Contributed Commentaries
Silver Stocks Remain Buoyant as Merger Mania Heats Up
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
The silver space has been beaten down for so long, most speculators who have attempted to bottom fish this tiny sector have given up and moved on. After silver prices crashed and stayed low for what seems like a decade, the sector has been basically left for dead. The current silver bear market began after a speculative blow-off top reached nearly $50 per ounce back in April of 2011. This relentless selling of the metal is now 17 months longer than the 1980 – 1986 bear market, which also followed a blow-off top to the $50 region.
With the volatile metal still trading below $16, this silver bear is now into its eighth year and requires a monthly close above $21 to technically complete its 5-year basing pattern. This would be a 35% move from current levels and appears miles away when taking into account what the numerous false breakouts over the past seven years has done to the psyche of silver speculators.
Moreover, when the nearly 50% move higher in gold’s little sister peaked in mid-2016 at $20 per ounce, the quick burst of enthusiasm for all things silver turned into yet another false hope during what has now become the longest bear market in silver future’s trading history. I believe there is a strong possibility this was the final blow responsible for ridding the sector of most of the staunchest long-term bulls, creating a final capitulation bottom last November.
The recent divergence of silver stocks in the face of both lower gold miners and declining silver is another reason to believe we may have carved out a significant bottom. While gold has been correcting a nearly 15 percent move higher since hitting a one-and-a-half-year low last August, many of the silver equities have maintained most of their recent gains and appear “sold-out”. In fact, many of the individual silver juniors I own and/or track have stubbornly held on to their recent gains as the metal has retreated further below $16 this week.
SILJ, the PureFunds Silver Junior ETF, is consolidating its recent gains with decreasing volume and has been slowly outperforming the GDX since tax-loss selling ended late last year. This highly volatile sub-sector has historically been the first to sell-off before a longer-term correction ensues in the precious metals complex and could be a signal of silver having made a significant bottom last November.
Furthermore, silver has been experiencing something of a supply issue lately. According to reports, the U.S. Mint has suspended silver bullion coin sales after the mint ran out of 1-ounce American Eagle silver coins on Feb. 21st. This is encouraging from a longer-term standpoint and can be considered as another supporting factor for the continuation of the intermediate-term recovery in both gold and silver.
Meanwhile, gold is beginning to show signs of vulnerability as a key resistance area was tested and has been reversing from $1350 since last week. The price appears headed to a test of the formerly strong resistance region of $1300 - $1309, as the safe haven metal closed out its first losing month yesterday after a 4-month winning streak. This argues in favor of the “pause that refreshes” for the gold price to continue in the very near term.
However, the action of the gold miners during this sell-off should provide investors with clues as to how deep this healthy correction may go. The selling in the GDX so far has been normal after becoming short-term overbought last week. There is some support at the $21.50 level, with critical support at its 200-week moving average just below $21. As long as the global miner ETF remains in its uptrend above this important trendline, accumulation in the complex is recommended during this weakness.
Three global miners, which combined make up nearly 25% of the GDX, have been in the news recently in a battle of takeovers, hostile bids and saber rattling. Earlier this week, Barrick Gold announced that it has made a proposal to the Newmont Mining Corporation Board of Directors to merge with Newmont in an all-share transaction, saying a combination of the two would form the world’s best gold company with unprecedented potential for value creation.
Although a few major shareholders have backed the proposal, I am hard pressed in seeing a hostile bid below market value by Barrick being successful in taking over rival Newmont, which has out-performed it on a large scale since the last time both companies considered merging in 2014. Barrick’s share price is down 25% since that time, while Newmont’s is up over 65%. Contrary to this hostile bid, the recently proposed Newmont/Goldcorp merger may eventually be completed as Newmont management has instead said it favors proceeding with its planned acquisition of Goldcorp Inc.
No matter how this scenario plays out, I expect the divestment of both Newmont and recently discussed Barrick assets to create a few more mid-tier miners and drive more acquisitions of large scale/low cost development projects with blue sky potential. The news has also been bringing more attention from generalist investors to the undervalued and pretty much forgotten sector, while putting the spotlight on how desperate major miners are becoming to grow their rapidly depreciating reserves.
In the meantime, markets continue to reflect the political and economic events, as there are more than a few issues that are likely to keep gold firmly above $1250 per ounce. Accordingly, gold’s recent price action has been a response to the volatile year that lies ahead. Brexit, which may or may not happen at the end of March, is going to cause some kind of turmoil, while the European Union continues to face a myriad of political and economic problems with their membership. Not to mention the Fed’s growing monetary policy controversy, along with the slowdown in global growth rates.
Based on all of these issues, continuing to concentrate on accumulation of the best in breed juniors during this correction is recommended. While the GDX is consolidating its recent gains, deep value opportunities remain in the sub-$500M market cap growth-oriented producers, high-margin project developer/explorers, and cashed-up, early stage micro-cap juniors. If you require assistance in choosing the best quality juniors to invest, please stop by my website and check out the subscription service at http://juniorminerjunky.com/
 |
