Some patterns aren’t rigid enough to rely upon in investing. Some are.
There are a number of tried-and-true patterns in precious metals markets. Understanding these patterns can help investors amplify their profits significantly.
In every bona fide precious metals rally, gold takes the lead at the beginning. Silver then asserts itself, leading the way for the remainder of the rally (in terms of price action). And it always outperforms the gold market by the end.
For many decades, the gold market has been much larger than the silver market – equating to greater popularity. When conditions are ripe for a precious metals rally, the crowd forms first in the gold market for that reason.
The silver market is much smaller
As the gold trade starts to become crowded, investors (always) rediscover silver. Here the smaller size of the sector works to the advantage of early investors.
For example, when the rally in precious metals really
began in March 2020, the gold/silver price ratio was at an all-time extreme of 125:1.
Put in different terms, at that ratio, an equivalent volume of investor dollars in silver would generate 125 times as great a rise in price
Obviously, we never see such an equivalent flow of investor dollars into silver for any extended period of time. But when the capital flows into gold and silver become even remotely parallel, silver leaves gold in its dust – as is currently happening now.
Silver is up over 50 percent month-over-month, outpacing all other asset classes. Experienced precious metals commentators are now openly talking about silver returning to its natural/normal price ratio versus gold: 15:1
– or lower
At the current price for gold, that implies a silver price today of close to $150 per ounce
, not $30/oz.
The price of gold is widely expected to continue to rise rapidly in price. And silver will outperform gold every step of the way from this point onward.
The pattern in precious metals mining stocks
Commodity producers (like gold and silver mining companies) generate natural leverage versus the commodity they produce. It cuts both ways.
Gold and silver mining companies fall harder/faster when the price of bullion goes lower. They leverage the price of bullion in a rising market.
Gold mining stocks began this rally priced at historic lows versus the price of gold. They have generated only a modest amount of leverage to date – with most of that concentrated among the larger producers.
In short, gold (and silver) mining stocks represent unprecedented value opportunities at this moment.
The gold stocks are starting to run. The VanEck Vectors Junior Gold Mining ETF (GDXJ)
has recouped all of its losses from the March panic and is making new highs. GDXJ actually represents primarily the mid-tier and larger producers.
Accompanying this rally in gold stocks has been a flood of new capital into the gold mining sector. This capital infusion is visible in increased M&A activity
. Perhaps more importantly, it’s allowing the junior gold mining companies to cash-up (on reasonable terms) – as a springboard for growth.
Déjà vu with silver mining stocks
We’re now seeing a duplication of this trend in the silver mining industry.
There are no indices of silver miners to point toward. Thanks to the extreme under-pricing of silver, primary silver miners nearly became an extinct species.
Anecdotally, large producer First Majestic Silver
(US:AG / CAN:FR) has more than doubled off of its March low of $5. Mid-tier silver producer, Silvercorp Metals
(US:SVM / CAN:SVM) has nearly quadrupled from its March low – up to $8.06 as of Monday’s close.
And capital is now flowing into these silver companies beyond the surge in retail investing. Silver mining exploration companies are also cashing up.
Junior silver exploration company Discovery Metals Corp
(CAN:DSV / US:DSVMF) closed at CAD$1.32 on July 23rd.
On July 24th, the company announced a $35 million private placement
. On Monday, DSV closed at CAD$2.53. Nearly a double in less than three weeks.
Obviously, the explosion in the price of silver has played a large part in the surge in share price.
However, established silver producers haven’t risen this much over the same period of time. And (as noted) the junior stocks have typically been lagging the larger mining companies to date.
Investor sentiment in DSV was stoked by that CAD$35 million private placement.
When times are tough in the sector, financings are (naturally) seen as dilutive – and the share price responds accordingly.
However, when precious metals are in rally mode, investors see these private placements as accretive
. Such capital infusions are the necessary fuel that allows these companies to capitalize
on rising bullion prices through advancing their operations.
Another example of this is Emerita Resource Corp
(CAN:EMO). Emerita, a much smaller silver junior, announced an oversubscribed private placement
on July 10, 2020 for CAD$1.35 million.
It closed that day at CAD$0.14. Today, EMO closed at CAD$0.30. Another double.
High tide coming to the silver sector
Money makes the world go ‘round.
That cliché isn’t valid in every context. But it’s certainly true in the world of mining.
Mining is capital intensive, with a very long/slow production cycle. It takes enormous quantities of capital to significantly change supply parameters in any mining sector.
In the case of silver, under-priced for decades, with inventories and stockpiles depleted, it will take many years of much higher prices to restore mere sustainability to the silver sector
To replenish silver inventories to historical norms will take many more years beyond that – and even higher prices.
These are the ultra-bullish fundamentals that currently apply to the silver mining sector today. And we are still early in the first inning of this paradigm shift.
Silver mining companies are now capitalizing, to prepare the industry to boost the supply of silver above current critical levels.
Investors wanting to ride these stocks higher need to be positioning themselves now.
DISCLOSURE: The writer holds shares in First Majestic Silver and Silvercorp Metals.