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« Endeavour Silver Corporation’s Stock Price fails to reflect achievements | Main | The Year of the Roth »

Are Silver Stocks worth the effort?

Silver Chart Comparison 05 August 2010.JPG

Question: What is it that we are trying to achieve?
Answer: Exposure to the silver bull market.

Which vehicle will give the best returns and enable us to maximize our profits?

1.Physical metal
3.Silver producers
4.Options and/or futures trades.

The physical metal in your very own hands negates any third party risk and from time to time does perform better than the stocks.

The funds, some of which may or may not have the physical metal, track silver prices and are liquid for trading purposes.

The silver producers suffer from the numerous inherent risks of mining but do offer leverage to silver prices, but not on any consistent basis.

The options and/or futures trades can provide wonderful returns but they are risky and can also wipe you out completely.

So we will kick off with a look at the chart above which plots silver and a selection of stocks over a six year period. The first observation that sticks out like dogs danglers is that Silver Wheaton (SLW) has outperformed both silver and the silver producers by a long way. The other point to note is that the leverage of the producers to silver, which was evident when the bull market began in 2001 has now diminished considerably. This lack of leverage calls into question the use of silver stocks as an investment vehicle.

If we now fast forward and take a look at the chart below covering the past year where we can see that SLW has still outperformed silver itself and a selection of the silver producers once again. Also note that the producers have been unable to keep up with silver prices suggesting that investors don't want to expose themselves to the risks that come with mining.

Silver Chart Comparison one year 05 August 2010.JPG

So far, the obvious move would appear to be that we avoid the stocks and redeploy our cash into the the metal itself and SLW as it has performed incredibly well.

Many of our peers are calling for the precious metals stocks to rally and perform like gladiators and we agree that they should head to higher ground. However, we want the best bang for our buck not merely an improvement on our account statement. The ignition for these stocks is a dramatic move in silver prices. So we can profit from holding the metal itself and hopefully from holding the stocks. In choosing stocks we are now leaning to being overweight on SLW and reducing our exposure to the producers. Going forward SLW has the price of silver pegged at around $3.90/oz with the overall cost running at around $8.00/oz, as it is a silver streaming company and not a silver miner. So any improvement in silver prices will have an immediate impact on their bottom line.

On the other hand the miners do not have such a luxury and are subject to rising costs such as the price of oil, labour, taxes (note the recent proposed 40% tax by the Australia) political change, transport costs, management issues, etc. The list goes on and on with any one of these reasons having the potential to hit their bottom line.

In conclusion we are now doubting the wisdom of investing in silver producers and are seriously considering avoiding them completely.

Disagree! Good please tell us why.

Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09.

On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days.

Accumulated Profits from Investing $1000 in each OPTIONTRADE signal 14 May 2010.jpg

Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more. have been rather fortunate to close both the $15.00 and the $16.00 options trade on Silver Wheaton Corporation, with both returning a little over 100% profit.

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

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Reader Comments (2)

Great article. reference this article in two years and see how much silver has appreciated. It will be profound.

August 5, 2010 | Unregistered CommenterJerrold Minyard

Silver Wheaton has been in and out of my portfolio for years now and I've had very good luck with this stock. It really has outperformed all my other stocks by a wide margin and because of it's business model, it always will be.

August 5, 2010 | Unregistered Commenterdaveydog

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