If you’ve been following the financial markets in recent months you’ll likely have noticed that precious metals are still deep-out-of-favor contrarian plays. The stock-market cheerleaders presenting the financial news jeer the PMs and still attribute their record-high “bubble” levels to nothing but inflation and anti-dollar hedges. Rarely are PM fundamentals considered.
With this universally rotten PM sentiment it is apparent that the metals and their related stocks are still far from being mainstream favorites. This is just fine though as it tells us there is still a long way to go in their secular bull markets.
Regardless of this PM disdain, gold’s strength remains steadfast. The Ancient Metal of Kings is the ultimate form of money and will always be a store of value. And its fundamentals remain stellar! With global mined gold production continuing to fall in the face of rising demand, the quadruple we’ve seen in gold’s price since 2001 is likely not the end.
Silver also remains in an excellent strategic position. Though this shiny-white metal has more of an industrial flavor to it, silver’s precious-metal attributes are timeless with gold’s. The market for this volatile metal is a speculators’ playground and silver will likely continue to trend upwards in lockstep with gold.
With gold and silver the bellwethers of the PM complex, their prices above $800 and $15 respectively bode very well for the mining stocks. The companies that explore, develop, and mine these PMs are positioned to greatly capitalize on these bull markets. In fact since the turn of the century the gold and silver stock sectors have been some of the most lucrative to trade, earning investors and speculators fortunes.
And because these stock sectors have performed so well, more and more companies are entering the mix in order to capture some of the capital flowing into these markets. With more stocks to choose from now than ever before, skillful stock picking is of vital importance.
In the newsletter business we must stay on top of the PM stocks in order to provide our subscribers with high-potential trade recommendations. And with all these stocks to choose from now we’ve really had to step up our own research efforts to make sure we identify the best of the best.
At Zeal we strive to stay on top of the massive inflow of stocks by formalizing our research into a report format. Each time we research a sector we start from the top. And like separating the chaff from the wheat, we narrow down the population to those stocks we believe have the highest probability for success when the trading environment is favorable.
Having these reports at our fingertips we know which stocks to choose from when the technicals favor a newsletter trade. In the last couple rounds of research we’ve focused on the gold stocks. First we took a look at the high-potential gold producers, and then in our next report we drilled down on the most promising gold juniors.
While these latest gold stock reports have been popular, we’ve been getting a lot of requests to update our favorite silver stocks. So we did! Our newest report profiles our dozen favorite silver stocks. And of course before we got too deep into the stock research it was imperative that we reexamine the fundamentals of these companies’ underlying metal.
And silver’s fundamentals have been highly debated of recent. From simple economics to wild manipulation theories there is a war out there right now. And whether or not I agree with the latter, I’ll defer to those who know more than me for pontification. The economics tell me all I need to know to be a silver bull.
So just taking a look at economics, I believe silver’s fundamentals remain excellent. Growing investment and industrial demand are likely to keep the supply-and-demand balance tight for many years to come. And this is conducive to a high-price silver environment in which the stocks should positively leverage the metal.
But unfortunately silver’s fundamentals aren’t as stellar as gold’s from a production standpoint. While demand is rising, so is supply. With silver’s incredible bull market that has seen it rise over 400% since 2001, the miners have responded.
Mining is responsible for about 70% of the annual supply of silver with recycling and central-bank sales picking up the balance. According to the U.S. Geological Survey (USGS), the mined supply of silver has risen by 25% in the last 10 years. And 2008 should be the fourth year in a row of mined supply growth.
In my studies I’ve found there to be two major reasons why silver mining has been able to ramp up production as opposed to gold’s downward mining trend. The first reason lies with the base metals bull markets. And the second reason lies with the production efficiency of the primary silver miners.
Tying into this first reason it is important to understand the geology of this white metal. Due to the mineralization characteristics of the ore in which silver resides, it is often a byproduct to other more prevalent metals. This is why up to three-quarters of the world’s mined silver supply comes to market as a byproduct!
