What happened
Investors are increasingly turning to precious metals as a hedge against a stumbling global economy. In the United States alone, over 36 million individuals have filed for unemployment benefits in the last two months, while retail sales tumbled 22% in April from the year-ago period. Those and a number of other economic statistics make it clear that a recession is on the way, which is driving demand for safe-haven investments such as gold and silver.
Investors might argue whether precious metals are really safe havens, but the reality that is gold and silver prices are trekking higher. An ounce of gold is worth 35% more today than this time last year. Silver has been a little more volatile, but prices are 9.5% higher now versus the year-ago period.
That's lifting many gold and silver stocks today, especially small-cap stocks representing businesses that could use a helping hand. At the close of trading on Friday, shares of Fortuna Silver Mines (FSM +6.49%) were up almost 18%. Shares of Endeavour Silver (EXK +8.38%) had jumped nearly 11%, while the stock of Hecla Mining (HL +6.45%) gained over 13% on the day.
Image source: Getty Images.
So what
All three miners listed above are heavily reliant on silver production. That's been a bit of a disadvantage in the last year. Gold prices are well above levels from January, whereas silver prices are still far below levels from the beginning of 2020. But prices are rising, and investors are hoping that trend can lift the fortunes of smaller, struggling silver producers. It certainly can't hurt.
In the first quarter of 2020, Hecla Mining produced 3.2 million ounces of silver. That was followed by production of 1.8 million ounces for Fortuna Silver Mines and 857,000 ounces for Endeavour Silver.
However, investors also need to be cautious. Gold and silver producers will be affected not just by the prices of precious metals, but also by the geographic distribution of their assets. Those with operations in South Africa or Argentina might be affected by local lockdown orders, whereas mining operations in the United States are considered essential businesses.
For instance, Hecla Mining is currently producing at four of its five mines, representing 95% of total expected production volumes, largely because its assets are in the United States and Canada. Meanwhile, Fortuna Silver Mines and Endeavour Silver have been hurt by relative changes in the value of the Mexican peso. Then again, the Mexican government will allow mines in certain regions to resume operations on May 18, which could help the businesses recover in the second half of 2020.
Now what
Investors looking to hedge their bets against a stumbling economy with precious metals might want to remember a simple fact: Gold and silver stocks almost never outperform the S&P 500 over long periods of time. Given the regional effects and consequences of the coronavirus pandemic, investors cannot simply assume rising gold and silver prices will offset other headwinds for producers. Therefore, investors who wade into the mining industry need to be very sharp with their research, and evaluate businesses on a case-by-case basis.
