tested $22 at minimum, possibly even $21.

The PSLV chart looks very similar from a directional perspective and we can see the same trendline peaks that we see in the underlying metal. Given what I expect to happen in Silver short term, I think there is a realistic possibility PSLV revisits the $7.50 level. If that price comes, I plan to deploy more capital in the fund shares. I want to be very clear; I have not sold any PSLV shares since I wrote my October article. In fact, I’ve never owned more than I do currently. I would simply like to add to that position in my retirement account and I believe I’ll be able to do so in the coming weeks provided Silver gives us a pullback to $21-22.

Risks

Like any entity that functions as a derivative of a real asset, PSLV does have risks. First, it often trades at a discount to the net asset value of the fund shares – this means it’s entirely possible that PSLV underperforms the underlying assets that the shares represent. Second, as a derivative, there is third party risk that the assets may not be where the custodian says they are. I don’t take the view that this is a large risk with an entity like Sprott but you can never give any entity complete trust. Third, Sprott assets are vaulted in Canada; a country where the quality of governance over the last several years can certainly be debated – as such, jurisdiction risk is now also something to be aware of as the Canadian government could opt for confiscation of sound money assets if global fiat issues worsen and inflation continues to be a problem.

Summary

I believe that Silver is going to have a tremendous 2023. I think there is a really strong fundamental setup for the metal and PSLV should perform very well because of that. If you haven’t already read The Perfect Storm is Brewing from Atlas Equity Research, I would recommend doing so for a more fundamental macro setup analysis. Despite my belief that Silver will end 2023 much higher than its current $24 level, I think the short term technical setup suggests we could experience a slight pullback. In my view, that pullback would be an opportunity to buy the dip. PSLV is my personal Silver derivative of choice and I would look at any back test of the 50 day moving average as a dip to buy.