Strike While the Silver is Hot

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When you hit a hot topic, like silver, you need to milk it a bit. That's pretty much the rule when you're in the publishing world.

I received a ton of emails over the last couple of days regarding my articles on rare earth mining companies and silver mining stocks. So today I'll turn it over to you all to keep the conversation going.

"Silver? You make no sense. "Overbought but has the potential to make a historic run over the next ten years as more investors realize its dual benefits and as the economy grows." The ratio has been to the extreme low of 6 to 1. Or even close to 20 to 1 in the 70s. Why not just buy silver instead of stock in a mining company. Silver is the real deal. And you said it yourself it can run for the next ten years." - Dave

I think Dave agrees with me that the long-term trend for silver is intact, but he seems to disagree with my analysis of what would appear to be a low in terms of the gold:silver ratio.

My article yesterday only looked at the price of silver and gold over the last 20-years. I think the following chart shows the relationship in the context of a longer historical period - back to the mid 1300's. You may need to enlarge this chart, but clearly the price of silver now (the blue line) around $24 is very low in comparison to historical prices over the long term. And the gold:silver ratio is higher than the long term average.

So over a longer time horizon, Dave certainly makes a good point.

Thanks for a very good article. I'd like to comment on just one aspect...you wrote: "For these reasons, huge inventories of silver have been built up over thousands of years, just like gold." Actually it's the opposite. Huge inventories of silver have been squandered over the last 40 years. In 1960 there were three billion ounces of silver in Fort Knox.

Five years ago they had zero left. It's estimated by most analysts that there is less than one billion ounces of investable silver left in the world, including comex inventories, ETF inventories and private inventories. Compare that to four to five billion ounces of gold. Also the underground ratio of silver to gold is about 14:1. Historically (the last few thousand years) the price ratio was also about that. So your 45:1 ratio does not seem so low anymore with that perspective.

As an avid follower of the silver market, it seems to me that there is something going on this past few weeks that is very unusual. One analyst thinks that a big buyer has entered the market. Others hypothesize that the beginning of a long short covering by the big commercials has begun. For whatever reason, what is happening in silver is extraordinary, and very few analysts are covering it. So, thanks for your article! - M

Thanks for your comments M. I think the previous chart and comments show you're absolutely right about the historical ratio. And interesting comments about the 'squandering of silver' over the last 40-years.

"If it [silver] is indeed overbought implying a peak, I am curious to ask, when did you post articles advising people to buy silver since the technicals indicated it was poised for rapid growth?" - James

Good question James. I'll take the opportunity to toot my horn a little. I published bullish articles (as indicated by blue arrows in chart below) dedicated to silver in Small Cap Investor Daily on June 21 ( The Best Small Cap Silver Miner in the Universe ), July 12 ( Precious Metal Monday ), and on September 1 ( How to Make Money with Silver ), as well as various other mentions.

On June 15 th I recommended subscribers to Small Cap Investor PRO buy a silver mining company. We're now up 44 percent on this micro-cap, and love the gains - but also recognize that a sharp pull-back is more than likely. However, I don't want to book the gain yet because I believe that trying to time the perfect sell point is nearly impossible, and this company is growing organically to reach over 4 million mined ounces in 2011. It's a great growth story, and I believe the potential for doubling our money, or more, over the next few years with this stock is entirely possible.

"Hey you masonic [jerk], Silver is going to $80 oz. Overbought? B.S." - Chris

I'm not a member of the Masons, but thanks for your comment anyway Chris. I'd love to see silver at $80 because of what it would do for my silver stocks, but I don't know if I'd like the state of the economy if fiscal policy drives silver that high.

"I have enjoyed your editorial on investing, particularly in silver. I have been following with great interest developments at a historic silver mining area called Keno Hill. It is located in The Yukon Territory, Canada - a short distance from the town of Keno.

The company involved is called Alexco Resources ( AXR ) . They have spent the last several years exploring the site. A few months ago they received their final permit to mine (water use permit), and mining is now in progress. The area has been found to still have very rich deposits of silver." - A.L.

Careful is right, if you're even one day late selling out of these parabolic runs you can lose half your gains. Momentum on some of the hot miners seems to have petered out this week while the spot prices have kept shooting up. May be a sign that a pullback is at hand. - D

Thanks for bringing Alexco Resources to our readers' attention D. The company also trades on the American Stock Exchanges under the ticker symbol AXU. It's been a strong performer lately.

***I also received few articles relate to my article on rare earth stocks.

" Loved the article. One more company you didn't mention is Rare Earth Minerals (OTC: RAREF.PK) . I am very new to investing and started following them back in July. Should have bought some shares back then instead of watching and waiting till now. I am far from being a rare earth expert, but I can see how these companies could really be going places.

My goal is to be one of those rich little old ladies with high priced stocks. However, I would like to enjoy the money myself while I am alive instead of willing it to a charity after I kick the bucket." - Christine

Hope you achieve your goals Christine!

"Don't forget Lynas Corp. (OTC: LYSCF.PK) which will be first to production outside of China (2011). For heavy rare earths, look at Quest Rare Minerals (OTC: QSURD.PK) . Its resource is similar but even larger than Avalon's. For a European play, check out Tasman Metals (OTC: TASXF.PK) . Tasman owns the only rare earth mine in Europe and it has a nice resource of heavy rare earths." - J

Thanks to everyone for their comments. Also, a final word of caution - I haven't vetted all of these stocks mentioned, so don't misconstrue my mention of them here as a recommendation to buy shares.

Always do your own research, and come to your own conclusions before buying or selling any stock, bond, silver or gold coin, bar; or really any asset at all. At the end of the day, it's your capital, and your responsibility to act in your own best interest.

Keep the comments coming - my address is: editorial@smallcapinvestor.com . Have a great weekend.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: AXR

Wyatt Investment Research

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