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As I emphasized here as of April 21st , it was not a good idea to buy silver (SLV), given the hyperbolic upward movement. Along with gold (GLD), silver was one of the commodities that should have been avoided at that time. In that article, which was written when silver was trading around $45, I particularly emphasized that

silver has significant industrial use. Those manipulated prices will soon start hurting U.S. industrial companies asking for official involvement.

As I expected, there has been a pseudo-official involvement: The initial crash of silver provoked higher margin requirements, which triggered an almost complete collapse in silver prices. A week ago, those bullish on silver were suggesting a target price of $62. As of last closing day, silver was trading around $35. Those who were cautious on the hyperbolic silver saved quite a bit of money.

I was planning to write this analysis of silver companies two week ago, as a complementary article to my previous article on avoiding silver. However, given the extremely defensive nature of precious metal holders, I decided to wait until the silver collapse. To my surprise, it happened in such a short amount of time after the first article was published. Within a week, silver collapsed by 26%.

The question is, what about the silver companies? Are they going to collapse as well? They also suffered quite a bit. However, their prices tend to lag the physical silver, which means it will take a while. Which one will suffer the most? To answer this question, one needs to perform correlation analysis. The Pearson correlation coefficient shows how two variables are related. It is obtained by dividing the covariance of two variables by the product of their standard deviations:

Corr (X,Y) = Cov (X,Y) / (σX* σY)

A value close to 1 implies perfect positive correlation, and a correlation coefficient close to 0 implies no relation at all. The last two years of data (excluding the last two weeks) is used for calculating the correlation coefficients between physical silver and silver producers. The stock price data is from Yahoo Finance, and silver data is from Kitco. Company data is from Finviz. Here is a brief analysis of the silver companies, and their correlation with silver prices:

Ticker

Company

Country

Market Cap

P/E

P/B

Corr

AG

First Majestic

Canada

1682.46

47.5

6.61

0.92

CDE

Coeur d`Alene

USA

2474.16

1.21

0.14

EXK

Endeavour

Canada

764.37

93

4.74

0.79

GPL

Great Panther

Canada

434.7

82.75

10.68

0.73

HL

Hecla Mining

USA

2258.57

62.23

2.17

0.45

MGN

Mines Man.

USA

63.56

4.07

0.25

MVG

Mag Silver

Canada

608.85

5.34

0.26

PAAS

Pan American

Canada

3581.03

31.63

2.36

0.63

SLW

Silver Wheaton

Canada

12652.7

43.68

5.59

0.95

SSRI

Silver Standard

Canada

2413.51

7.06

2.33

0.01

SVM

Silvercorp

Canada

1948.72

28.56

4.93

0.22

Average

48.96

4.55

0.49

As one might notice, the average P/E ratio of silver companies is 48.96, three of them reporting no profits. What is more extreme is the average P/B ratio of 4.55. Given the fact that silver companies' reported assets are highly correlated with their reserves, the collapse of silver will not only affect their future profits, but also diminish their asset base. As silver prices are going south, investors in silver miners should consider all possible scenarios for silver, and hedge themselves accordingly. The current volatility in the commodity markets is a strong signal to avoid them for now.

My experience shows that extreme volatility in any market is followed by complete collapse. However, if you are really determined to be in the silver business, First Majestic and Silver Standard can be a feasible combo with relatively lower risk. Interestingly, the first one is almost perfectly correlated with silver, whereas the second one has no connection at all. They could be a good combination for those interested.

I have done a similar analysis for gold companies as well. The results show that the average P/E ratio was 72.92, P/B value was 4.46, and correlation coefficient was 0.77. This is a strong indicator of the bubble we are experiencing in gold miners. However, gold did not go hyperbolic yet. It will take some more time for the collapse of the gold bubble.

As I stated here, a month before the WSJ report, George Soros has been selling off his gold holdings, and already reduced the position by 23% as of last quarter. For a detailed analysis of the correlation coefficient analysis, with an application to companies that could suffer the most from the impending collapse of the gold bubble click here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I am short in gold futures.

Source: Silver Gone South: What About Silver Miners?