"Paper is a check drawn by legal looters upon an account which is not theirs: watch for the day when it bounces…" Ayn Rand (1957)
The check is bouncing: deficit spending and the QE that supports it are rapidly deflating in the face of predictable financial and geopolitical panic.
On August 28, the S&P broke below the bottom channel of a long-term trend line and neared another. In my piece, "Bear Sighting" I described these lines in detail and warned that even one of the many fiscal and geopolitical crises with which the world brims could take the QE-inflated indices quickly below these lines at 1640 and 1628. Needless panic in markets over possible US or NATO air strikes on Syria broke the S&P below the line that links the lows of Nov. 15 - Dec. 30, 2012 - June 24, 2013. We rest just above 1628, which hits the line from the Nov. 25, 2011, low to that of June 24 this year. We soon may revisit the June 24 trough at 1573. Waiting below is 1510, terminus of the line from Nov. 2011-Nov 2012 whose low, 1,353 would give us the 20% correction many analysts have predicted. Panic is draining the indices of their water weight and markets now reflect geopolitics rather than commerce, economic stress or regulatory duress.
How can one play this culture of terror that distracts us from the funky fiscal policies creating a bifurcated, neo-feudal economy? Some of the depressed but vital commodities and PMs (precious metals) are an answer. August 28 action emphasized that miners act like stocks rather than the metals they produce and are primary risk-off assets. Yet, with gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) bullion prices rising steadily and trading in a tight, stable range in recent days, the miners are likely to recover and continue to outperform as they ascend from suppressed 2Q lows. This article discusses the merits of two silver miner ETFs, Global X (NYSEARCA:SIL) and the relatively new (November 29, 2012) Pure Funds Junior Silver Miners (NYSEARCA:SILJ) as ways to play the metal that is unique in its rapidly growing tech-industrial functions and monetary status.
SIL is an established trading vehicle with an average daily volume of 226k units. Because it is weighted toward major, well-known and widely traded companies, it saw triple volume August 28 as prices first surged, then wavered and in the last two hours collapsed with the indices. SILJ, with a small but growing daily volume of 4,300 units saw a modest 15% rise to 4,900 on a day when double volume (Silver Standard Resources (NASDAQ:SSRI) and Silver Wheaton (NYSE:SLW)) or triple volumes (Endeavour Silver (EXK)) hit the sector.
The small volume of SILJ, scarcely a third the size of Teucrium wheat ETP (NYSEARCA:WEAT), has some disadvantages: depending on your trading platform, some limit orders may fail to execute. This will be amended in due course. For now note that the mid and small cap focused SILJ, down 2.24%, held up well in the general route in which declines of 4% to 6% were common.
The main differences in the funds are in cap size and the exclusive focus on silver miners in SILJ. None of the top six holdings of Global X SIL, among them SLW, SSRI, First Majestic (NYSE:AG) and McEwen (MUX), are in SILJ. Moreover, at this time, MUX is mainly a gold producer and likely to remain so. Both funds include Silvercorp (NYSE:SVM), with a cap of $722 million: it is the top holding of SILJ and the seventh in SIL. The eighth through eleventh largest holdings of SIL are Tahoe Resources (NYSE:TAHO), Hecla (NYSE:HL), Coeur d'Alene (NYSE:CDE) and Pan American (PAAS), none of which are held by SILJ. Fortuna Silver (NYSE:FSM) and EXK (both profiled in my previous piece) are held by both funds. They are the second and third weightings in SILJ, at about 12% each. FSM and EXK are the twelfth and thirteenth holdings at SIL with portfolio weightings of 4.37% and 4.2%. One gets a nearly identical dollar-weighting in these two companies from SIL and SILJ, between $11.14 million and $11.73 million as of August 26.
There is considerable overlap in the junior miners the two ETPs hold, for example, Alexco (NYSEMKT:AXU), Scorpio (SPM), Excellon (EXN) and Great Panther (NYSEMKT:GPL). The highly regarded SilverCrest (NYSEMKT:SVLC) is the sixteenth holding in SIL with a 1.63% weighting while it is the sixth largest holding at SILJ. The amount of research required to become familiar with this many junior issues in one sector argues for allocation to the funds for those who want to participate. Additionally, it is likely that smaller companies held by both funds are considered more promising operations by those who follow the sector.
