Silver Takes First Place?

By Matt Cavallaro | December 06, 2011 AAA

Central banks are ramping up the printing presses again; that's a positive catalyst for precious metals like gold and silver. This year, gold has outperformed silver and silver miners are underperforming silver futures. If metals rally into the aggressive monetary easing plans unfolding in Asia and Europe, silver could realize a leveraged rally beyond gold. (To know more about silver futures, read: Trading Gold And Silver Futures Contracts.)

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Gold or Silver?
Typically, silver and gold trade in lockstep. There's been a slight divergence this year. The SPDR Gold Trust (ARCA:GLD), which is designed to reflect the performance of the price of gold bullion, is up about 22.6% in 2011. Meanwhile, the ETF that tracks the performance of silver futures, the iShares Silver Trust (ARCA:SLV), has risen just about 3% year-to-date. Silver's underperformance may translate into a catch up rally, as metals seek to revert to historic ratios.

The silver and gold trade is almost wholly a function of monetary policy, inflation expectations and currency movements. Central banks are colluding to kick the European can down the road, yet again, in an end game that will almost certainly result in large scale defaults, harsh austerity and significant asset sales. This will, in all likelihood, drive silver up from the current price, just below $33 per troy ounce.

Silver Options
Quantitative easing isn't the only factor working in silver's favor. The discrepancy between how much silver is traded and what is available for delivery, creates a leveraged market. Silver has a lot of industrial momentum behind it. Miners should benefit from increased production needs for silver, as an input into a wide range of products, including batteries, electronics and solar panels.

The largest pure play silver streaming company is Vancouver-based Silver Wheaton Corp. (NYSE:SLW). Profits surged during Silver Wheaton's third quarter, as revenues doubled to $185.2 million. Even though the quarterly results came in shy of expectations, the underlying trend of higher silver prices and strong operating cash flows, bodes well for the group.

A miner that beat top line expectations last quarter is Coeur d'Alene Mines (NYSE:CDE), the largest U.S. silver producer. Coeur had its best period for sales and operating cash flow ever, during the third quarter of 2011. Revenues jumped to $344 million on higher metal prices and strong production from silver and gold mines in Mexico and Bolivia. Pan American Silver (Nasdaq:PAAS) is another miner whose third quarter net income and sales soared on strengthening silver prices. Third quarter earnings swelled to $52.4 million on revenues of $220.6 million.

The Bottom Line
Even considering silver's positive near-term catalysts, investors must recognize that the commodity trade is a high beta play. Miners are susceptible to adverse broad market moves, capacity disruptions and other fundamental factors. Nevertheless, miners can be expected to benefit from the correlation to underlying metal prices and for underperforming silver futures, as well. The mining ETF, Global X Silver Miners ETF (ARCA:SIL), is actually down about 16% in 2011. Going forward, metals like gold and silver should get price support from low interest rates, inflation and risk aversion.

Silver has been a very profitable trade; since the iShares Silver Trust was launched in 2006, it is up 124%; gold typically gets most of the metal headlines. Silver investors might be better positioned to reach the top of the podium. (For additional reading, check out Is Silver The New Gold.)

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At the time of writing, Matt Cavallaro did not own shares in any of the companies mentioned in this article.

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