Shares of precious-metals miner Endeavor Silver (NYSE:EXK) rose as much as 17% on July 21. While the stock was one of the biggest gainers, it was hardly alone: Americas Gold and Silver (NYSEMKT:USAS) was up nearly 16%; Silvercorp Metals (NYSEMKT: SVMLF) nearly 13%; Fortuna Silver Mines (NYSE:FSM), 12%; Coeur Mining (NYSE:CDE) roughly 11.5%; Great Panther Mining (NYSEMKT:GPL), 11%; Gold Resource Corporation (NYSEMKT:GORO) just under 11%; and First Majestic Silver (NYSE:AG), up just about 10.5%.
All of these gold and silver miners gave up some of their gains as the day progressed, but by 2 p.m. EDT, they were all holding on to high-single-digit to low-teens advances.
Both gold and silver prices were higher today. Gold was up about 1.5% at 2 p.m. EST, with silver up a far more impressive 6.5% or so. That continues an impressive run by silver that started in mid-March -- the metal has risen by more than 75%, using iShares Silver Trust as a proxy. Gold, by comparison, has been heading higher, but not to nearly the same degree, with a roughly 23% advance since its March lows, using SPDR Gold Shares as a proxy.
What's most interesting about the silver rally is that it follows a period in which gold materially outperformed silver. This is best captured in the gold-to-silver ratio, which shows how many silver ounces it takes to buy an ounce of gold. The average ratio over the past 20 years is around 65, but earlier this year, that number peaked at more than 120.
Precious-metals investors often look at this as a timing indicator for shifting between the two metals, buying silver when it's cheap relative to gold, and vice versa. A gold-to-silver ratio of 120 suggested that silver was extremely cheap, so the big silver rally may not be as surprising as it seems. That said, both silver and gold are hitting notable levels, with gold at price points not seen since late 2011 and silver trading around four-year highs.
What's interesting about most of the names here is that they're relatively small miners. For example, Endeavor Silver, Americas Gold and Silver, Great Panther Mining, and Gold Resource Corporation all have market caps between roughly $300 million and $500 million. That makes them junior miners, which often benefit more than larger, more established names when precious-metals prices rise. In many cases, this is because they have high operating expenses. When metals prices move above these companies' mining costs, they can quickly shift from red ink to black. And notably, once these companies are in the black, profits can quickly pile up.
First Majestic Silver, Coeur Mining, Silvercorp Metals, and Fortuna Silver Mines are all slightly larger entities, with market caps ranging from about $1.2 billion to $2.75 billion. These are mid-tier miners, but they generally have cost structures that aren't quite as good as the industry giants, which benefit much more from economies of scale.
To provide some context, industry giant Barrick Gold was only up about 0.5% at 2 p.m. EDT. But digging in a bit deeper helps explain the difference. To keep the math easy, we'll use a hypothetical that's close to the day's change, with our example gold prices rising around $25 per ounce.
For our purposes, that takes the metal from a nice round $1,820 per ounce to $1,845 (a roughly 1.5% gain). Barrick's all-in sustaining costs, which is how much it costs the company to mine an ounce of gold and maintain its mines, is roughly $950 per ounce. So at the start of this hypothetical day, the company was making about $870 per ounce of gold. After the price gain in the metal, that profit rose to $895 per ounce. Not bad.
Great Panther's all-in sustaining costs at its main gold-producing asset were roughly $1,740 per ounce in the first quarter. That's really high, and the company hopes to get that number down to between $1,150 and $1,250 for the full year (all-in sustaining costs can be materially impacted by capital-investment efforts). But using that first-quarter cost will help to show just how big the difference really is.
Great Panther's profit per ounce of gold at the start of this hypothetical day was $80. But based on the rise in the price of gold, it increased to $105 per ounce. On an absolute basis, that doesn't sound like much and certainly isn't as impressive as what Barrick is making on an absolute basis.
However, that's the point, and this is where things get interesting. Barrick's profit per ounce increased around 9%, hardly something to complain about. But because Great Panther's costs were so much higher, its profit per ounce increased just a touch over 30%! That's a huge increase.
For smaller miners with higher cost structures, a relatively small move in the price of gold and silver can have a major impact on profitability. This helps explain why these names rose so much today.
Investor sentiment plays a huge role in the price of silver and gold. Right now, investors are pretty hot on both metals, likely because of concerns about COVID-19 and the impact it's having on economies around the world. That could continue for some time, or just as quickly as this advance has taken shape it could peter out and the precious metals could start to fall.
A few big price gains is not a particularly good reason to start investing in the highly volatile gold and silver space. A better approach is to view the metals and the miners that dig them up as diversifying assets, including just a few percentage points worth of precious-metals exposure in your portfolio at all times.
That said, most investors would be better off focusing on larger, more established miners or streaming companies when considering precious-metals stocks, precisely because their stocks aren't usually quite as volatile as the smaller names here. These companies are most appropriate for investors willing to put in the time and effort to become industry experts.