You Can Still Catch Silver's Rising Star

These days it displays all the speed of a shooting star -- but shows none of the propensity for petering out.

I am speaking, of course, of silver, which is tethered to gold by the slingshot effect. Investors are witnessing that slingshot effect in action, as silver has surged briskly to bring the gold-to-silver price ratio nearer to the range of modern historical averages. Long-term, I expect silver to outpace gold until a ratio of about 40:1 is achieved, but at the present level of roughly 56:1, we are already well on the road to correcting the anomalous peak of 80:1 reached in 2008.

Silver's meteoric 36% rise -- from about $18 in late August, to more than $24.50 on Thursday -- has translated into some noteworthy moves among the shares of silver miners and explorers. Silver Wheaton (NYSE: SLW  ) has led the charge all year long, bringing my top stock pick for 2010 to an 84% increase year to date. Shares of junior miner Endeavour Silver (AMEX: EXK  ) have surged more than 50% since my mid-August interview with CEO Bradford Cooke documented his on-the-money call for a strong rise in silver prices. Popular Fool favorite Hecla Mining (NYSE: HL  ) has enjoyed a similar rise, though its shares have yet to record a fresh 52-week high.

Although I foresee a meaningful continuation of this secular bull market trend for silver (toward my long-term target price of $50 per ounce), I understand the difficult position that newcomers face in mulling fresh exposure to silver at these elevated price levels. Back in May, I proposed that any silver stock will do, but as the trend matures further, effective stock picking becomes increasingly significant as a means to ease concerns over downside risk.

When I want to sleep well at night while investing in a red-hot space like silver, I hunt for value. For newcomers seeking the widest value moat in the business, I recommend a careful look at major producer Pan American Silver (Nasdaq: PAAS  ) .

At nearly twice the market capitalization of low-cost sensation Silvercorp Metals (NYSE: SVM  ) , Pan American Silver is a well-established leader among primary silver producers that seems to garner little attention from investors. Following a long-awaited breakout through the $30 threshold, however, I suspect these shares could begin to rapidly close what I have presented as a meaningful valuation gap. This miner has a net cash position, holds massive untapped reserves, expects 23.4 million ounces of low-cost silver production for 2010, and even pays a small dividend. It is my contention that a major rift remains between the stock's present level and anything approaching fair value.

I am eager to hear your thoughts on the matter and encourage you to share your opinions in the comments section below.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly in the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Endeavour Silver, Hecla Mining, Pan American Silver, Silvercorp Metals, and Silver Wheaton.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (14)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 14, 2010, at 4:48 PM, burrenejg wrote:

    Silver Wheaton (SLW) is still the creme de le creme. I just upped my holdings and will continue to enjoy the ride upward. I you have to select one, this is it.

  • Report this Comment On October 14, 2010, at 10:13 PM, motox77 wrote:

    defintely correct --silver sat for years doing nothing with so many uses,just time for a market correction i agree silver at 50 bucks easy.

  • Report this Comment On October 15, 2010, at 5:17 PM, jesusfreakinco wrote:

    Chris,

    You've done a great job picking and justifying your picks. I appreciate the work you have done and have been rewarded financially for following your work. Keep it up!

    JFC

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