When Will Silver Make a New High?

Dear Readers,

Mining companies are starting to release Q411 production figures, soon to be followed by earnings. It will be an interesting time. Gold is still well off its recent peak, so expectations may be realistic for a change, and that would be a good thing. On the other hand, costs – particularly royalties and taxes – are rising all over the world, and mining is always a messy, difficult business, so we're expecting a mix of the good, the bad, and the downright ugly in the weeks ahead. This can create buying opportunities, so we'll be keeping a sharp eye out for good bargains put on sale for the wrong reasons.

Rock & Stock StatsLastOne Month AgoOne Year Ago
Gold1,635.501,672.501,381.50
Silver29.6431.3429.22
Copper3.633.434.37
Oil99.03100.1491.39
Gold Producers (GDX)54.0554.0456.05
Gold Junior Stocks (GDXJ)26.3726.3036.45
Silver Stocks (SIL)22.1021.5023.90
TSX (Toronto Stock Exchange)12,231.0611,759.9413,401.48
TSX Venture1,536.031,458.432,289.00

Meanwhile, Andrey Dashkov has followed Jeff Clark's lead on looking at gold corrections and done similar work for silver, which already seems to us to be offering the market good opportunities.

Remember, there's more volatility ahead, so keep some powder dry – that's the way you make volatility your friend.

Sincerely,

Louis James


Senior Metals Investment Strategist
Casey Research


When Will Silver Make a New High?

By Andrey Dashkov, Research Analyst

In last week's Metals, Mining, and Money, Jeff Clark estimated that given the magnitude of the correction that started last September, it may take until May 2012 for gold to reach a new high. This week let's take a look at how long it may take for silver to rebound.

It's a commonly known fact that silver is more volatile than gold. Already in this decade, silver has risen by a factor of 12 from its ten-year low ($48.70 vs. $4.07), while gold has seen about a sevenfold climb ($255.95 vs. $1,895).

This volatility – as you'll see in a minute – holds for corrections as well. On average, silver's retreats have been deeper and longer than gold's. The three big gold corrections we looked at last week averaged 22.8%. Take a look at the three biggest for silver, along with how long it's taken to recover and establish new highs.

(Click on image to enlarge)

The three biggest silver corrections in the current bull market average to 42.1%.

Our recent correction is the second biggest on record since 2001, but what really makes it stand out is the duration. The 2004 and 2006 declines took only five and four weeks respectively to reach their low points. And it was 31 weeks after the crash of 2008 that silver bottomed. Our current decline, measured from the peak reached on April 28, 2011 to its December 29, 2011 low, spans 35 weeks… quite the determined downtrend.

It also takes silver longer to recover than gold: gold's three biggest corrections required an average of 57 weeks and 6 days to regain their old highs, while it's taken silver's three biggest falls an average of 98 weeks and 4 days to catch up.

So how long will it take to recover from the 2011 slump? We don't know the future, of course, but the current correction is close to the average of the three in the chart, so let's apply the average recovery time to our current situation. The average 42.1% correction took 98 weeks and 4 days to recover; using the same ratio, a 46.3% correction would take 108 weeks and 3 days. Counting from the previous peak of April 28, 2011, we wouldn't break the $48.70 high until May 26, 2013 (based on London PM Fix prices).

[Ed. Note: Last week, we inadvertently reported the recovery period from gold's low instead of its previous high, which is how all recovery periods in both that and this chart were measured. Thanks to reader John D for catching this. The good news is that gold could hit new highs sooner than the August date we originally projected.]

It shouldn't come as a surprise that silver will take longer to return to its old high than what we found with gold in last week's article. Why? Half of silver's use is industrial, so a weak economy can drag down its demand. We certainly saw that in 2008.

And an exact date is pure conjecture, of course, and ignores fundamental factors that directly influence the price. 2011 is not 2008. In fact, we've already seen an interesting shift in investment activity in both gold and silver markets. The Silver Institute pointed out in a recent market report that "investor activity" was the biggest contributing factor to both last April's rally as well as September's selloff. Meanwhile, demand for physical metal has not only held firm but was projected by GFMS to reach a new record high in 2011.

