Forgotten no more

  • The forgotten metal that is about to take off
  • Limited silver plays on the ASX

Too many people miss the silver lining because they’re expecting gold.

Arthur Yorinks

Gold investors have undeniably done well in 2016.

At the start of the year, the yellow metal was trading for US$1074.61 per ounce. Today it’s at US$1331.48. That’s a tidy 24% gain in less than seven months. That dwarfs the 2.68% gain the ASX 200 delivered over that same time.

But while gold received the lion’s share of the financial headlines — and investor interest — silver has quietly returned almost twice gold’s gains. At the beginning of the year silver fetched US$13.84 per ounce. As of writing it’s selling for US$20.35 per ounce — up a phenomenal 47%.

This stellar performance has finally caught the notice of the mainstream media. As recently as April you could go all week without finding any news on silver. Now pundits are tripping over themselves to bring you the latest.

Like this (pun-laced) headline from the Australian Financial Review (AFR), ‘Hunt is on to discover new ways to ride silver’s sterling surge’. Or this one from Business Day, ‘Investors take shine to silver’.

You can understand why silver is now in the spotlight.

A 47% gain in less than seven months is undeniably newsworthy. But as an investor this ‘news’ doesn’t really do you much good. As an investor, wouldn’t you have preferred to know about silver’s likely surge at the beginning of the year? Or maybe back in October of 2015?

Of course you would. And I’ll get back to how you could have known about it fully nine months ago, right after we have a look at the markets.

Markets

US markets enjoyed another day of healthy gains yesterday with the Dow up 0.73% to close at 18,506 points, another record high. The NASDAQ also closed up 0.67%, and the S&P 500 rose 0.53%.

European exchanges had a mixed performance. London’s FTSE 100 fell 0.24%, while the French CAC 40 gained 1.16% and the German DAX climbed 1.39%.

Closer to home, at time of writing the Nikkei 225 is up 1.16% and the Shanghai Composite is down 0.05%.

And the ASX 200 is enjoying another day of gains as well, up 0.54%. That brings the index up 3.23% for the week.

In commodities West Texas Crude has fallen 1.14% to US$45.16.

Gold is trading for US$1332.64 per ounce. And silver is at US$20.35.

Ah, that’s right…silver.

The forgotten metal that is about to take off

The above subheading comes straight from the 15 October, 2015 issue of Greg Canavan’s advisory service, Crisis & Opportunity. That’s right, when silver had fallen off the radar of virtually every analyst, Greg put the ‘poor man’s gold’ under his microscope.

And he liked what he saw.

Now, full disclosure, in November and December silver traded below its October peak. That’s why Greg remained cautious. He recommended his readers take a smaller allocation in the metal than they would ordinarily, and wait for the confirmed break-out to higher prices before buying more.

Here’s what he wrote to his subscribers in that issue:

I’ve spent a lot of time this year talking about the emerging bull market in gold priced in Aussie dollars…

But it’s not gold I want to tell you about in this issue. It’s silver, gold’s volatile sibling.

‘You see, silver priced in Aussie dollars looks ready to make a major move. As you’ll see below, this move has been building for a while.

Have a look at the chart below. It’s a 10 year weekly chart of the ASX listed Physical Silver ETF [ASX:ETPMAG]. It looks as if it’s made a major low and is now about to turn higher.

Keep in mind the numbers used in the charts below do not correspond exactly with the market price of Aussie dollar silver. There is a slight difference due to the ETF’s fee structure. 

You can see that from a low of around $16 in 2009, silver rallied to over $44 in May 2011. It was a classic parabolic move. 



chart image

Source: BigCharts.com
Click to enlarge


Then the bust came. First the sharp fall, followed by another attempt at the high. But when that rally ran out of puff, the fall was precipitous. Silver was in a downtrend.

While strong rallies worked to keep investors’ hopes up, the downward trend remained dominant all the way through to the end of 2014.

