from Silver Doctors:

From a current-technicals standpoint, the silver stocks are looking better than the gold stocks these days!
by Adam Hamilton of Zeal LLC

The silver miners’ stocks are looking interesting.  While they really lagged silver’s surge on gold’s bull-market-breakout rally last summer, their upleg since remains intact.  Gold stocks’ own upleg peaked in early September.  And silver itself remains wildly undervalued relative to gold, overdue to mean revert dramatically higher.  When that happens during gold’s next upleg, the silver stocks have big potential to soar.

Like the global silver market is vastly smaller than gold’s, silver stocks are a proportionally-little fraction of the precious-metals miners.  As a small subset of a usually-ignored contrarian sector, the silver stocks often languish in obscurity.  For decades there wasn’t even a silver-stock index, making sector analysis difficult.  Thankfully that changed in April 2010, when the first silver-stock exchange-traded fund launched.

The SIL Global X Silver Miners ETF has maintained a first-mover advantage ever since, functioning as a silver-stock index despite its flaws.  This week SIL’s net assets ran $525.4m, 3.6x bigger than its next-largest competitor’s.  All 3 silver-miner ETFs trading in the US only have $763.6m of capital.  Compare that to the 11 US-traded gold-miner ETFs, which command net assets a massive 27.3x bigger at $20,849.1m!

Every few months I analyze the latest quarterly results of the major silver miners included in SIL.  That’s where this sector benchmark’s limitations really become apparent.  With Q4’19 results still coming out over the next month or so, Q3’19 remains the latest reported quarter.  And that continued to show major silver miners increasingly diversifying into gold production.  Recent years’ low silver prices necessitated this.

SIL’s top 17 silver miners dominating this small ETF at 93.9% of its total weighting averaged just 40.4% of their Q3’19 revenues from silver!  The majority of their sales came from gold, with some base metals mixed in.  Gold’s far-superior cashflows have greatly helped traditional silver miners weather their metal’s long slog deeply out of favor.  But lower silver exposure also retards these miners’ sensitivity to silver-price moves.

The more gold the major silver miners produce, the more they trade like gold stocks amplifying that metal’s trends.  The secular yellowing of this sector definitely casts a pall over silver stocks’ potential.  But most investors and speculators still remember these companies as primary silver miners.  And since there aren’t many major silver miners left anyway, capital will pour into them again as silver’s next upleg powers higher.

I’ve written much about major gold stocks in recent months, and despite remaining really undervalued relative to gold they are wavering technically.  The leading and dominant GDX gold-stock ETF peaked in early September, and hasn’t been able to regain those highs since.  That’s despite gold surging to new secular highs of its own on geopolitical fears, the US-Iran conflict flaring and China’s coronavirus outbreak.

Usually the silver stocks mostly follow the gold stocks for several reasons.  Again the majority of the big silver miners’ revenues now come from gold.  And silver’s primary driver is gold, silver only powers higher when gold itself is.  Finally the traders interested in silver stocks are a subset of the contrarians interested in gold stocks.  So for the most part, silver and thus its miners’ stock prices are effectively slaved to gold.

Thus I don’t write about this small realm often, since silver’s fortunes are directly dependent on gold’s.  Generally as goes gold, so goes silver and its miners’ stocks.  But SIL’s recent performance has really diverged from silver’s, gold’s, and GDX’s!  I’ve been watching this chart superimposing SIL over silver with growing interest recently.  The silver stocks are faring much better than they ought to in this situation.

Back on September 4th, a silver-stock upleg peaked in concert with silver, gold, and the gold stocks as measured by GDX.  SIL crested at $32.22 that day, driven by silver hitting $19.59.  While the major silver stocks had blasted far enough to catapult SIL 46.6% higher in 3.3 months, that was a disappointing silver-stock upleg.  In that same short span silver itself soared 36.6% higher, so silver stocks’ leverage was terrible.

Naturally silver stocks are far riskier than silver itself, bearing all kinds of operational and geopolitical risks in addition to silver-price risk.  Thus silver stocks are only worth trading if their gains amplify silver’s when it enjoys bull-market uplegs.  A case in point is this silver-stock bull’s maiden upleg mostly in the first half of 2016.  SIL skyrocketed 247.8% higher in 6.9 months, leveraging silver’s advance in that span by 6.1x!

Given the risks inherent in highly-volatile silver and its miners, I need to expect leverage running at least 3x to deploy capital in this sector.  Silver stocks were so disappointing when the precious-metals sector peaked in early September because SIL had merely amplified silver’s own gains by 1.3x.  That’s nowhere near enough to compensate traders for the miners’ serious additional risks beyond their underlying metal’s.

Silver crested then because gold did, which in turn peaked because speculators’ gold-futures positioning had grown excessively bullish.  After studying and trading silver for decades, I’ve found it mostly acts like a gold sentiment gauge.  When gold is consistently rallying, traders increasingly flock to silver forcing its price higher.  But these capital inflows wane when gold tops out, and reverse to selling as gold retreats.

Since those normal precious-metals upleg toppings in early September, silver has ground sideways to lower.  While silver surged with gold starting with the latter’s late-December downtrend breakout, silver didn’t follow gold to new upleg highs.  Silver’s rallies on that flaring US-Iran conflict in early January and the Chinese coronavirus outbreak in late January proved very muted compared to gold’s major new highs.

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