Leveraging Silver with Stocks

The stupid way to leverage silver is to go out and borrow money to invest in this highly volatile commodity. A much more sensible approach is to buy silver producers and explorers whose share prices are leveraged against the price of the precious metal.

With silver touching $14 an ounce today, and the cup-and-handle formation in the price charts promising a shift to the upside, there has seldom been a more appropriate moment to consider how best to leverage up on the price of silver.

Ruff’s silver picks

1970s investment star Howard Ruff puts it succinctly in his little book: These stocks will especially be a license to print money. The basic premise is that costs for silver producers stay fairly static as the price takes off so the leverage of price against profits is even higher.

Ruff’s list of pure silver mines is fairly comprehensive: Hecla (HL), Pan American Silver (PAAS), Silver Wheaton (SLW), Silver Standard Resources (SSRI) and Coeur D’Alene Mines (CDE).

You have to search further to find smaller silver producers and explorers like Endeavor Silver (EXK) which potentially offer even greater leverage through their ownership of claims, that is the right to explore for silver on land likely to yield new mines.

For in a precious metal boom these claims will soar exponentially in value if past experience is any guide. And it is therefore here that the greatest leverage will be obtained, albeit charlatans also know this and tend to concentrate their promotional activities in this area.

Serious precious metal investors often make a small capital allocation to the junior explorers in the hope of a big upside but only to the extent that this sum will not be much missed if it does not work out.

Volatility

But the problem with silver is the volatility of the underlying metal price. Within the past 12 months it has crashed by over 50 per cent, taking silver share prices even lower.

You need a strong stomach for gains and losses to be a silver investor, and leverage works in both directions, up and down. However, the argument for levering up silver is growing by the day as this precious metal tends to outperform gold in a true bull market.

Thus if gold takes off thanks to the inflation of the global monetary supply - something we do know to be happening and irreversible - then silver will be an even greater beneficiary, and this is the magic bullet for investors in today’s markets. Silver stocks look the pick of moment in this scenario.

Comments

[Sakata:]

This article should have been written last October when mining stocks bottomed out. I bought a bucketful of them at that time and have been well rewarded. Not having the time to do extensive research I just determined some minimum criteria which I could check in a few minutes for each company and the randomly selected 25 of those which passed. I later added another 25. For a total time investment of less than 5 hours I have returned over 50% since then.

This is about the same as the return on my physical silver but my point is that by selecting RANDOM stocks I was able to match the silver price, and in the process way out perform the general market. If I had had the time to investigate the stocks further I would almost certainly have had much better returns. Or if I had had the time to determine a more rigorous exit strategy I would probably have returned closer to 75% then 50% from this random collection because several of those stocks are now off their high since I bought then.

I disciplined investor, who had the time to spend several hours a week in this sector could easily have returned well over 100% in about six months. Now that I have more time I am anticipating being able to achieve at least 100% in the next six months. I keep a sizable holding in physical silver, as an insurance policy, but I am moving more and more into a combination of large mining producers and junior stocks and looking to move more into silver stocks than gold stocks.

May 07 11:22 AM

[chux08:]

I agree. Great article too! Except to say, what does anyone (still) see in CDE??
FOR THE SAME MONEY, try Alexco Resources (AXU) which has been written about extensively here at S.A. You want a chance at some future share price appreciation with an up and coming silver explorer/producer with some true BLUE SKY POTENTIAL? Or do you want to ride around that tired ol horse called CDE that can't find it's way out of the....mine?? Compare em both and I'd bet you'd agree.

May 07 11:26 AM

[Mayascribe:]

Peter: Good article, but...I can see why you switched to silver after making the gutsy call that gold was going to $1000/oz. by the end of the week, two weeks ago.

When you switch back to a gold mind frame, I suggest you look into Jaguar Mining. The junior increased its bullion production by 50%, and expects to keep increasing its production for at least the next seven quarters. With their relatively inexpensive Brazilian labor costs, coupled lower fuel costs than endured in the previous quarters, this well-operated junior is a screaming buy, based soley on fundamentals alone, and not the argument that hyper-inflation is on our doorstep.

Jaguar Mining's annual report was a joy to read! It just might be one gold stock that will outperform the silver to gold leverage ratio your article implies.

May 10 02:44 PM