Silver had a very volatile year in 2011. The big moves up and down might have been so jarring to knock out your silver fillings, but I hope not, as there appears to be a silver lining. After such a move, many investors in silver and mining stocks are asking the question: “What will happen now?” Although no one can predict the future, the most likely scenario is that we are setting the stage for resumption in the move up for the price of silver, with mining stocks to follow.
The price of silver, as well as mining stocks in general, cannot move up in a straight line. The move we saw in silver prices from 2010 to 2011 was too far too fast and was due for a pullback. This does not mean that the bull market is over in silver and mining stocks; far from it.
When you consider silver was trading $16.00-$18.00 an ounce in early 2010 and then exploded to just under $50.00 an ounce in spring of 2011, this move was due for a healthy correction. This pullback in silver has opened the door for opportunistic, long-term investors in silver mining stocks to accumulate more shares at cheap valuations. As the price of silver is about to resume its upward trajectory, a lot of added gains can be had by looking into mining stocks, as they’ve lagged the market offering value to long-term investors.
Chart courtesy of StockCharts.com
One interesting note on the price of silver: if we take a look at the high last August 2011 and the lows in December and we calculate the 50% retracement, we would reach approximately $35.00. This almost exactly the level we reached on this recent move up and is the first major test for silver on the way back up. This is a normal test for a commodity and I would expect silver to be range-bound for a little while before it tries to break above this area. If silver were to break above this range and resume its upward trajectory, we should see mining stocks follow.
One company in this area that is very interesting is Pan American Silver Corp. (NASDAQ/PAAS). Of the mining stocks, Pan American Silver is very well run, with a profit margin of 42.4%, a trailing price-to-earnings ratio of 7.36, and cash of $485 million, or $4.59 per share. With very little debt of $42.6 million, Pan American Silver looks set to benefit from higher silver prices.
When researching silver mining stocks, you want to find companies that have strong management that can grow revenue and production and do so with little to no debt, manage their cash positively, and that are in an industry with profit potential, like silver. While smaller mining stocks in silver might give you a chance at a bigger move up, you have to be careful and research their assets and production thoroughly. Any problem could really hurt the price of mining stocks, whether they’re involved in silver or other precious metals.