More and more people are talking about silver as being the next big thing. The commodity is being talked up by financial types, because silver is used in manufacturing more so than gold. In early October, I wrote again in this column about Silver Wheaton Corp. (NYSE/SLW), which is a silver stock that’s been on fire lately. At that time, the stock had hit a new record high of $27.00 a share. Now the position is trading over $35.00 per share and looking strong.
As I’ve said, a mining company doesn’t need to improve its fundamental situation in a rising commodity price environment. It helps of course, but all that’s required is for the underlying commodity to be going up in value and you’ve got the makings of a booming share price.
The broader equity market is currently experiencing a consolidation, which is good. A full correction is what’s required as far as I’m concerned. Because precious metals prices are holding up strong, most mining shares haven’t pulled back to the same degree as the rest of the market, and valuations are high.
I think that it would be a very helpful development for spot prices in gold, silver and copper to experience a major correction. Prices in futures markets have a tendency to run with greater momentum than in other capital markets and traders are definitely trying to stick with the upward price trend.
A stock like SLW is a tough trade for any investor, because the momentum could evaporate at any time. All that’s required is a reversal in spot prices for silver and the story would change very quickly.
I think we’re only at the end of the beginning of a bull market in mining shares and that speculative investors need to have some exposure in this sector. The best entry point has already passed and, from my perspective, it’s kind of a waiting game to see if a new, attractive entry point presents itself. It’s always been the case that speculating in mining is a high-risk game, not for the inexperienced.
The argument for speculating in silver, over other precious metals, does have some weight. Part of the attractiveness for equities is that the selection of silver producers is relatively small. There are very few mid- and large-tier producers from which to choose and this makes price movements even more pronounced. Just pull up a one-year stock chart on SLW and you’ll see why.