What happened
Shares of silver-heavy precious-metals miner Coeur Mining (CDE 8.46%) jumped 9% at the open on July 27. Although that was an impressive gain, it wasn't as good as the initial bump at Fortuna Silver Mines (FSM 6.55%), which rose 10%. And those gains weren't as impressive as the nearly 14% gain at Endeavour Silver (EXK 7.57%). That said, by 11 a.m. or so EDT, all three had given back some of their early advances, but were still holding on to material gains running between roughly 8% and 11%.
So what
The big story here is pretty straightforward: precious metals were showing material gains. Silver, as has been the case in recent months, was the better performer. The companies that mine for the metal went along for the ride. Nothing surprising. That said, there are two interesting things going on that investors need to take into consideration.
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For years, silver lagged behind gold performance-wise, leading a number of miners to shift their focus to the yellow metal. That performance discrepancy peaked in early 2020, using the gold-to-silver ratio as a relative valuation tool. This metric shows how many ounces of silver it takes to buy an ounce of gold. In precious practice, precious-metals investors use the gold-to-silver ratio to decide which of the metals is the more desirable and switch between the two accordingly. In March the number hit a peak at over 120, which is extremely high historically speaking, suggesting silver was relatively cheap.
Since that peak, silver has rallied more strongly than gold, bringing that ratio down to around 80. It's been an incredible run in a very short period of time. Since hitting a low in roughly mid-March, silver, using iShares Silver Trust as a proxy, has more than doubled in value. Gold, using SPDR Gold Shares as a proxy, is up "just" 30% or so.
Over that same span, silver-heavy miners Coeur, Fortuna Silver Mines, and Endeavour Silver are up roughly 185%, 220%, and 275%, respectively. That's not particularly shocking, even though the pace of the advance should be. Precious metals miners tend to be leveraged to the price moves of the metals on which they focus. That said, the rough average for the gold-silver ratio in the last century was around 50 (it's been higher over the last 20 years), so there could be more room for silver to run.
Which brings up the second big issue that's worth considering. Both silver and gold are advancing right now at the same time that the stock market is at or near all-time highs. Often, precious metals are viewed as safe-haven assets, to which investors flock when times get tough in the economy or on Wall Street. The current price advances suggest that at least some investors are worried about the market's current heights. However, after such a material advance, how much more room is there to keep going? Silver, for example, is at levels last seen roughly seven years ago.
If the market doesn't fall into another bear market soon it wouldn't be surprising to see the allure of precious metals fade. And, based on the swift advance of silver, it would probably fall more quickly and deeply than gold. If there is a bear market, silver and gold could keep rising, but how much further is realistic? Gold, for example, is trading near the levels it reached in 2011. That was when a major commodity boom peaked.
Indeed, it's equally possible that investors are buying the rumor here and will sell the news, meaning that a bear market could cause a wave of profit taking in precious metals if investors choose to hide in cash. Nobody has a crystal ball, but investors looking at silver stocks today need to keep the bigger picture in mind here given the fairly sizable price advance over a very short period of time.
Now what
It's not a great idea to buy silver, or gold, because the price of the metal has risen dramatically. The same is true with regard to miners like Coeur, Fortuna Silver Mines, and Endeavour Silver. It's a better call to view companies like these, and precious metals in general, as diversifying assets. With that view, keeping a small percentage of your portfolio in the metals or the companies that mine for them for the long term helps to stabilize portfolio returns over time. Right now, though, it's likely volatility will be the norm for silver miners.
