By: Marco G.
September 23, 2010
http://goombarhsedge.blogspot.com/
Introduction
Today is Fall, the first day, and so it is befitting for us to look back and examine what has been happening to the precious metals markets. If you are a watcher of the markets, maybe you might be aware, that there seems to be a rise in the price of Gold recently.
Invisible reader: Well, how much has the precious metal risen recently?
Let us go to the charts and you may be a bit surprised.
Gold’s Rise
Of course, you are a student of the markets, and you are aware of Gold’s rise in price.
Invisible reader: Yes it is only a flash in the pan. The rise is insignificant, and Gold is volatile, and it will drop back soon.
Well, my rationale for the strength and duration of what is happening to the precious metals markets will have to wait for another day. The topic today is Gold’s rise, and how to leverage upon the trend. Following we chart the price of the largest Gold ETF – GLD, for the last three months. We are using the GLD as a proxy for the actual gold price.
Figure 1: GLD - Gold ETF in Summer 2010
It does not take very much astuteness to see that there seems to be a trend in place. The author has made it easier for the reader by placing a golden arrow following the GLD price upwards. This is an interesting chart. How much has the price of GLD gained in the last while? To keep things on a straight basis, we do some simple arithmetic starting with July 28th, the day of the first movement upwards for GLD and using today’s price we find that Gold’s rise amounts to about 12% (the figures are rounded and not exact).
Big Cap Gold
Invisible reader: All right then, how has the price movement of Gold, the metal, translated into the market valuation of the Gold miners.
Forget the large cap HUI, and let us take a look at GDX, the ETF that contains 30 odd large Gold miners. Following is the chart for the GDX this summer.
Figure 2: GDX - larger Gold miners performance in Summer 2010
Invisible reader: H..m..m, that yellow arrow upwards is interesting. What is the percentage movement upwards?
Using the same starting date, the movement upwards for this collection of miners is 20%. Wow, that is pretty good, so the miners are leveraged to the Gold price and magnifying the Gold price move by another two thirds times or 166%. Yes, this is a prime example of the leverage of mining equities to the underlying Gold price.
Junior Golds
Invisible reader: What about the smaller gold miners? Are they moving more, or less, or not moving at all?
We use the GDXJ ETF, the collection of about 60 smaller miners (mostly under $1Billion market capitalization) for this analysis and the chart is below.
Figure 3: GDXJ - Junior gold miners in Summer 2010.
Not surprisingly, or is it surprising to you? The smaller gold miners are also moving upwards and at a fast clip apparently. The price movement is up by 33% for this collection of Junior Gold miners. Wow, the Juniors are taking Gold’s price movement and adding another 21% move or taking the Gold’s move of 12% and multiplying by 275%!
The Lunar Metal’s Rise
Invisible reader: I wonder how the price of Silver is doing relative to Gold?
The author has penned a previous article pointing out that Silver may move more than Gold here. We use the large Silver ETF, SLV as a proxy for the Silver metals prices and the chart if below.
Figure 4: SLV - Silver metals ETF in Summer 2010.
Interestingly, looking at the above Silver chart, Silver seems to be a laggard and did not move upwards until the end of August, almost one month behind the movements of Gold. Well, to keep the comparison valid, we use the same starting date, July 28th and we will see what happens. Astonishment, the calculations show that Silver has moved 18% in price even when starting one month late!
Invisible reader: Wow! This is 50% more than Gold's move of 12%!
The Crème de la Crème of Silver Equities
Invisible reader: I can’t wait to see the results then for the Silver miners.
Unfortunately, there are no Silver miners ETF, that I am aware of. So, we use my favorite indicator of the health of the Silver market, the crème de la crème of Silver stocks, Silver Wheaton (SLW), the Silver royalty company to chart the gains made this Summer. The Silver Wheaton chart follows:
Figure 5: Silver Wheaton - SLW, large cap Silver Royalty company.
Surprisingly or not surprisingly, Silver Wheaton has turned in a gain of 47% from our calculations.
Invisible reader: Is something wrong here? SLW is a large cap and large cap miners are not supposed to leverage that much. They moved 47% while Silver only moved 18% in prices?
A Discarded Junior Silver
How about the smaller silver producers?
Genco Resources (GGCRF, TSX:GGC) was a previous silver producer, that had run into difficulties and management was trying to turn it around. In the chart following you can see the collapsing share price and then something happened this Summer to Genco.
Figure 6: Genco Resources (GGCRF, TSX:GGC) Silver Junior
On Sep 20th, Genco Resources received a merger offer from Silvermex Resources (SLVSF, TSXF:SMR) causing the share price to move by over 30%. Obviously, someone saw value in Genco. Silvermex is noted for having executives from Hecla (HL) and Silver Standard Resources (SSRI) (large Silver miners) in their management.
Using the same starting date of July 28th, the movement upwards for Genco was 59%.
Invisible reader: Well, you are being unfair again, that includes the takeover offer that juiced the price up!
The Hunt Brothers Forgotten Mine
Let’s take a look at another forgotten Silver security.
Canadian Zinc (CZICF, TSX:CZN) has the advantages of almost complete mining infrastructure and extremely high value ore for a pre-producer. A recent interview with CZN’s Chief Operating Officer is here.
This Summer’s performance of Canadian Zinc is displayed following.
Figure 7: Canadian Zinc (CZICF, TSX:CZN) Silver, Zinc, Lead mine in northern Canada
The price movement upwards for Canadian Zinc calculates to be 72% as of this writing.
Invisible reader: Sputter….Sputter……..but………but this can’t be happening! This is not making sense at all!
A Small Silver Producer
Finally, we look at a smaller Silver miner, based in the famous Silver Valley of Idaho. The chart for US Silver Corp (USSIF, TSXF:USA) is following.
Figure 8: US Silver Corp., (USSIF, TSX:USA) Silver producer in Silver Valley Idaho.
US Silver Corp is completing a $6Million private placement to refurbish a shaft to increase production abilities. The calculated price movement for US Silver this summer works out to be 102%.
Invisible reader: Now, this does it! The writer is obviously rigging the figures!
Leverage of Silver Juniors
The heading of this summary says it all. Silver is moving more than Gold in this run of the precious metals bull market. Miners leverage the underlying metals price. Juniors are leveraging the metals prices more. Good juniors will move quite spectacularly.
Invisible reader: This is all unfair! You are only choosing specific examples to skew the mathematical analysis and comparison!
Exactly, no further comment.
Disclosure: The author is long Silver mining equities.
Important Disclaimer
The information and opinions contained within this document reflect the personal views of the author and should be viewed as food for thought and amusement only. The author may from time to time have a position in any of the securities mentioned. There are no guarantees of the accuracy, reliability or completeness of the information contained herein. Independent due diligence and discussions with one’s own investment and business advisor is strongly recommended. These writings are not to be construed as an offer or solicitation with respect to the purchase or sale of any security or as an endorsement of any product or service. We do not request or receive compensation in any form in order to feature companies in this publication. It is prohibited to copy or redistribute this document to any type of third party without the express permission of the author. This document may be quoted, in context, provided proper credit is given.
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