| | | | | Saturday, August 22, 2015 | |
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Buy Silver... Once Again With Feeling!
During the last four years, the financial markets have presented compelling evidence that silver is only for selling. But a couple of contrarian voices believe the markets will present contradictory evidence over the upcoming months and years. In other words, they believe silver might now be for buying.
"While there are no guarantees in life," says Rich Checkan, president and COO of Asset Strategies International, "this may be one of the best signals of a bottom in silver we have seen in the past two decades."
The "this" to which Rich refers is the gold-silver ratio, or GSR, which tracks the price of gold relative to the price of silver. As the chart below shows, the GSR has ranged between highs around 80 and lows below 45 during the last 20 years. The high points on the chart are the ones that interest Rich. That's because the high points are the ones that have signalled great moments to buy silver.
"In the past two decades," Rich explains, "gold was over 80 times more expensive than silver only three times. In every case, within about a year, the gold-to-silver ratio corrected downward by 40% to 60%... because silver outpaced gold as they both moved higher from that point."
In absolute numbers, here's what the silver price did in each case: - After the ratio peaked at 85.4 in 1995, silver advanced 38% over the next two months.
- After the ratio peaked at 81.9 in 2003, silver jumped 85% over the next 10 months.
- After the ratio peaked at 84.4 in 2008, silver soared 100% within a year and 200% within two years... before eventually skyrocketing as much as 440%!
"Right now, we are showing a GSR of 76.6," Rich points out "which is very close to that 'magic number' of 80." Even though the ratio has not quite reached Rich's "magic number," he believes it is close enough for investors to begin pulling the trigger on silver.
Jim Grant, editor of Grant's Interest Rate Observer, seems to agree. In a recent issue of his fascinating investment letter, Jim sang the praises of Pan American Silver (Nasdaq: PAAS) - both as a bargain-priced "silver play" and as a "balance-sheet story."
To kick off his story, Grant reminded his readers that he had published bullish remarks about Pan American in earlier editions of his newsletter, when the company's share price was trading at much higher levels than it is today.
But after issuing his mea culpa, Grant kicked off his analysis of Pan American by declaring, "The company remains a well-financed and well-managed owner of operating and development-stage mines in Mexico and South America... [But] to remove any doubt, the shares are a speculation."
That said, Grant considers it a speculation worth taking, unlike his counterparts elsewhere on Wall Street. Of the 12 analysts who cover the stock, a total of zero rate it a "Buy." Nine of the 12 rate it a "Hold," while the remaining three rate it a "Sell."
But Grant, a legendary contrarian, is not often swayed by popular opinion. Despite calling Pan American "a speculation," he highlights several data points that render this speculation somewhat less speculative.
For starters, he points out that Pan American managed to boost its net operating cash flow by about 4% last year, despite the falling prices of silver and gold. Grant further notes that Pan American's Navidad project in Argentina could nearly double the company's silver production... or not.
"Optimists imagine a day," says Grant, "when this mine... could produce 19.8 million ounces of silver a year (75% of this year's expected production) in its first five years at a $6-per-ounce cash cost."
But alas, the mine might not be built anytime soon. That project awaits, as Grant puts it, "the conversion of [Argentinean President] Cristina Fernandez de Kirchner to the capitalist faith, or more likely, the expiration of Kirchner's term in office in October." (Because Kirchner has already served two consecutive terms, she is prevented by law from seeking a third consecutive term.)
Another factor that takes some of the "spec" out of the Pan American speculation is the company's balance sheet, which is one of the strongest in the industry. As of the end of June, the company held $274.9 million of cash and equivalents, against total net debt of just $37.9 million. In other words, the company held $237 million of net cash. That's equal to $1.56 a share, which is a meaningful number for a stock selling for $7.41.
This substantial cash hoard not only provides the company with staying power in the current low-silver-price environment, but it also provides a potential "war chest." Now that the shares of almost every precious metals miner on the planet are deeply depressed, Pan American could go on a shopping spree for prize assets. The solid cash position also enables Pan American to maintain its plump 2.7% dividend.
Lastly, Pan American's appeal is greatly enhanced by its deeply discounted share price. The shares of Pan American have never been cheaper in their history, based on price-to-book value.
Net-net, if silver is a "Buy," as Rich Checkan suspects, Pan American is probably not a "Sell."
Interestingly, Ross Beaty, chairman and founder of Pan American, has been adding to his already-substantial holdings of the stock. Late last year, he picked up half a million shares - bringing his total holdings up to 2.46 million shares. For the record, he paid $9.63 per share, which is quite a bit higher than today's quote of $7.41.
More recently, Van Eck Associates doubled its position in Pan American. Van Eck, a $30 billion investment manager specializing in the resource sector, now owns 11.9% of the company.
Apparently, silver isn't always for selling.
Cheers,
Eric Fry
For The Non-Dollar Report
Breaking Information on Stock Exchange Bylaw "Section 703"
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