Is silver back en vogue again? It sure looks that way judging from the recent action of the iShares Silver Trust (NYSE:SLV). The fund has rallied nearly 34% off its late-2011 low, and just last week it crossed back above its all-important 200-day moving average line. And, several of the silver-mining stocks are in tow.
The question is, how far can silver go from here, and which of those stocks are poised to deliver the best returns? We’ll name some names in a second, but let’s make a silver forecast first.
Silver’s Shiny Again
Click to Enlarge Admittedly, silver is overbought again, at least in the short run. That doesn’t mean it’s doomed, though. It just means we can reasonably expect the bears to push back more than a little right now. Even a pullback here, however, can’t change the fact that the bigger trend is undeniably bullish now that the 200-day average line as well as a key Fibonacci retirement line (38.2%) have been hurdled by silver’s close at $35.40 per ounce on Friday.
The depth of any temporary pullback will largely depend on which of the support lines the bulls decide to use as a rally point. The 20-day moving average line (blue) was a key floor back on the 20th, but the 50-day average line (purple) — currently at $31.55 — also has a bit of a history as support and resistance for silver. Make no mistake, though — silver already has cleared a key milestone; the rest is all academic.
There’s something else about this rally that screams “more upside ahead” though, in a contrarian way.
Notice anything missing with this rally? It’s volume — there’s practically none. Normally a lack of volume would be bearish in that it indicates a clear lack of participation and interest, and therefore suggests a lack of follow-through. In this case though, silver has already run up and followed through without the need for a lot of volume.
Who’s buying it here doesn’t really matter. What matters here is that once the market realizes silver’s heating up again, the volume spigots will be turned on in a major way and things will really start to heat up and lead us into the next leg up. That move could be just around the corner following a decent dip.
Bottom line? Silver’s next stop is around $40.30 per ounce. Although it might not get there in a straight line, it’s got enough bigger-picture momentum to get there in the foreseeable future. If it can build a good base somewhere around there, the next stop after that is the $48 area where it peaked last April. Hopefully we don’t set up a blowoff top (and subsequent oversized pullback) this time around.
The Best of the Best
The easy way to play this budding trend would indeed be with the iShares Silver Trust. That’s not necessarily the highest-octane way to play it, though. A duo of silver miners — or at least silver-focused miners — might be setting up for a bigger reward.
Click to Enlarge The first one is Pan American Silver Corp. (NASDAQ:PAAS). It’s hardly a household name, but the Canadian resources company is a good one … with “good” meaning it’s consistently profitable and controls massive amounts of proven reserves.
All told, Pan American is sitting on 235 million ounces of proven/probable silver, and more than another 700 million ounces of indicated reserves at its Navidad project. That’s more than 940 million ounces, more than a fourth of which is almost a proverbial “sure thing.”
Either way, the company’s current market cap of only $2.7 billion translates into a “value” of only about $10 per ounce of proven silver, and only about $2.50 per ounce of likely silver. Yes, it takes money to go dig it up, but it doesn’t take $25 per ounce to mine it! ($25 is the approximate difference between current silver prices and what the market is saying Pan American’s silver is worth.)
Simply put, with silver trading in the $35 area, PAAS is mathematically undervalued even under the worst-case scenario.
This smaller U.S.-based operation, with a market cap of only $1.3 billion, is more sensitive to fluctuations in the price of silver than Pan American Silver is, but that can work for SVM as much as it can against it. The “for it” pans out when silver prices are high, as they are becoming now.
For instance, Silvercorp posted record-breaking revenue of $131 million in the third quarter of last year shortly after silver prices soared to $48 per ounce. Margins also were huge that quarter, as the mining outfit was able to turn $44 million of that $131 million into a profit; that’s a net margin of 33%. While we can’t expect quite the same size profit this quarter with silver only trading near $35, that’s still a great price and is going to leave a lot of room for net margins. And silver still is on the rise, so those margins are going to widen as long as the trend stays intact.
The nice part about SVM as well as PAAS is that both are just now starting to make their way out of bearish technical ruts.
Other possibilities are out there, though anything smaller than Silvercorp Metals starts to get into micro-cap territory where a lot more intestinal fortitude is required. If you’ve got the Pepto-Bismol, though, they could be worth a swing too.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.