Why I Bought Silverado Gold Mines (SLGLF)

Jan.26.06 | About: Silverado Gold (SLGLF)

The name Silverado Gold Mines (ticker: SLGLF.ob) is unlikely to trip off the tongues of gold stock investors these days. In fact, it is more likely to bring out the emotions of laughter, anger and a general shaking of heads amongst the gold-investing community.

But to those for whom it merely evokes curiosity, it is sufficient to say that back in 2002, this stock experienced a massive 840% run up in price from $0.09 to $0.76 as investors piled in before even more rapidly crashing back down to earth 4 months later to $0.10. The whole episode is charted below:

Since then, the stock has drifted ever down with the occasional and short-lived adventure upwards.

Readers may remember that the bust was triggered by an article by an analyst who suggested that all was not well in the Silverado camp. Within a day of that article appearing, the stock began the downward phase of its roller coaster ride.

By the time the plummeting was over, recriminations followed as Silverado CEO, Gary Anselmo, expressed disbelief as to why this had happened while a certain gold stock analyst mysteriously disappeared amongst accusations of pumping up the stock.

So much for 2003, but this is now 2006 and though memories may not have faded, I came to this stock as one who was a distant observer of that fleeting price spike. Below is the relative performance chart for Silverado and the HUI since gold stocks resumed their bull market back in May 2005. The daily chart for Silverado is also displayed here.

As a chartist, I have two things to note. The first is that Silverado hit a multi-year low of $0.03 a share in May before progressing to a recent high of just over $0.08. That is a 267% increase and by any measure a top performing stock over the last 8 months.

The second observation is the high correlation between the HUI and Silverado price over this period. Note how the Silverado price roughly tracks the rises and falls in the HUI index as they both advance to greater highs. There appears to be an unmistakeable correlation in price changes.

This leads us to the somewhat surprising conclusion that despite its recent history, Silverado is now a full-blooded participant of the gold stock bull market. Not only that, it has proved to be one of the best performers over that period!

Despite what you may think about this stock, its assets and management, I don’t think you can argue with the price or the correlation, the only question left to answer is "Why?