How To Play The Silver Miners Rally

October 16, 2018

silver bars

The long-awaited silver rally may be starting soon. If and once silver starts rising the silver miners will be the place to be without any doubt. How to prepare for a silver miners rally, and which silver miners to choose?

Silver price forecast

First, before looking into the details of the silver miners selection, let’s explore what to expect from the silver price going forward.

As explained in great detail in our silver price forecast 2019 our baseline silver price forecast is $17 to $21.50. We wrote: “However, if the bond market outflow that started recently with the end of the 40-year bull market in bonds will result in an inflow of capital in commodities and stocks, resulting in a sudden rise in inflation and ‘risk on’, we will see a strong breakout in silver above $21.50. In that scenario we forecast $26 for silver in 2019. The probability is 20%.” The latter, of course, has potentially a severe impact on our silver stocks forecast 2019 which we discuss lower.

It seems quite clear that gold will lead the rest of the precious metals market higher. This process started last month, and we shared evidence of it in this article on Gold-Eagle.com: The Price Of Gold Bottomed, And Silver Miners Might Offer An Epic Buy Opportunity. The remainder of the current article assumes that gold indeed bottomed, certainly does not go below $1200 for more than 5 consecutive days, and, consequently, will lead the precious metals market higher.

The silver chart shows the upside potential in an undeniable way. The monthly silver chart reveals several very valuable insights. First and foremost, the long term uptrend is still intact. Second, as indicated with the support line (2) on the chart, we see a higher low against the January 2016 lows. This is a bullish setup, make no mistake. Third, the silver price, in consolidating since its 2016 highs, is now close to move to area (4) on our annotated chart. We like to work with areas on monthly charts, it’s an easy yet very powerful way to understand how investors can position themselves to stay in line with ongoing and future trends.

What we are saying is that, once silver crosses the $16 area, it will rise quite fast to $21.50. Any break above $21.50 will be strongly bullish, and this may happen if precious metals (commodities in general) get a bid from the massive bond market outflow mentioned before.

silver price chart

Silver ratios

Although we do not consider ratios to be leading indicators they mostly can help understand relative strength or weakness. We tend to look at the silver market with two specific ratios which are quite unique.

The silver miners to gold ratio is an interesting secondary indicator suggesting risk sentiment in the precious metals market. If precious metals investors go ‘risk on’ they certainly take increasingly larger positions in silver miners. That’s when the silver miners to gold ratio will drastically rise.

As seen on the ratio chart below there is an important test ongoing ‘as we speak’. Note how current levels are former resistance as well as the breakout level of 2016. If this ratio holds we will see bullish price action in silver miners, and we expect a resolution sooner rather than later.

Moreover, silver miners against the S&P 500 is another relevant secondary indicator.

This ratio has drastically improved last week with the global stock market sell-off. No surprise that silver miners got a strong bid, and this may just be the beginning.

As said in the past we do not anticipate 2008-alike crash even if many believe that THE stock market crash of 2018 is underway. But a couple of months of weakness in broad indexes may be sufficient to send silver miners much higher.

The ratio chart of silver miners against the S&P 500 shown below sends a very clear message: a mega double bottom formation is bullish, and a small rise of SIL ETF combined with a small loss of the S&P 500 will create breakout on this chart in favor of silver miners. If and once this happens we believe we will see a replay of the epic 2016 silver stocks rally, an opportunity that not any investors wants to miss.

Silver miners

That said, how to play silver miners, and prepare for a monster rally, is the million dollar question.

We believe there is one very frequently made mistake that silver investors tend to make: the go all in by taking positions on similar silver miners. There really is no added value in taking long positions on very similar silver miners.

The trick is to apply a smart form of diversification across silver miners, across sub-segments. This requires two things: on the one hand some sort of classification of silver miners complemented by a thorough research of charts and fundamentals. Moreover, as an absolutely mandatory condition, we want to see relative strength against the 2016 bottom.

In applying our own method we see that 3 silver miners come successfully out of our test.

Outstanding silver production outlook: First Majestic Silver

This should not come as a surprise. First Majestic Silver is, by far, our top favorite silver stock. It is also one of the few pure play silver producers. We discussed our excitement extensively this year, for instance in Is First Majestic Silver A Stock To Buy Now?

With the acquisition of Primero Mining they are certainly investing in future revenue as well as cash flow increase. The estimates are that the company will have 168 million oz. of silver reserves and about 400 million oz. of resources with the combined 7 silver mines in Mexico. First Majestic provides a leverage to the price of silver.

It is primarily strong production prospects that makes us very exciting about this silver miner. Note how First Majestic Silver trades twice as high as its January 2016 bottom, a sign of its great outlook.

Any price target? The first target is $7.40. If silver remains strong in the next few months First Majestic may rise outside of its 2-year falling channel, in which case it will rise to the 17-20 area.

Excellent silver producer : Pan American Silver

Pan American Silver knows how to achieve excellence in producing silver.

Not only are they planning an increase of 20% in their silver production but they have shown especially strong skills in lowering cash costs. In 2017 their cash cost was just $7 per oz. They hold plenty of cash and an acceptable $43 million of debt. 

Its chart shows relative strength against the January 2016 bottom. Moreover, in the last 20 years, the company may have been ups and downs, but overall, in comparison with the vast majority of precious metals miners, they really have a solid chart. 

Note the solid trading range since the 2016 top. If and once this silver miner crosses $20 it will rise very fast to test its former all-time highs.

Low-cost though smaller silver producer: Hecla Mining

Hecla Mining is a low-cost high-grade silver producer. It is the smallest of the 3 we feature in this article with ‘just’ 2 silver mines.

Their cash cost was some $5 per oz last year, this really is exceptional. They have 450 million oz. of high-grade silver and 200 million oz. of low-grade silver.

The debt position of Hecla Mining is rather high. This might become a concern only in case silver prices continue to fall but we consider the likelihood of this quite small. 

Hecla Mining has a great chart. It is not ultra-volatile, and that’s in line with its fundamentals and outlook. It is a solid way to play a silver rise, kind of a calculated risk silver play.

Right now, Hecla Mining is in a strong buy area. It will easily double if silver prices continue to rise.

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Dollar falls on uncertainty but ends week with modest gain