Some of the largest silver mines in the world measured by volume are actually primary mines of lead, zinc, or copper measured by revenue. And because base metals prices have skyrocketed in recent years, the miners of these metals have turned up their volume, thus increasing silver’s volume.
The second reason for mined production growth surrounds the fact that primary silver miners have shown an uncanny ability to quickly bring mines into production. Provocatively this skill is in stark contrast to what we know about the evolution of mining. Typically it takes five to ten years and a hefty capital commitment to explore, discover, and develop a mine from scratch.
But with silver prices at record-high levels many silver miners have found a way to skip some of the standard steps of mine development. And it is the past-producing silver mines that are opening the doors for these miners.
Many of these old mines do in fact have significant amounts of silver remaining. And the miners are finding it economically feasible to redevelop old mine workings and recommence production. When “search and find” is taken out of the equation, the time and capex required to bring a mine to life is greatly reduced.
The redevelopment of past-producing mines is also made easier due to their geographic concentrations. If you look at the global populace of silver stocks and the locations of their projects you’ll find a recurring theme. Mining companies are flocking to Mexico and Peru.
Mexico and Peru are not only geopolitically safe but they are silver-mining havens. These two countries alone are responsible for a combined one-third of the global mined silver supply. And because of their rich histories there is vast potential to increase this output.
The history of silver has largely been written across the rich Sierra Madre gold and silver belt that knifes through the center of Mexico and the mineral-rich Andes Mountains that stretch across the west coast of South America. For nearly half a millennium these Latin American silver powerhouses have dominated the silver industry.
And the silver miners of today and tomorrow know exactly where to go in order to increase their odds of success in this tough business. Therefore it is not surprising that the vast majority of both juniors and producers that consider silver their primary metal have interests in Mexico and Peru.
I was actually quite astonished when I first noticed how many of the publicly traded silver companies were active in Mexico and Peru. But when I researched the history and geology of these countries it made perfect sense. And when I noticed that all but one of the elite stocks that made it into our report had either primary or secondary interests in Mexican or Peruvian exploration projects or mining operations, I wasn’t too surprised.
Mexico in particular has seen the biggest modern-day silver rush. This country is even more geopolitically safe than Peru and its mining laws are very favorable, especially to foreigners.I believe over the next several years Mexico will eventually overtake the top spot from Peru as the world’s leading silver producer. And it will probably be able to accomplish this without making a single new discovery.
This concept sounds a bit strange, but the key to this idea lies within the thousands of past-producing mines that litter the massive precious-metals belt that drives through the center of this country. If it is true that one-third of all the silver ever produced in the history of the world has come from Mexico, then this idea is not too farfetched.
The miners of the past already did a lot of the work for the new generation of silver miners. They made discoveries. And the new miners can take advantage of these discoveries because most of these old mines still have a lot of silver remaining. This is all possible because today’s silver miner has the advantage of time.
Most of Mexico’s historic mining efforts focused on the low-hanging fruit via super-high-grade surface deposits or underground along the best-of-the-best bonanza-style veins. Silver was so abundant early on that the miners didn’t waste their time unless the silver was jumping out of the ground at them.
Because of this, today’s silver explorers are finding vast resources of silver mineralization at these past-producing mines that previous operators either didn’t identify or considered too low-grade. So with a combination of modern exploration and processing techniques and higher silver prices, many of these historic deposits are today amenable to profitable mining.
Even better is many of these deposits are open in all directions. This allows for brownfields discoveries of the same high-grade silver that was so abundant for the Spaniards centuries ago that they used it to shoe their horses. Silver was flowing in the streets of Mexico!
Increasing production out of Mexico as well as other major silver-producing countries is expected to contribute to a growing supply of mined silver in the coming years. In fact many experts believe 2008 could see the largest mined-supply growth in over 15 years. At first glance this trend seems to not bode well for fundamentals, but we have to look at the other side of the economic coin before making any assumptions.
