Timely Guidance for Silver Investors

Many of my fellow silver investors are all worked up over the disappointing failure of silver mining equities to keep pace with the most recent and dramatic portion of silver's historic run.

After all, silver's incredible run has seen the iShares Silver Trust (NYSE: SLV  ) gain more than 50% already this year, while superstar Silver Wheaton (NYSE: SLW  ) stands less than 10% ahead of where it began 2011. Silver Wheaton's last blockbuster earnings performance -- achieved at an average realized silver price of just $26.44 in the fourth quarter of 2010 -- will absolutely pale in comparison to the bonanza this company is presently experiencing when selling its fixed-cost silver by the millions of ounces at prices above $45 per ounce. Under the circumstances, one could correctly interpret as irrational the market's failure to bid Silver Wheaton shares higher in the midst of this sizzling silver surge.

Complicating the picture, some individual silver stocks have been impaired by their own unique sets of unfortunate developments. Pan American Silver (Nasdaq: PAAS  ) came under intense pressure recently after Bolivian authorities announced their intention to nationalize the company's San Vicente mine. It now appears that opposition from the relevant workers' unions may effectively block the measure, but uncertainty continues to weigh on the shares.

These have been dark days for Hecla Mining (NYSE: HL  ) , with the low-cost miner actually staring at a 15% decline in 2011. Hecla's misfortune began back in February, when total liabilities stemming from the environmental practices of a bygone generation were reported likely to exceed $260 million. Hecla then suffered a collapse at its Lucky Friday mine in Idaho on April 15, and efforts to reach missing miner Larry Marek concluded in tragedy Sunday. Notwithstanding these challenging developments, I believe that Hecla's stock will ultimately spring back into life and erase much of its recent disconnect from silver's unrelenting strength.

Those special circumstances aside, a noteworthy fatigue in the momentum of silver stocks has indeed been palpable ... particularly over the past few weeks. Eager to make sense of the resulting disconnect, investors have offered a full spectrum of speculative attributions, few of which can be substantiated. Ultimately, the near-term trajectory of silver miners will be determined in the futures trading pits, where an epic battle has ensued since the silver manipulation bombshell first dropped last October. By late February, the unfolding of a powerful short squeeze was confirmed; and this major move set the stage for an imminent retest of silver's all-time nominal high of $50 per ounce. In fact, silver dared to peek its head above $49.60 in overnight action early Monday, and has retreated intraday to beneath $46.50 in one of the more volatile sessions in recent memory.

Nothing about these recent dislocations alters my long-term strategy for investing in silver. To the contrary, seeing so many silver mining equities priced -- in my view -- as though silver were trading near $30, I perceive a particularly favorable risk-to-reward profile among well-selected shares at present. Silver Wheaton, Hecla Mining, and Silvercorp Metals (NYSE: SVM  ) strike me as compelling valuations here; while carefully vetted junior explorers and producers warrant the attention of those seeking higher-octane returns. Whether silver busts through $50 with ease, or -- perhaps more likely -- retraces several paces after glimpsing that bastion of technical and psychological resistance, my bullish long-term outlook for silver prices and mining equities is unfazed by either outcome.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Hecla Mining, Silvercorp Metals, and Silver Wheaton. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On April 25, 2011, at 1:00 PM, Knotes wrote:

    Thanks for sharing your thoughts...Barnes' sudden departure as CEO of Silver Wheaton also raised some concerns with me and makes me nervous about jumping back in. Although, it does appear attractive assuming the miners catch up with the spot price action.

  • Report this Comment On April 25, 2011, at 1:22 PM, XMFSinchiruna wrote:

    Knotes,

    He did a tremendous job as CEO, but I don't see Barnes' departure having any deleterious impact on the company's outlook.

    As I suggested within the comments section (comment #42) of my "compelling microcaps" series (Volume IV: Barkerville Gold Mines) on my blog:

    It doesn't affect their business outlook in the least. Developers will approach SLW for new streams ... it's a business model on auto-pilot. He probably just got bored. :)

    [The latter portion was meant in jest, of course.]

    http://caps.fool.com/Blogs/compelling-pm-microcaps/578114

  • Report this Comment On April 25, 2011, at 4:41 PM, pettiepie wrote:

    mr. barnes sudden departue and what i see generly happening to all silver stocks right now telling me the easy money is in the silver bullion mineing co very riskey

  • Report this Comment On April 25, 2011, at 5:32 PM, xetn wrote:

    All mining is very risky because it is very expensive to start a mine and once started, you run huge risks of not finding adequate minerals, and government regulations that keep changing with the wind.

    That said, there are also huge returns possible especially with the junior miners, both from actual production and the huge possibility of being acquired by the big "boys" once they can show proven reserves.

  • Report this Comment On April 26, 2011, at 3:07 AM, Janetbrien wrote:

    The pure play is bullion: bars, or raw (ungraded) silver coins. No fees. Try places like http://bit.ly/gF9XYg

  • Report this Comment On April 26, 2011, at 6:02 PM, incolumis wrote:

    Anybody any theory as to why SLW keeps dropping while silver is still above $45?

  • Report this Comment On November 14, 2011, at 10:33 PM, MHedgeFundTrader wrote:

    I received an urgent call from my friend at He had just been cleaned out of the 1,000 ounce silver bars at $34,930 each, and there was nothing in the pipeline. What the hell was going on with silver? I tried to calm him down with my usual measured, rational, global, cross asset class explanation, and made the following points:

    An interim solution, or at least some progress, seems imminent in the European debt crisis. Any solution means a European style quantitative easing and a TARP, and we here in the US already know how positive those can be for risk assets.

    My friend at the Swiss National Bank told me yesterday that this resolution should send the Euro down to parity against the dollar. This is prompting massive European buying by panicky individuals across the entire precious metals spectrum. That’s where his silver 1,000 ounce bars went.

    Gold seems to be taking another run at the old high of $1,922. If the “RISK ON” trade continues, it might even make it. Then the hot money will rotate into the next natural target, silver, which has so far lagged gold’s move. That makes silver a great “catch up” play.

    The technical set up for silver is looking really interesting. As I write this with the (SLV) at $33.60, it looks like we are just about to break the 50 day moving average to the upside. If successful, then the 200 day moving average at $35.60 is a chip shot. Break that, and we could fill in the $10 of air on the chart created by the September crash and gap all the way up to the old high, just short of $50.

    Traders are getting sick to death of listening to all of this BS about Europe, which is largely being exaggerated by journalists jonesing from free continental vacations. Ignore Europe, just buy the dips in all risk assets, and turn off CNBC.

    The conversation prompted me to do a quickie analysis of the options market and look for some inviting plays. Since I am 80% in cash, and up 47% on the year, I have plenty of room to take a flyer here. That led me to the Silver ETF (SLV) January $35 calls. Here are the numbers I came up with:

    A run up to just the 200 day moving average takes the $35 calls to $3.00, up 33%. A move to fill the September gap takes silver to $39 and the options to $5.00, up 120%. A run to the old high under $50 takes the options to $15, assuming there is no time premium left by the time we get there, a return of 670%.

    I am going to use a stop loss here of $30 on the underlying. Those who can’t do options, just buying the (SLV) ETF outright here makes a ton of sense. Adrenaline junkies can even consider the double leveraged silver ETF (AGQ). Just make sure you fasten your seat belt.

    The Mad Hedge Fund Trader

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