Friday, October 30, 2015

Silver and Pan American Silver

As we consider whether the silver bull has restarted and its consequences for mining stocks, it is salutary to examine how leveraging silver via mining stocks can be a hit or miss. This is best shown in one of the most favoured silver mining stocks, Pan American Silver. The first chart shows the company’s performance over the last twenty years with the silver price overlaid in green.

Not surprisingly, the two generally track each other over the course of bulls and bears, though it is clear from a cursory examination that the two do not rise and fall in a proportionate manner. The question is how PAAS has performed relative to silver over the past two decades.

To answer that question in visual form, imagine an investor bought PAAS on the 12th June 1995 and held it for a decent investment time horizon. In this case, I have chosen four years. Now we calculate how much PAAS returned above and beyond any absolute gain in silver on or about the 12th June 1999, four years later. That is our leverage number.

So, if silver and PAAS performed the same, the value is one. If PAAS performed twice as well as silver, the value is two. If PAAS performed twice as worse as silver, the value is a half. Now repeat this for the next trading day and so on until the present day and you get the PAAS to silver leverage chart below.


What becomes immediately clear is that PAAS had its big day back in December 2004 when it outperformed silver by a factor of four in the early days of the silver bull. Thereafter, the leverage dropped but did not drop to breakeven with silver until May 2006 during one of silver’s sharp downturns.

However, PAAS could only keep up with silver as it ran up to $21 in early 2008. Once the credit crunch hit, PAAS (like most silver mining stocks) dropped faster than silver and to this day, Pan American Silver has failed to outperform silver over a rolling four year holding period.

What went wrong with PAAS? The answer will lie in the fundamentals of the company, it may be found in a lack of anticipated resource discovery, unexpected production declines, bad management, the politics of governments and natural disasters. I will leave the finding of the exact areas of blame to someone else.

But while PAAS failed to outperform silver during the great run up to $50 silver between 2008 and 2011, others did outperform silver. I have monitored a representative batch of fifteen or so silver mining stocks since 2007 and during that big silver move; they collectively outperformed silver by a factor of 1.80. So you got 80% more than someone who bought silver bullion. The point being that one should not put all their eggs in one basket.

When I started tracking silver stocks collectively in 2007, there was only one silver mining stock fund on the planet. Today we have several to choose from, such as SIL and SLVP where you can spread the risk of investing in silver mining stocks.

PAAS may again be one of the best performers as it was in 2004, and indeed is currently one of the top performers since August. However, be careful, spread the risk and diversify your stock holdings!

Further analysis of silver can be had by going to our silver blog at where readers can obtain subscription details for the Silver Analyst newsletter. Comments and questions are also invited via email to

Thursday, October 15, 2015

Gold SIlver Ratio Update

I posted an article on the gold-silver ratio (GSR) back in February 2009 which you can find here. My closing words were that “it looks like a top was set back in late January”. By that I meant a top in the GSR, not the price of silver which clearly had suffered a large drop during the mass sell-offs of the Credit Crunch. When the GSR peaks, the price of silver tends to bottom and that clearly came to pass as silver began a run up to $50 two years later.

How has the Gold Silver Ratio (GSR) been doing recently and how does this stand up against the price action of silver over the past years? Some will use this ratio to rebalance their gold and silver holdings. A high GSR means switch from gold to silver and vice versa. I did not pay much attention to any such signal back in 2009, but it was on my mind this week as I increased the holdings in my favoured silver ETF.

Where I did find it useful back in 2009 was as a trend changeover signal and as I show you the monthly GSR chart for the last twenty years, it is evident that the GSR has been on an upward trend since April 2001. The weekly GSR with the silver price superimposed in green is shown for comparison below it.

Since I am always on the lookout for indicators which are globally or locally useful to the price of silver or gold, one leapt out at me this week past and that was the 20 month moving average of the GSR, which is the red line on the first chart.

In this case, I noted something as the last three major uptrends of the GSR peaked in November 1996, June 2003 and November 2008. When the GSR then dropped below its 20 month moving average, it confirmed the start of a major move in silver. Using the guidance of a full month’s trading range below the moving average; the new upward silver trends were subsequently confirmed in February 1997, January 2004 and September 2009.

Now as we await a new silver bull trend to commence, again we see the GSR nicely moving just above the 20 month moving average but still giving no indication that it is about to breach below the moving average. Though the required full trading range below the average will happen some months after the chronological start of the bull, its arrival will give increased confidence to everyone who is poised or already committed to the next great move in the rollercoaster story of silver.
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