Mining Companies Not The Best Way To Bet On Silver

by: Bennington Investment Ideas

Current market uncertainty has caused many investors to seek safety in precious metals, including gold and silver. One convenient way to gain exposure is through ETF investments, such as iShares Silver Trust (NYSEARCA:SLV), ETFS Physical Silver (NYSEARCA:SIVR) or the SPDR Gold Trust ETF (NYSEARCA:GLD), that track the underlying physical commodity. However, other investors have sought exposure to gold through individual mining companies such as Barrick Gold Mining (NYSE:BRX) or even sector ETFs, including Market Vectors Gold Miners ETF (NYSEARCA:GDX) and Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ).

In my previous article, "Do Gold Betas Point The Way To Greater Profits," I looked more closely at the recent performance of gold mining companies. Investors who have tried to bet on gold through mining stocks have had mixed results lately. While GLD is up about 25% over the past six months, many mining companies have posted relatively disappointing results, including Barrick Gold Corporation (NYSE:ABX) which was essentially flat over the past six months. While there might be perfectly logical explanations (e.g., significant hedging, poor management decisions, etc. ...), the results are nevertheless disappointing to investors in the mining companies.

So when I saw several articles touting the benefits of silver mining companies, I was wondering just how correlated are these mining stocks to silver prices. Many precious metal companies mine both gold and silver, meaning that there are fewer pure plays than one might expect. So when I read "5 Silver Stocks that Could Surge Higher," I wondered just how much of a relationship there was between silver prices, as measured by the two aforementioned ETFs, and these silver mining companies. The articles thesis is largely summed up in its opening paragraph:

The latest surge in silver prices has seen companies on this list profiting handsomely. Their revenues should continue to rise as silver production increases through new exploration programs or by acquisitions. These stocks are only suitable for investors who have the emotional and financial resources to stomach the ride that comes with holding stocks that are leveraged to volatile silver prices. - 5 Silver Stocks That Could Surge Higher

So if one is betting on silver prices, would it be better to buy silver miners and take on some additional risks or buy direct exposure through SLV or SIVR. The following securities were considered in this analysis:

Silver and Gold Securities
Ticker Name Recent Close $ (Sep 21)
Market Capitalization ($ millions)
SPY SPDR S&P 500 Index ETF 116.63 NA
SIVR ETFS Physical Silver Shares 38.31 NA
SIL Global X Silver Miners ETF 26.29 NA
GDX Market Vectors Gold Miners ETF 64.28 NA
GDXJ Market Vectors Junior Gold Miners ETF 35.10 NA
AG First Majestic Silver Corp. 20.11 2,090
EXK Endeavour Silver Corporation 12.40 1,047
GPL Great Panther Silver Limited 3.29 442
SLW Silver Wheaton Corp 40.66 14,365
CDE Coeur d'Alene Mines Corporation 26.95 2,416
SVM Silvercorp Metals Inc 7.13 1,248
KGC Kinross Gold Corporation 17.00 19,310

Source: Yahoo!Finance

For a silver miner to be a good way to bet on silver, their stock performance should be correlated to silver prices. The following table shows the companies correlation to SLV, GLD, and SPY.

36 Month Correlation to
SLV 100% 77% 31%
GLD 77% 100% 12%
SPY 31% 12% 100%
AG 69% 63% 40%
EXK 73% 72% 34%
GPL 54% 31% 38%
SLW 62% 63% 39%
CDE 52% 47% 61%
SVM 62% 50% 53%
GDX 70% 85% 31%
KGC 50% 70% 32%

Source: Derived from split and dividend adjusted monthly prices from Yahoo!Finance. SIVR, GDXJ and SIL do not yet have 36 months of history. Over shorter time frames, SIVR as expected offers ~100% correlation, GDXJ offers a 70-80% correlation and SIL offers a 70-80% correlation.

The first observation is that the correlations between the various mining companies and SLV is not very good, ranging from 50-73%. GDX, the gold mining ETF, offers the third highest correlation after EXK. The security with the highest correlation is ironically GLD. So for an investor betting on silver prices, picking silver mining companies might not be the best approach. Simply purchasing exposure through SLV or SIVR would be better. The next best options would probably be SIL and GDX which provide some diversification of company specific risks. However, it should be noted that several silver mining companies have had extraordinary performance over the past year with AG, EXK, and GPL all up over 200% compared to just 81% for SLV.

Disclosure: I am long SPY.

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.