Those drawn to the merits of small, agile companies on the cutting edge of E&D for a vital commodity may want to research the junior issues held by SILJ alone. These include Minco (MSV), Sierra (SMT), Trevali (TV), Perilya (PEM), Revett (NYSEMKT:RVM) and Kooten (KTN), among the ten of SILJ's 26 holdings not in SIL. Many of these issues trade on the Canadian or Australian exchanges. As noted in my previous essay, Simon Ridgway, CEO of FSM, cut his teeth prospecting in the Yukon and Central America so there is promise and talent in little-known juniors.
SILJ also is a window on the geographic focus of E&D efforts. The base of its holdings is heavily Canadian, 76% (as opposed to 56% for SIL), with 20% American companies, 3% Australian and 1% UK. SIL has as its second and third holdings the major Mexican silver producers Fresnillo (OTCPK:FNLPF) and Industrias Penoles with Mexico being 24.2% of SIL holdings. Both funds have a small stake in Mexican Junior Arian Silver (AGO: LN). SIL also holds significant Russian producer Polymetal though it is only 1% of its total mix.
In these times of tension and heightened volatility, one should note another Pure Funds product that is highly non-correlated with the markets and main sectors. It is the Diamond - Gemstone ETF (NYSEARCA:GEMS) that on August 28 was green 1.19% while most issues plunged. Its average volume still is low, 7k units / day but growing rapidly as recent days have seen (relatively) heavy trading in it: Tuesday, GEMS traded 21.9k units, triple its average volume. It includes developers, miners, wholesale and retail precious gems companies from Dominion Diamond (NYSE:DDC), which I noted here as a prime uncorrelated asset, Zale and Blue Nile in New York, Anglo-American and BHP Billiton (NYSE:BHP) as well as five Chinese issues trading from Hong Kong and constituting about 28% of GEM's holdings.
As a trading tip on the topic of low 'r' issues, keep your eye on the DJ-UBS Nickel (NYSEARCA:JJN) and Copper (NYSEARCA:JJC) ETNs. JJC continues a month of mostly green days signaling that behind the terror and turmoil there may be hope for global growth. JJN has had a strong week as it rises from a 52-week low at $17.90. It closed August 28 at $19.67, up 4.79% on a day of harsh declines. Also, Reservoir Minerals (OTCPK:RVRLF) which I have mentioned often as a rich E&D play, again showed its worth, up 1.94% August 28.
While one gets some overlap in the small-cap silver space in SIL and SILJ, they remain substantially different with ten of the top eleven holdings of SIL absent from the junior ETF. Those ten issues are 68% of SIL so the distinction is a genuine difference in emphasis. When you add Hochschild Mining (OTCPK:HCHDF), also held by SIL but not by SILJ, the divergence grows to 72%. SILJ gives comparably greater exposure to junior silver miners.
Given the still depressed price of silver and its greatly increasing tech-industrial uses, both SIL and SILJ are valuable ways to participate in a vital commodity still suffering from negative sentiment, finite supply and increasing demand and extreme under-investment. The historical average for investment in silver is about .34 of markets, thirty-four times the current level.
Along with individual holding of some of the best companies like AG, EXK, SLW and FSM, one probably will do well to have a position in both SIL and the Pure Funds SILJ. Even if a global recovery is muted and economies suffer extended declines, silver remains highly desired for industry, as a store of value and monetary exchange and for jewelry. Despite barely registering on the screen of most portfolios, it indeed is part of the global power matrix to which one should be anchored. And because paper is good for exchange but is rapidly losing value, the PM ETPs fully backed by gold (NYSEARCA:PHYS) and silver (NYSEARCA:PSLV) remain strong in rocky times, as shown Tuesday.
Disclosure: I am long SILJ, GEMS, AG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.