Worth Taking Some Profits In Silver Stocks?

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Includes: AEM, AG, CDE, FNV, FSM, GG, GOLD, GPL, HL, NEM, PAAS, RGLD, SLV, SLVP, SLW, SSRI, TAHO
by: Lawrence Williams

Summary

Many silver mining equities have doubled, tripled or more year to date. Should one consider taking profits?

Safer investments, but offering lower returns, are the gold and silver royalty and streaming companies.

Gold:Silver Ratio has come down from above 80 earlier in the year to around 67 as silver has outperformed gold.

Coeur Mining (NYSE:CDE) up 410% year to date, First Majestic (NYSE:AG) +367%, Pan American Silver (NASDAQ:PAAS) +172%, Fortuna Silver (NYSE:FSM) +273%, Hecla Mining (NYSE:HL) +220%, Great Panther Silver (NYSEMKT:GPL) +198%, Silver Standard (NASDAQ:SSRI) +181%, Tahoe Resources (NYSE:TAHO) +85% - almost any halfway decent silver miner has shown triple digit gains so far this year. (Tahoe is showing a lower price upswing as it was perhaps not quite so oversold as most of the other silver mining stocks.)

Even the theoretically much safer investment in streaming company, Silver Wheaton (NYSE:SLW) which is heavily involved in the silver sector is up 107%. So in nearly all the above, if you were invested in them at the beginning of the year, you would have seen your investment value double, triple or more. The question is, should you now consider taking profits and moving your money elsewhere or hang on in the hope that the volatile precious metal will continue to soar in value and take the mining stocks with it?

There is also a Blackrock ETF invested in equities which derive the greater part of their incomes from silver mining - the iShares MSCI Global Silver Miners ETF (NYSEARCA:SLVP). As one would expect from the rise in value of the major silver mining stocks this is up around 162% year to date and represents a way of mitigating the investment risk in individual silver stocks, but can fluctuate fairly dramatically with the movement in the silver price itself.

Silver tends to rise alongside gold, but in a more volatile manner tending to outperform on the upside and underperform when the gold price moves down. One can track this volatility by following the Gold:Silver Ratio (GSR) - which tracks the number of ounces of silver it would take to buy an ounce of gold - and this year, as gold has risen and silver has followed - particularly in the past two to three weeks - the GSR has fallen from a high of circa 83 to a current level of around 67. If one tracks the GSR over the past 10 years it has ranged between about 85 and 45, apart from in 2011 when the silver price spiked to close to $50 and the GSR fell to around 30. Apart from that spike period, the average has been close to 65 where the GSR seems to be heading at the moment.

But for silver to continue to outperform gold and the GSR to head downward further, there would seem to be a necessity for the gold price to keep rising and maybe, just maybe, we are in for a bit of a consolidation period over the northern summer. As the Brexit effect moves out of the news, and failing any other big geopolitical shock in the immediate future we could well be seeing gold sitting at around current levels, or even falling back a little more (it is weakening today) for the next few months, and perhaps until after the northern holiday period ends as represented by the U.S. Labor Day holiday, which falls on September 5th this year.

Where gold and silver prices will move from then is anyone's guess. Historically Q4 is good for the gold price but it should also be remembered that the big decline in the gold price in 2011 commenced immediately after the Labor Day holiday that year and effectively continued for the next 4¼ years. So, although we are seeing more and more bullish forecasts for gold from bank analysts, it should also be remembered they were mostly positive in their predictions ahead of the 2011 price decline. They are reactive in their assessments and seldom seem to pick up real trend changes until it is too late!

With the big gains in silver stock prices it may thus be well worthwhile taking at least some gains - not all - and holding off until one sees where the land lies as the year progresses. Unfortunately there's no easy answer in where you should reinvest any such gains as although general equities markets appear to be recovering from the Brexit shockwaves they continue to look a little precarious given the global economy remains swimming (drowning?) in an enormous sea of debt.

There is a consensus that the U.S. Fed will desist from making another upwards interest rate revision until the end of the year, if then. But then to delay that far would lessen even further the Fed's economic credibility so there's the chance, in this writer's opinion, that it may use any seemingly positive element in U.S. economic data to implement another small interest rate rise earlier rather than later. A certain amount of pride is at stake here. If this were to occur that would undoubtedly knock the gold and silver prices, albeit probably briefly, and may provide a good opportunity to climb back in if you feel that the true long term potential in precious metals prices remains robust.

Another place to consider investing profits might be in the better-placed gold mining majors which mostly are dividend payers, have greater financial strength in depth than their silver mining counterparts and which do not tend to be so volatile. Look at Newmont Mining (NYSE:NEM), Goldcorp (NYSE:GG), Randgold (NASDAQ:GOLD) and Agnico Eagle (NYSE:AEM) as perhaps the best picks among the gold majors.

We have also mentioned in this context before the bigger royalty/streaming companies as safer places to put your money. They maintain decent upside potential should precious metals continue to rise and a far lower downside risk potential should precious metals fall back. Look at Franco Nevada (NYSE:FNV) up 67% ytd, Royal Gold (NASDAQ:RGLD) up 119% and Silver Wheaton, noted above, in this respect. And, of course there are the gold and silver ETFs - (NYSEARCA:GLD) and (NYSEARCA:IAU) for gold and iShares Silver Trust (NYSEARCA:SLV) for silver. These track the gold and silver bullion prices so are hugely less volatile than the equities. Gains will be far lower on the upside, but losses would also be much more limited should metal prices turn down.

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

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.