A sharp rally in early 2015 was the first indication that the long bear market was coming to an end. But silver wasn’t ready to take off. It still had more work to do.

Here we are, 10 months later, and the signs are positive that a lasting low may be in place… I’ll show you how I think you should play this potential new trend in a moment.

But first I want to tell you why I’m recommending you buy silver in the first place.

Importantly, it’s completely out of favour. Silver is out of the headlines. A lot of people lost money on silver in the bust and don’t want to know about it anymore. These are the ingredients you should look for in an investment or trade.’

I love that last bit. You can’t get much more contrarian than that.

Of course, there were a lot of other ingredients Greg looked for before making the silver recommendation.

These included the gold/silver ratio, which measures how many ounces of silver you can buy with one ounce of gold. Back in October that ratio was historically high, indicating to Greg that silver was set for higher prices.

That call, as we know today, was spot on.

Limited silver plays on the ASX

You can get direct exposure to silver via the Physical Silver ETF mentioned above, or by investing in the physical metal. But, unlike gold stocks, there are very few purely silver miners listed on the Aussie market.

Why would you want to invest in a silver miner versus the physical metal?

Because when the price of silver increases, the companies mining it see their cash flows increase. Provided their costs remain under control, you can expect most of that cash to hit the bottom line. That often sees their share prices rise faster than the metal they’re mining.

Jim Rickards explains this better than I can, in this case talking about gold miners,

When it comes to gold miners, we all know that when gold goes up, the price of mining stocks goes up faster. That has to do with the role of fixed costs versus variable costs in mining company income statements. Once fixed costs are covered (a difficult challenge) mining profits can drop to the bottom line directly because variable costs are low in relation to fixed costs. Since stocks are priced on a multiple of earnings, the stock price goes up faster than earnings. That’s the environment we’re in today.

We’ve seen this play out in recent months with numerous Aussie gold miners. And, according to an article in Wednesday’s AFR, the same is true for many silver miners. Such as Fresnillo [LON:FRES]. The stock is up an eye-popping 168% this year.

But, as you’ll notice, it’s listed on the London Stock Exchange. According to the same article in the AFR that means, ‘…investors have been somewhat locked out of the metal’s recent run.’

Of course that’s nonsense.

Just because you live in Australia doesn’t mean you’re ‘locked out of’ international stocks. However, as we know from surveys we’ve taken among our own readers at Port Phillip Publishing, many Aussies don’t feel comfortable investing overseas. In fact, our most recent survey showed that roughly half of our paying subscribers were not interested in receiving international stock tips.

I was more than a little surprised by those results. What a lot of investors don’t seem to grasp is that by limiting your focus to only Aussie stocks, you’re not only limiting your possible returns but also increasing your risk.

Remember that a huge part of the ASX 200 is made up of the banks and miners. By investing solely in Australian companies, you’re concentrating your wealth in a very narrow field. If the Aussie economy takes an unexpected nose dive, your portfolio will be better prepared to withstand the shock if you own stocks in different countries.

That’s why it’s so important to look overseas.

With today’s silver story in mind, if you haven’t yet dipped your toes into a foreign stock exchange, there’s no better time than the present. There are a number of brokers that can make international trades for you.

Three reputable brokers you could consider are:

Commsec Online Trading Web: www.comsec.com.au Tel: 13 15 19

WESTPAC Online Investing Web: www.onlineinvesting.westpac.com.au Tel: 13 13 31

E*Trade Web: www.etrade.com.au Tel: 1300 658 355

(Note we have no affiliation with these brokers whatsoever. There are others to choose from if you wish.)

Now I know what you’re thinking. With a 47% surge in silver prices already this year, hasn’t the boat already sailed on this opportunity?

Not according to Greg Canavan. Though he foresees some possible pullbacks in the silver price in the short term, the mid and longer term outlook remains strong.

That’s all for today.

Cheers,
Bernd