For the last several weeks, we have warned precious metals investors about the growing potential for a corrective decline in the iShares Silver Trust (NYSEARCA:SLV) and many of its sector-related counterparts. Since then, the fund appears to be showing evidence of clear weakness as SLV has been unable to reach its highs established on August 10th, 2020. Undoubtedly, the global markets are facing an uncertain future and the potential for volatility remains elevated. But precious metals investors must also remember that corrections are a healthy part of the investment process and that this activity can help build a more sustainable uptrend (in any asset) over time. Ultimately, this is what will help to propel safe-haven assets to new highs, and we remain bullish on the space (along with previously stated views on SLV). However, we will also need to see a deeper retracement to the downside before we can recommend establishing new long positions.

Source: Author via Tradingview

When we are looking to arrive at an outlook for what is likely to happen next in SLV, it is important to understand the long-term history of these assets within the context of broader volatility tendencies. During the late 1970s and early 1980s, silver markets experienced a surge in price volatility that sent spot prices into the lower $30s. Similar moves occurred after the 2008 financial crisis, but spot prices actually managed to rally a bit further (into the upper $30s).

During the aftermath of the coronavirus pandemic, we have already started to see the beginnings of another such move in the financial markets. Of course, this is an additional factor that supports the long-term outlook for safe-haven assets because continued market uncertainty might be expected as cases of coronavirus reinfection continue to be reported in several parts of the world. If longer-term trend histories give us any indication of how investors might behave in the future, an extension of the post-2008 rally could easily give markets an additional bump and push valuations into the lower $40s before all of this is finished.

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Source: Bloomberg

But we must also remember that downside corrections are generally needed in order to fuel future rallies. It is exceedingly rare that we see any type of asset surge in the way that silver markets have rallied since the March 2020 trading period. On the positive side, we can say that silver markets have a long history of surging incredible distances in very short periods of time. On the negative side, we must accept the possibility that this might not happen in 2020 and this creates a need for investors to wait patiently for a clear corrective retracement before buying instruments like the iShares Silver Trust or the SPDR Gold Trust (NYSEARCA:GLD).

Source: ETFdb

Bullish investors must also contend with the flow-related evidence suggesting that a downside reversal is already underway. Over the last one-month period, the iShares Silver Trust has been hit with net outflows of -$392.2 million. For some precious metals investors, these numbers might not seem significant. However, this figure should send warning signals because it indicates a clear reversal that is now present in the market, which calls into question the strength of the trend’s longer-term behavior.

Source: ETFdb

Over the last year, net outflows haven’t reached this degree of bearish strength at any other point, and this does tell us that the potential for a true downside correction is growing. Fund outflow activities are also looking stark if we view them based on medium-term horizons:

Source: ETFdb

One issue that precious metals investors will be forced to contend with will be the overall strength of the U.S. currency. Specifically, the U.S. Dollar Index should offer one of the best ways of assessing strength or weakness in relative currency valuations, and this benchmark has fallen by nearly 11% since the end of March 2020.

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Source: Author via Tradingview

Eventually, this activity could continue to work in favor of bullish iShares Silver Trust investors as long as the U.S. Dollar Index fails to break above resistance near 95.60 (which marks the 100-day exponential moving average). Those looking to compare the relative benefits that differentiate SLV and the SPDR Gold Trust should also remember that the long-term uptrend in the market’s gold/silver ratio has also made a clear break to the downside. On a relative basis, this helps support the bullish outlook for the iShares Silver Trust over other precious metals counterparts.

Source: Author via Tradingview

Ultimately, precious metals investors must remember that downside corrections are a healthy part of the process. As investors take profits on prior profits, new buyers are able to enter the market at more favorable levels, and this is the activity that can help build a sustainable uptrend over time.

Currently, it appears that this could be the case for the iShares Silver Trust, and this is why we have warned investors about the growing potential for a corrective decline. The iShares Silver Trust has been unable to reach prior highs established on August 10th, 2020, but we will need to see a deeper retracement to the downside before we can recommend establishing new long positions. We remain bullish on the space long-term because global markets are facing an uncertain future and potential for stock market volatility remains elevated.

Thank you for reading.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.