My esteemed colleague “Rougemont” wrote an article approximately a month ago advising investors to sell silver stocks. Specifically, the iShares Silver trust (SLV), Silver Wheaton Corp. (SLW), Silvercorp Metals, Inc. (SVM), Endeavour Silver Corp. (EXK), and First Majestic Silver Corp. (AG), and buy Bank of America (BAC). If you followed his advice you would be much worse for the wear.
Please review this short excerpt from his article detailing Rougemont's thesis.
I remember when silver was undesirable as an investment and sold for less than $5 an ounce. I also remember when Bank of America sold for about $50 per share. At that time, it was a good opportunity to buy silver and sell Bank of America. Fast forward to 2011 and silver is nearly $50 per ounce and Bank of America is about $12 and is considered to be an undesirable investment by many. There is definitely no frenzy or rush to buy BAC shares and there is no bubble in this bank stock. The same can't be said about silver and yesterday we saw a large move down in the price of silver as margin requirements. When you see a large drop due to raised margin requirements, it is a sign of froth and speculation. It also is a reminder that leverage is high in the silver market and the use of excess leverage can result in a quick collapse in prices. We have seen excess leverage bring down the stock market, and companies like Lehman Brothers, as well as real estate.
Well, if you would have followed Rougemont’s advice, you would be down nearly 50% more by investing in Bank of America rather than the SLV, in just one month. Bank of America shares have dropped precipitously to a multi-year low of $10.65 since closing on May 3 at $12.60. That's a loss of $1.95 or 15.5%, while the SLV has gone from $40.58 to 36.21, reflecting a loss of $4.37 or 10.7%.
Now you are probably saying “Dave, it’s only been a month!” and I’ll give you that. However, based on the charts and recent events, I would suggest you do the exact opposite at this time.
Jamie Dimon of JP Morgan Chase (JPM) challenged Bernanke after his speech Wednesday stating "Has anyone bothered to study the cumulative effect of all these [regulations]" - that it could be the reason it's taking so long for credit and jobs to come back? Bernanke essentially says no: "It's just too complicated. We don't have quantitative tools to do that... There is going to be some trade-off here." Dimon went on to say that “on top of all this the banks are about to be hit with higher capital requirements and approximately 300 new rules.” Dimon seemed frustrated. This does not bode well for the future prospects of bank stocks. Moreover, Bank of America’s chart looks disastrous. Bank of America shares are in a definite downtrend with no positive catalyst on the horizon. I don’t see Bank of America bottoming here, there is more pain coming. The bank has a large amount of distressed loans still on the books. See chart provided by CNBC below.
On the other hand, the SLV appears to have bottomed, consolidated and started a new uptrend. Moreover, Rougemont’s key point that the SLV was frothy and the margin requirement adjustment to correct the “bubble-like” performance of the stock would cause a major correction, was true. The issue now for Rougemont’s thesis is the SLV didn't drop as far as the author expected and is now recovering with the higher margin requirements in place and weaker hands shaken out. Silver has industrial uses, is used as a safe haven for inflation and fiat currency devaluation. Silver is in a different asset class than Bank of America stock as well. Silver is a precious metal commodity whereas Bank of America is an equity that is not diametrically opposed to the SLV. They don’t really make a lot sense for a pair trade in the first place. This may be why you would have lost big no matter which of Rougemont’s picks you chose. I believe you should always have a portion of your portfolio in precious metals for diversification purposes. Please review the SLV chart below.
The following are the silver stocks Rougemont suggested you sell. While I think silver bullion was in a bubble and should have been sold, I believe the sell off is over and as silver recovers and reaches new highs in the future, these stocks will benefit as well. I left off First Majestic Silver Corp. (AG) because I agree with Rougemont on this one, I would not buy it.
- Silver Wheaton Corp., (SLW) is trading at $33.70. Silver Wheaton is a silver and precious metals company based in Canada. These shares have a 52 week range of $17 and $47.60. The 50 day moving average is $34.04 and the 200 day moving average is $33.89. Earnings estimates for Silver Wheaton are for a profit of $2.08 per share in 2011, and profits of $2.23 per share in 2012.
- Silvercorp Metals, Inc., (SVM) is trading at $9.79. Silvercorp is a silver and precious metals company based in Canada. These shares have a 52 week range of $5.86 and $16.32. The 50 day moving average is $11.18 and the 200 day moving average is $9.59. Earnings estimates for Silvercorp are for a profit of 42 cents per share in 2011, and profits of 62 cents per share in 2012.
Endeavour Silver Corp., (EXK) is trading at $8.71. Endeavour is a silver and precious metals company based in Canada. These shares have a 52 week range of $3.07 and $12.75. The 50 day moving average is $7.57 and the 200 day moving average is $8.01. Earnings estimates for Endeavour are for a profit of 69 cents per share in 2011.
iShares Silver Trust (SLV) is trading at $36.12. SLV is a silver exchange traded fund that tracks the price of silver. These shares have a 52 week range of $16.73 and $48.35. The 50 day moving average is $30.75 and the 200 day moving average is $32.41.