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« Bank of America: Long Straddle Options Strategy | Main | US Dollar: Double Top Formation »
Sunday
Feb082009

Silver Producers: Set to Outperform the PM Sector!

Gold, silver and the Hui 09 feb 09


Chart courtesy of Stockcharts


2008 has began with the attention of precious metals bugs firmly focused on gold and why not as it has held up so well. However we need to keep an eye on silver as it has so far outperformed both gold and the Gold Bugs Index, the HUI.

Without putting too fine a point on it, the historic ratio for gold to silver is a little over 50:1, we use this ratio as it easy to remember for approximate calculation purposes. We now have gold at $911.40 and silver at $13.13 giving us a ratio is approximately 70:1, which tells us that silver still has a lot of ground to make up. For more detail on this relationship you may want to read an essay entitled Silver/Gold Ratio Reversion by Adam Hamilton which can be found by clicking here.


While gold hogs the headlines make sure that you grab a few good quality silver producers for your precious metals portfolio. We tend to favour silver producers as we believe that their stock prices will respond very well when silver prices go higher.

There is a lot of popular support for the junior stocks but we don't see 2009 being the year for junior stocks. We know that they have been battered recently and some are trading at less than their cash value, etc. Before investing in them do find out just what the burn rate is for the company as the cash soon goes. Investors are also nervous, which is not surprising in this environment and may decide to be less cavalier with their cash and plumb for the mid to large caps first. If things go well for them and they gain a little more confidence they may well turn their attention to the juniors, but that could be a year away. It is true that some of these stocks have doubled since November 2008, say from $0.05 to $0.10, but having fallen from $1.00 then a bounce of this nature was to be expected as nothing goes down in a straight line, but this does not guarantee a continuance of this progress, so tread carefully.

To add to your sleepless nights you may want to start thinking about your strategy regarding the 'sell in May and go away' crowd. We could well see the broader markets rallying if they believe that the latest Obama stimulus package is the solution to some of their ills. This rally could take us through the next two months which puts us at the end of March, should the confidence then start to dissipate investors would head to the exit as the heard does and the metals sector would once again be vulnerable to a sell off.


Stay tuned people..

If you are new to investment in the precious metals sector then you may wish to subscribe of our FREE newsletters regarding gold stocks, silver stocks and uranium stocks, just click on the links.


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