On the demand front industrial growth will continue to drive consumption. The demand for silver in industrial applications continues to rise and it accounts for about half of the world’s total demand. And while growing demand on the industrial side compensates for falling demand in such areas of consumption as jewelry, photography, and silverware, it is investment demand that will likely balance the anticipated supply growth.
And investment demand in recent years has really been augmented by the introduction of exchange-traded funds. While I still believe hoarding physical metals, gold and silver, should be the foundation of one’s portfolio, the exciting silver ETFs have done wonders to bring more mainstream awareness and interest into silver investment and speculation.
The largest silver ETF is the iShares Silver Trust (AMEX-SLV) introduced in April 2006. Like the popular gold ETF (NYSE-GLD), SLV is designed to give stock traders exposure to the price of silver from an investment portfolio. In doing this SLV’s trustee stores physical silver so that each SLV share is fully backed by the physical asset. And much to the dismay of the industrial consumers that frown on a rising silver price, SLV quickly gained popularity.
In just two years of existence SLV has been so popular that its stockpiles have grown by over 800%. When this ETF IPO’d it started out with about 21m ounces of silver in trust which quickly grew to 121m ounces by the end of that year. In 2007 SLV added nearly 48m ounces and it is well ahead of this pace in 2008 already adding 42m ounces.
With total global silver demand only about 900m ounces each year, investment demand through the new silver ETFs has become a sizeable chunk of annual consumption. So even with rising supply from the miners, growing investment demand is very auspicious for silver’s long-term fundamentals. And as precious metals gain more popularity through the course of these secular bulls, investment demand should only continue to grow.
But even if silver’s fundamentals don’t appear as strong as gold’s, its relationship with the yellow metal is likely to buffer any inverse movements. Though more volatile on a daily basis, it is indisputable that the performance of silver is highly correlated to gold. In fact from 2001 to current these two metals sport an r-square of 97%, which means that 97% of the daily behavior of silver can be explained by the daily behavior of gold!
Therefore it can also be deduced that silver stocks are highly correlated to gold stocks. And like gold stocks, we are in a season of volatility in which investing and speculating in silver stocks has not been for the faint of heart. With the stocks seemingly in a state of malaise and seasonality now working against the PMs, we have seen some serious capitulation even from some of the battle-hardened faithful in this sector.
But while the environment hasn’t been great for silver stocks of late, the fundamentals of the elite stocks should not change radically before this sector returns to favor. At $15+ silver the miners have excellent margins on their production and the explorers still have an incredible incentive to find and develop silver deposits.
This secular silver bull likely still has a long way to go. And I believe we will eventually see silver prices much higher than the highs experienced in March. But even if silver retreats for a spell, silver mining should still be highly profitable. Even at $10 the elite miners can still turn incredible profits as they produce their silver at costs half this amount, with some operating at costs near nil when byproduct credits are thrown into the mix.
When the tides do change for the silver stocks, only a handful will emerge as the leaders. And picking the winners requires diligent research and analysis especially considering the growing pool of silver stocks to hit the markets in recent years.
In Zeal’s newest research report we profile our favorite 12 silver stocks fundamentally. These stocks range from junior explorers to some of the biggest and best producers in the world. We believe these high-potential stocks are best-positioned to capitalize on the ongoing bull market in silver. To have these stock profiles at your fingertips, while silver stocks are cheap, please purchase this report today.
The bottom line is silver’s long-term fundamentals remain excellent. While mined supply is expected to rise, demand should also continue to grow mainly led by investment. As silver’s powerful bull market continues to gather strength, more and more investors will see the fortunes of investing in this precious metal.
And with the rise of silver, a lot more mining companies are taking notice and targeting this metal. And these companies should be able to greatly leverage silver’s gains. Silver stocks have been beat up of recent so there are some excellent buying opportunities as this metal consolidates and awaits its next upleg.
May 30, 2008
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