The market(s) reaction to Friday's economic numbers was amazing to watch. Gold and silver prices soared, treasury prices surged to new highs (new yield lows). Equity and options traders appeared to "jump ship" pushing the stocks and indices into strong oversold readings.
Could it have been the "perfect storm" of news creating a sense of doom that avalanched back down the mountain of worry? The Economist encapsulates the driving force as:
What preys on the minds of financial and business-world risk takers is not a single threat but a multitude of them, regurgitated in one big hairball of risk. And all are about policy.
I can understand the move in gold and silver and the equity markets. But treasuries getting pumped up reminded me of a spoiled child threatening to hold his breath until getting what he wants - QE III. Earlier in the cycle I would agree with the individual reactions but this within the current environment is somewhat of a quagmire. If the "flight to quality" lacks justification, which I strongly believe, treasury prices are headed lower (yields higher). The U.S. dollar will resume its advance with the equity markets more likely producing a lackluster rally attempt followed by additional downside. I am not advocating interest rates will rise across the board or that the Fed will begin a prolonged tightening process - not yet anyway.
Technically, silver remains in a bearish pattern. Some analysts have laid claim to the "bottom" being in and while I support a bullish view on silver it seem prudent to leave open the potential for prices to wallow a bit longer and to drift back toward support at the 25.65 area. Longer term I remain bullish and continue to use weakness to add to long positions.
Using the Revere Hierarchy I "drilled" down the following sector path Industrial and Materials > Materials >Mining> Metal Ore Mining > Precious Metals > Silver to find 79 companies of which 14 are focused (50% or more of revenue) within silver mining. Within this group of 14 there are 5five companies with a market cap of greater than $1 billion. They are Couer D"Alene Mines (CDE), First Majestic Silver (AG), Pan American Silver (PAAS) presented below and Hecla Mining (HL) and Silvercorp Metals (SVM) covered previously. See my SA article - 4 Mid to Long - Term Investment Opportunities.
Couer D'Alene Mines Corp (CDE)
CDE is a large primary silver producer with growing gold production and has assets located in the U.S., Mexico, Bolivia, Argentina and Australia. In the first quarter of 2012, CDE's total silver production increased 19% and sales of metal increased 2.5%, ($4.9 million). CDE's average realized silver and gold prices during the first quarter of 2012 were #32.61 per ounce and $1702 per ounce, respectively, (an increase of 4.3% and 23.9% versus the first quarter of 2011). Sales of silver contributed 68.1% of CDE's total metal sales for the first quarter of 2012 versus 56.4% for the same period of 2011.
First Majestic Silver (AG)
Since inception, First Majestic has been in the business of the acquisition, exploration, development and production of mineral properties. During the fiscal year ended June 30, 2004, First Majestic started focusing on the acquisition, development and exploration of mineral properties in Mexico with an emphasis on silver projects. First Majestic is a primary silver producer with 96% of its revenue in 2011 coming from the production of silver. First Majestic is an intermediate producer that is aiming to become a senior producer. In the intermediate category are Silvercorp and in the senior category are Pan American Silver and Coeur d'Alene.
Pan American Silver (PAAS)
Pan American Silver is principally involved in the operation and development of, and exploration for, silver producing properties and assets. PAAS's principal product is silver. gold, zinc, lead and copper are also produced and sold. Currently PAAS has mining operations in Mexico, Peru, Argentina and Bolivia as well as projects in development throughout the region. PAAS also controls non-producing silver assets in the U.S. as well as Central and South America.
PAAS reported consolidated cash costs to produce an ounce of silver of 2011 were approximately $9.44, net of any credits. Projected cash costs for the full year of 2012 are forecast at between $12.50 and $13.50 per ounce, net of any credits.
The World Gold Council in a May 2012 report stated:
- Central banks across the globe continued the now established trend of net purchasing with demand in Q1 2012 reaching 80.8t. Demand was driven by Eastern Europe with Russia and Kazakhstan adding to their holdings and accounting for a substantial amount of the purchasing. Mexico's central bank made the largest single purchase of 16.8t. The main driver for this demand by emerging market central banks is the need to diversify their holdings.
- First quarter demand for ETFs and similar products totaled 51.4t, equivalent to a value of US$2.8bn; in stark contrast to the first quarter of 2011, when the sector witnessed net outflows.
- China and India have seen continuing economic growth and whilst China's economy is expected to slow, it will nonetheless surpass the rates of growth in the West. As we previously forecast it is likely China will become the largest source of demand for gold in 2012.
- This growth story also extends to other emerging market economies and is reinforced by central banks' continued buying of gold, as a diversifier and a preserver of national wealth. The current picture of the gold market is diverse and not withstanding a flight into U.S. dollars and treasuries near term, we believe the fundamental reasons for investing in gold today remain very strong and compelling."
At the risk of repeating myself - I am going to repeat myself and restate what I have previously discussed regarding silver's mid to long-term potential.
Silver still appears poised to lead the charge higher within the precious metals. Most chart patterns have followed the direction set by spot prices. As previously discussed, silver's chart reveals strong areas of what I'm calling "congestion and resistance." I don't foresee an easy rally taking hold and quickly whisking prices to new highs. I would expect volatility to get kicked up a few notches, which may add an adrenaline rush to trading. But once resistance is successfully conquered, look for upward acceleration to kick in.
With the silver mining sector taking a royal thrashing lately, I am leaning more toward this sector for trades. Near-term there may be additional downside across the board so working out entry strategies and stop levels remain important. Silver Wheaton remains the strongest prospect but I encourage performing due diligence before making any trade decisions.
From my SA article 4-mid-to-long-term-potential-investment-opportunities-in-silver-mining.