Investment demand is rooted in the metal's monetary characteristics. It's not a stretch to say that we expect silver to regain its currency appeal soon, given the amount of worldwide fiat currency destruction. This will be perhaps the strongest catalyst for prices going forward. We wouldn't want to be without any silver.

Take-Aways

If there's anything that sticks out from this bird's-eye view of the past ten years of data, it's that corrections are normal. And just as obvious is the fact that corrections end.

As with gold, the silver bull market is far from over, regardless of any weakness we may see in the near term. Don't be the impatient investor who gives up too early. And trying to time the market for a short-term profit shouldn't be the strategy in the midst of a long-term bull market. Instead, keep silver's fundamentals in mind: its industrial uses are growing and, like gold, silver is money.

That said, we believe that the window for buying silver at $30 won't be open for too long. The profit you someday realize from silver will be made buying now, when the price is low.

[Holding your assets in dollars, euros, or other paper currencies is like giving the government permission to rob you. There's a better way to store your wealth.]


Gold and Silver HEADLINES

Don't Believe In Gold? That's Okay, Just Leave It To The Chinese (Forbes)

The latest data on Chinese gold imports look very bullish for the yellow metal. A record 102.2 tonnes (3.3 million troy ounces) were imported into China in November 2011, up 20% from October and an incredible 483% over November 2010. Preparation for the Lunar New Year is the likely factor for much of this activity, but given the opaque nature of the Chinese gold market, it's difficult to trace the buyers.

Meanwhile, a representative of People's Bank of China stated that the current weakness in price should be used to further diversify the country's foreign exchange reserves into gold. We believe that a significant portion of the world's gold bullion is currently undergoing a shift in ownership, from West to East.

Hecla Must Shut Down Lucky Friday for Entire Year; Stock Down 20% (Mining)

After an accident at its Lucky Friday mine in Idaho, Hecla Mining was forced to shut down the mine for the entire year. The accident occurred on December 14 and involved seven miners who received minor injuries. Two miners also died last year. The tragedies led to an investigation, which in turn resulted in a decision that the built-up material in the shaft should be removed, a costly and lengthy job. Lucky Friday represents about 30% of the company's silver output. Unsurprisingly, the share price plummeted 21% on the day of the news, with some dubbing it the "Unlucky" Friday mine.

We don't follow Hecla in any of our paid newsletters, but we'll admit the potential contrarian opportunity raised our eyebrows. That said, it'll be 2013 before the mine is back in operation, so there's time to see if the stock gets cheaper and offers better entry points.

From Gold Bras to Gold Bars (Wall Street Journal)

Jean-Paul Gaultier – a famous French fashion designer – has created a one-ounce 24-karat gold bar that's engraved with rays, a heart, and Gaultier's name. Would we buy it? It sells for 10% over spot – less than we thought it would, but we'll let those with a taste for luxury and tolerance for high premiums take it. That said, it could expose gold to a customer base that hadn't considered it before.

What forms of gold do we buy? We interviewed some of the top bullion dealers in the industry in the current issue of BIG GOLD and got their recommendations on what forms of gold will someday be easiest to sell, what forms to avoid, and even which product currently has no reporting requirements when it's sold. Get these experts' insights along with a special discount on a Buffalo coin you can't get anywhere else with a risk-free trial subscription to BIG GOLD.


This Week in International Speculator and BIG GOLD – Key Updates for Subscribers

International Speculator

  • A producer in the IS portfolio released record Q4 production numbers. The company is well cashed up and has a lot of exploration potential in addition to the production story.

BIG GOLD

  • A number of our producers have filed updates on 2011 production and outlook for 2012 – our reasons for choosing those with high growth are about to kick in with many of them. Check out the BIG GOLD portfolio page for the latest on some of your favorite gold and silver producers.
Jan 16, 2012