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Why These Precious Metals Stocks Rocketed at the Open

By Reuben Gregg Brewer - Updated Feb 1, 2021 at 12:34PM

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Mining stocks can be volatile, but this isn't normal. Here is what's going on and why you should be very cautious with these stocks right now.

What happened

Shares of McEwen Mining (MUX -7.39%) rose 29% at the start of trading on Monday. Fortuna Silver Mines (FSM -5.30%) rose nearly as much, with a 27% advance. Great Panther Mining (GPL -9.22%) rose almost 23%. And these were just a few of the precious metals miners seeing huge gains. SilverCrest Metals (SIL 2.07%), Alexco Resource (AXU -3.20%), and Americas Gold and Silver (USAS 1.39%) were up 26%, 21%, and 16%, respectively.

A hand lifting up cards on a poker table filled with chips.

Image source: Getty Images.

But those gains didn't last long. By roughly 11:30 a.m. EST today, McEwen's advance had been pared to 19%, while Great Panther and Fortuna had increases in the low teens. SilverCrest, Alexco, and Americas Gold and Silver were up "just" 6%, 9%, and 6%, respectively. All of this can be traced back to the Reddit board behind the short squeezes in stocks like GameStop and movie theater operator AMC Entertainment Holdings

So what

At this point, a loose collection of individual investors following a message board are discussing short squeeze candidates and acting on those ideas. Over the weekend, the chatter moved aggressively to silver and precious metals miners. That led to big early gains in silver and precious metals stocks, particularly those that are heavy on silver. Mining stocks can be volatile, as can the metals they produce, but this is something completely different. 

It looks more like a mania than anything else, since people are even going out and buying silver coins and bullion. Physical silver is a highly inefficient way to "invest" in precious metals. There's nothing inherently wrong with it, but there are often notable transaction costs involved, you may have to wait for the silver to be delivered (if you buy online), and then you need to worry about storing it.

Selling is no easy task, either, since you need to deliver the silver to the buyer and, if a dealer is involved, you aren't likely to get full market price since the dealer needs to make money, too. Yes, owning some bullion can protect against a financial system collapse, but it's not something to buy if you are trying to take advantage of short-term market swings.  

As for the list of miners here, they all fall into one of two categories: small and even smaller. For example, Fortuna and SilverCrest both have market caps in the $1.5 billion range, which isn't tiny, but isn't very big compared to larger precious metals miners like $40 billion market cap Barrick Gold or $47 billion heavyweight Newmont. Then there's McEwen, Great Panther, Alexco, and Americas Gold and Silver, which range between $300 million and $600 million market caps. These are very small companies by almost any measure. 

This, to some degree, helps explain why a group of people on a message board could push their share prices around. But it highlights the risks here, since what goes up often comes down just as hard. And with a narrow following on Wall Street, the only thing holding these shares up right now is very likely investor sentiment based on the hype around short squeezes. This type of get-rich-quick mentality usually doesn't lead to lasting gains for investors. 

MUX Market Cap Chart

MUX Market Cap data by YCharts.

Another important thing to keep in mind today is that silver had a very good year in 2020, up nearly 50%, using the iShares Silver Trust as a proxy. Silver miners, meanwhile, benefited from higher selling prices in 2020. Thus, generally speaking, they had a pretty good year overall. So there isn't the same negative story here as there is in AMC or GameStop.

In fact, while the Reddit board is highlighting the short position in silver, some industry watchers warn that the market isn't transparent enough to make such determinations. This could, frighteningly, just be misinformed hype. Which suggests that buying into this rally is more akin to gambling than investing.  

Now what

Precious metals and precious metal miners are often viewed as a rock in a storm, providing a store of value when markets are going haywire. Only now, it appears that precious metals themselves are going a little off the rails. Investors looking for a store of value might want to consider cash instead.

Long-term investors, meanwhile, should probably sit on the sidelines in the silver space given the whirlwind that's hitting it of late. The risks look to be materially larger than the potential rewards right now.

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Stocks Mentioned

Fortuna Silver Mines Inc. Stock Quote
Fortuna Silver Mines Inc.
FSM
$3.04 (-5.30%) $0.17
Alexco Resource Corp. Stock Quote
Alexco Resource Corp.
AXU
$0.37 (-3.20%) $0.01
McEwen Mining Inc. Stock Quote
McEwen Mining Inc.
MUX
$0.47 (-7.39%) $0.04
Great Panther Mining Limited Stock Quote
Great Panther Mining Limited
GPL
$0.12 (-9.22%) $0.01
Americas Gold and Silver Corporation Stock Quote
Americas Gold and Silver Corporation
USAS
$0.69 (1.39%) $0.01
SilverCrest Metals Inc. Stock Quote
SilverCrest Metals Inc.
SIL
$8.88 (2.07%) $0.18

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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