This article examines the relative value of investing in gold as compared to investing in silver, their relative recent performances, and suggests some junior resource exploration companies stock picks, where stocks are severely depressed and are good value with strong upside potential.
Commentators have filled the news recently on the breakout in the price of gold (SPDR Gold Trust ETF: GLD). Gold broke out of its reducing triangle and following the Ernmor trap, started a strong move to higher levels. Expressions on the part of gold bugs led to predictions by many of $2,000 and $2,500 per ounce price levels before the end of the year.
As we have seen, however, Mr. Market has a way of humbling the over-confident. Rather than continuing its upward movement, gold has slowed its ascent. We have yet to see if it will rise above the levels of a year ago.
Silver has Had the Real Breakout
In recent weeks, gold has climbed out of its channel and risen from $1,600 to $1,770. This is a rather impressive rise, and is a 10% increase in value, but it pales in comparison to silver (iShares Silver Trust ETF: SLV)
Silver was stable at $28, but in recent weeks has risen to $35, and is still showing strength. This is a 25% rise in value, nearly 2 1/2 times the rise in gold. Silver has surpassed the 200-day moving average in a dynamic move, and its technical analysis shows great strength. On a technical basis, silver looks positioned to rise further and quicker.
A Comparison of Value Creation
The favorite mantra of believers in gold is that as the US Federal Reserve prints money (read QE or Quantitative Easing), the price of gold must rise. This week's announcement by the Fed is that it will embark on a continuous program, whereby it will buy at its discretion more bonds, and will also use the proceeds of maturing or liquidated bonds to buy more bonds. The aim is to maintain liquidity in the financial sector.
A Shift in Fed Policy
This is a major shift in policy. Rather than announce some misunderstood enormous figure to be labeled as QE, the Fed is now saying that it will do what is necessary when it deems it necessary, and it will do so on a continual basis. The effect of this announcement on the price of gold was muted at best. The anticipation was greater than the announcement. Perhaps gold will still react strongly. Perhaps not.
What remains apparent, is that other market forces, such as reduced demand for gold in India and China, also plays in the equation.
Silver: The Poor Man's Gold
While QE affects gold, it also affects silver. Although silver does not grab the headlines, silver has many driving forces. If the currency loses value, silver, similar to gold, is an alternative. But as the economy improves, and as modern manufacturing continues its increased demand for silver, the demand for silver sustains the price of silver. The demand part of the equation is far stronger for silver than for gold. Silver is in demand for jewelry as is gold, and for protection against inflation, as is gold.
But silver has far more uses than gold. Silver is an alternative in medical treatments, in conductivity, in electrical transmission, in electronic components such as smart phones, and in so many other applications. So silver is a very good bet as an investment. Whether gold is the alternative to currency debasement, or not, silver has equal value, but greater demand.
The Majors See the Opportunities
There is a continual need for major mining companies to replenish their reserves. It is an obvious fact that as metal is removed from the ground and processed, the amount of metal remaining in the ground that is owned by a company is reduced. Therefore, the majors look to replenish by buying the deposits of junior companies.
That is the way the industry works. Junior resource exploration companies raise money and search for deposits. If what they find is attractive and valuable enough, a major will sooner or later come knocking. Then the junior can either decide to take the deposit through to production (or at least try to do so), or let the major take over.
The majors see that prices for these juniors are now low, and are actively looking for deposits to increase their reserves. Coeur D'Alene (NYSE:CDE) has made strategic investments in junior silver explorers in British Columbia and Mexico, Hecla (NYSE:HL) made a bid for U.S. Silver, and Silver Wheaton (NYSE:SLW) has signed its first major royalty deal in years. The majors are hungry for new deposits in mining-friendly jurisdictions.
Now is the Time to Invest in Silver Exploration Companies
We believe in Argentum Silver Corporation (NYSE:T) - I am a director of this company, please see disclosure, Soltoro, First Majestic and Orko Silver. All of these have very strong potential for major silver deposits. All have severely reduced stock prices now. All are bargains.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I am long some juniors on the TSX exchange (ASL:T) (I am a director of this company), Soltoro (SOL:T), First Majestic (FR:T) and Orko Silver (OK:T). I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds. Larry Cyna and/or the CymorFund may have positions in the shares of companies mentioned.