A bright Silver ETF
In my last article, I reviewed the international context that led to the present stock market situation, and I also suggested an action plan in order to survive in this complex period. Now, as a follow-up, I'm back to my asset selection, with signs indicating a remarkable Silver ETF.
Global X Silver Miners ETF (SIL) seeks to provide investment results that correspond generally to the price and yield performance of the Solactive Global Silver Miners Index. With net assets of around US$ 321 million, we may note by the following list of the top 10 holdings (about 73% of the total assets) the great potential of this ETF:
% of Net Assets
INDUSTRIAS PENOLES (IPOAF.PK) 13.2
SILVER WHEATON (SLW) 12.8
FRESNILLO (FNLPF.PK) 11.8
PAN AMERICAN SILVER (PAAS) 8.3
POLYMETAL INTL. (GM:POYYF) 4.9
HECLA MINING (HL) 4.6
FIRST MAJESTIC SILVER (AG) 4.5
TAHOE RESOURCES INC (TAHO) 4.5
HOCHSCHILD MINING (GM:HCHDY) 4.3
COEUR D'ALENE MINES (CDE) 4.2
With a total of 32 companies, the ETF began operations on 04/19/2010. As can be seen, some of these companies are already stars of the first magnitude.
There are other promising gold and silver ETFs but still have a very low market capitalization. This may be due to the current low attention of most investors for the reasons I explain below. For now, I'll just mention Global X Gold Explorers ETF (GLDX) and Global X Pure Gold Miners ETF (GGGG).
With SIL, I aim to choose a very specific type of investment. This selection has nothing to do with a speculative intent and, by contrast, is designed to be a medium and long-term allocation in the expectation of adequate reward for a risky investment.
In order to explain the context of my investment choice, I will mention in particular the problems of the U.S. economy and the situation in the financial markets.
I believe without any doubt that we still are in the bull market that began in 2000. With such a long uptrend since then, some smaller cyclical bear markets took place without destroying the current dominant bull market. Presently, I also think we have every reason to believe that another cyclical bear market is underway.
What fundamentals are showing
The state of affairs in the U.S. economy can only be described, at least, as an ongoing confusion. The debt ceiling will surely rise again, which may solve the immediate risk of default- but can create other problems. The U.S. economy is not especially improving on any front since the job market is weak, manufacturing is also vulnerable, and the retail market is not rising as expected. The banking sector seems to be doing business as usual but still is not a convincing bet.
Trading near all time highs
Today, 83% of all S&P 500 investors are bullish, which is impressive. I think that something very ruthless may happen soon as greed causes many to enter the stock market when it has made already a long run and may be exhausted. I believe most still think that the super resistance zone around 1553-1576 on the S&P 500 is a mere historical level to be reached and exceeded. They are so confident in achieving this because they think that the market will continue to climb to new highs.
P/E ratio of S&P 500
Another point to consider is the average P/E ratio. As a matter of fact, when P/E ratio is too high, it means that prices will return to average. Historically, the level of 7 for P/E is cheap but can move to bubble zone if it rises above 28. Where are we today? With a record of around 18, we are far from the lows but we are approaching an area we may call expensive.
The failure of bull catalysts
We know that one of the most powerful driving forces of present uptrend has been monetary easing. In September, the Fed launched its QE3 debt monetizing campaign. At the time, the S&P 500 was trading sideways and this extraordinary action did not sent prices up strongly as should be expected. Not even the QE3 expansion, revealed in mid-December, could do much better.
The bear catalysts
National debt is a real problem as the United States has suffered record federal debt growth in the last four years, from $10,000B to over $16,000B (a 60% increase).
To make matters worse, interest rates will not remain near these record lows forever. It really is very dangerous to believe that zero percent rates remain artificially depressed.
The market and SIL
In this environment, precious metals stocks are trading once again at fear levels leaving them with a huge upside potential, ready to be achieved in the coming months or years. At present, high complacency levels tend to induce the majority of investors to easily buy stocks of larger companies, almost completely leaving the medium and small caps market, which is the area of SIL. This is also an extreme exaggeration which will surely be heavily adjusted in the medium-term.
Charts courtesy of StockCharts.com.
By analyzing the three charts above, we notice a very strong correlation between silver and SIL. When comparing prices with S&P 500, it is also clear that there is a real upside potential, exactly for reasons already stated. We can summarize the situation as follows: markets take elite stocks as safe bets and smaller and beaten ones as very doubtful.
But we must observe with particular attention the persistent rise that SIL performed in the second half of 2011, among other times. Not surprisingly, since many of its components are stocks with good quality and great potential for growth.