Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Why QE3 Means More for Silver Than Gold This Year

Monday, October 1st, 2012
By for Profit Confidential

Silver was the best-performing commodity for the third quarter ended September 30, 2012.

Will the silver prices go higher than they are now after a third round of quantitative easing (QE3)? If history repeats itself, then yes; and the returns could be phenomenal.

Silver rose about 53% after the first round of QE from 2008 to 2010—twice as much as gold bullion. In second round of QE, silver rose 24%—three times the performance of gold bullion.

Yes, QE3 has been announced and thus silver should continue to rise like it did before the QE1 and QE2 announcements, but this time it’s a different situation. The Federal Reserve is not the only one printing more fiat currency; the other central banks around the world are doing the same.

Paper currency can be created in unlimited quantities, while there is only a limited amount of silver and gold bullion in the ground—they can’t be printed.

To look at where silver prices are headed, I usually turn to the charts of silver-producing stocks. Silver miners are gaining momentum to the upside. I’m not advocating buying the stocks below, but I am using them to illustrate to you how strong the rally is in silver.

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Silvercorp Metals Inc. (NYSE/SVM) was trading in a downtrend for a major portion of the year and was mired in controversy last year. With the recent hike in silver prices, the company’s stock broke its downtrend, and it has been rising. The stock price has broken above its 200-day moving average—the first time in a year. In early August, the stock was trading just shy of $5.00 and now it’s beyond $6.50—up more than 30% in two months from its lows.

svm stock marlet chart

 Chart courtesy of www.StockCharts.com

Similarly, the stock of Pan American Silver Corp. (NASDAQ/PAAS) has not only changed its direction from the downtrend, but the company is also estimating higher profits. This silver mining company estimates its profits will increase to $264.6 million next year, compared to an earlier estimate of $212.2 million. Since the beginning of August, this stock has risen more than 53% to above $21.50!

pass stock market chart

Chart courtesy of www.StockCharts.com

But while the stocks of silver miners are rising quietly, the risk keeps on piling up on the equity markets in North America. More economic news and data are suggesting that the U.S. economy is sluggish and that the world economy is slowing down at a faster pace. S&P 500 companies are expecting their corporate earnings growth to decline, which could lead to cost-cutting, employee lay-offs, and capital spending reductions.

Silver and gold bullion miners are shining like never before, while other companies are cutting their revenue and earnings outlooks. And I still see opportunities available for investors in junior and senior silver and gold bullion miners.

Michael’s Personal Notes:

No matter what I hear about an “economic recovery” in the U.S. economy, I can’t, in all good conscience, trust it.

Consumers are not stupid. Why would consumers spend when they know the economic slowdown in the U.S. economy is worsening? Consumers only have to look at four things: the unemployment rate in the U.S. economy has been stuck above eight percent for more than three years; food stamp use is increasing (millions of people use them each month); a record amount of people are falling into poverty; and the S&P 500 companies are experiencing an accelerated slowdown in earnings.

Manufacturing in the U.S. economy is slowing down—hinting at a deeper economic slowdown. Durable goods orders in August dropped the most since January 2009 when the U.S. economy was facing recession. The U.S. durable goods order number for August came in 13.2% below July’s. (Source: U.S. Commerce Department, September 27, 2012.

It’s no secret that Bank of America Corporation (NYSE/BAC) has been hurting since the economic slowdown that began in 2008; now the bank is planning to cut 16,000 jobs by the end of the year. (Source: Wall Street Journal, September 20, 2012.)

Similarly, with a slightly smaller cut of 700 jobs, Campbell Soup Company (NYSE/CPB) is planning to shut down two of its U.S. plants in an effort to cut costs. The business is facing declining consumption of its canned soup. (Source: CNBC, September 27, 2012.)

Other companies plan to cut jobs as well in the final quarter of 2012.

As I have mentioned in these pages before, the earnings of the S&P 500 companies over the past couple of years rose due to a rigorous round of cost-cutting. Now companies facing the economic slowdown in the U.S. economy don’t have many other options to keep earnings growth going. They will need to cut their workforces to show better results for their shareholders.

Looking at the broader picture, job cuts by big U.S. companies will have a major impact on the already fragile U.S. economy. Will the unemployment rate rise even higher as the economic slowdown deepens? From the looks of it, it is certainly possible, but don’t forget that the government statistics are skewed.

Each passing month, in the U.S. economy, people who give up looking for work drop off of the official unemployment number. That’s why economists like me like to look at the underemployment rate, which includes people who have given up looking for work and people who have part-time jobs who can’t get full-time jobs. That number, the underemployment rate, stands close to 15%, while the government tells us the official unemployment rate is 8.1%!

Warning signs of an economic slowdown in the U.S. economy are coming from all directions.

Where the Market Stands; Where it’s Headed:

In a month where the Federal Reserve finally announced the long-awaited QE3, the Dow Jones Industrial Average rose only 2.6%—a disappointing rally. After all, didn’t the Fed unleash an unlimited amount of mortgage-backed securities with QE3?

I have a very uneasy feeling about stocks going into October. The euphoria over the Fed’s latest round of quantitative easing has faded. Now it’s back to the problems in the eurozone, China’s slowing economy, and the quickly decelerating earnings growth of the S&P 500 companies. Reality is about to hit home.

What He Said:

“Investors have been put into an unfair corner. Those that invested in stocks because they got caught in the tech boom (1999) have seen their investments gone. Now those that have leveraged heavily to play the real estate game, because it is the place to be (2005), could see the same fate as the stock market investors. Thanks again, Mr. Greenspan.” Michael Lombardi in Profit Confidential, May 27, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles