The week around Thanksgiving typically has light trading volume, but positive price action in the stock market. Of course, in this kind of environment, anything can happen. Europe’s sovereign debt crisis continues to hold the U.S. equity market hostage, and institutional investors remain unwilling to make any bold moves in the stock market.
As an investment theme, I believe that the commodity price cycle will be a key trend this decade. The fundamentals are there to support higher prices for precious metals, agricultural commodities, and oil. Even in a world of declining expectations, demand for commodities is rising while supply is stagnant.
In my view, there’s no other industry that’s better set for increasing profitability than precious metals. The stock market is certainly not dominated by gold or silver stocks, but, sector-wise, this area continues to offer equity speculators the best bang for their buck. And now there’s a new trade that’s developing and it’s in silver stocks.
We just had a good new entry point for gold and most gold shares experienced an upward bounce in October (if you want to see the spot price action of gold reflected in a stock, just follow Yamana Gold Inc., NYSE/AUY.) But, right now, one of the more attractive trades I see coming in the stock market is with silver stocks. The universe of silver stocks is very small and the commodity itself is underperforming gold.
Like all precious metal stocks, share prices follow the spot price of the commodity, even if a company is generating exceptional financial growth. Silver stocks have been trending lower since May, commensurate with the spot price, and valuations are now becoming very reasonable. It’s a trade that’s not quite actionable, but it’s getting close. Once the spot price of silver turns, silver stocks should outperform gold because of the disparity that exists between the two commodities.
October’s gold trade worked out and was especially good considering the trading action in the rest of the stock market (see PC-09-30-11 Third Quarter Ends The Correction Phase—Spot Price Of Gold Looks To Be Bottoming). The spot price of silver just broke through (to the upside) its 30-day moving average and is slowly getting closer to its 200-day moving average. And, if you follow commodities daily, you’ll know that the percentage change in silver’s trading action is increasingly greater than that of gold. To me, these very are positive signals. With most silver stocks now sporting very attractive valuations, I think they’re going to be the stock market’s next best trade.