Best of the Week
Most Popular
1.China Crash, Greece Collapse, Harbingers of Stock Market Apocalypse Forecast 2015? - Nadeem_Walayat
2.Gold Price Awaiting Outcome of Greece Crisis - Clive_Maund
3.Gold Price Peculiar 6 Month Cycles - Rambus_Chartology
4.Gold Price Just a Little Bit More - Bob_Loukas
5.8 Unprecedented Extremes Indicate a Stock Market Bubble in Trouble - EWI
6.Gold And Silver – Without Either, You Will Be Greeced - Michael_Noonan
7.Lies, Damned Lies and Statistics - James_Quinn
8.China Crash, Greece Crisis Harbingers of Stocks Bear Market? Video - Nadeem_Walayat
9.Gold and Silver Record Shorting - Zeal_LLC
10.Markets Big Deflationary Downwave Quick Reference Guide... - Clive_Maund
Last 5 days
Why This Stocks Bubble Is Actually WORSE Than the Internet Tech Bubble - 4th Aug 15
Gold Investing: Use the Cockroach Strategy - 4th Aug 15
I’m Ready for a Stocks Bear Market. Are You? - 4th Aug 15
Top 6 Myths Driving Oil Prices Down - 4th Aug 15
Is This Stocks Bull Market Summit? - 4th Aug 15
EURUSD: An Ending Diagonal Triangle in Action - 4th Aug 15
Crude Oil Price at Levels Not Seen Since March - 4th Aug 15
The Troika Loan Shark Stock Market Rally  - 4th Aug 15
Plan for Surviving Gold's Summer of Discontent - 4th Aug 15
Stock Market SPX Triggers Sell Signal - 3rd Aug 15
The Gold Investment Demand Juggernaut - 3rd Aug 15
Stock Market Pullback at Hand, Gold About to Rally? - 3rd Aug 15
Gold – The More Hate, The More Bullish We Become - 3rd Aug 15
Stock Market Critical Week Ahead - 3rd Aug 15
Gold Price Near Intermediate Bottom - 3rd Aug 15
Stock Market Reluctant Primary Wave IV? - 2nd Aug 15
Power and Compassion - 2nd Aug 15
Preparing for The Stock Market Crash - Inverse ETFs and Puts Timing... - 2nd Aug 15
Commodity Prices Slump Signals Slow Economic Growth Outlook - 2nd Aug 15
BSE Sensex Stocks Bear Market Underway - 2nd Aug 15
What Microsoft’s Dismal Earnings Report Really Tells You - 2nd Aug 15
Gold And Silver Charts Are The Compelling Story. Fundamentals Do Not Apply - 2nd Aug 15
The Fed Can't Stop the Commodity Bear Market - 1st Aug 15
Meet the Leader Who Turned Google Into a “Buy” - 1st Aug 15
The Greek Coup: Liquidity as a Weapon of Coercion - 1st Aug 15
Gold’s Amazing Resiliency - 31st July 15
Silver – A Century of Prices - 31st July 15
Demand for Gold Bullion Surges – Perth Mint, and U.S. Mint Cannot Meet Demand - 31st July 15
Reasons Why the Greek Crisis Will Only Get Worse - 30th July 15
The War On Cash: Why Now? - 30th July 15
Greece - The IMF Experts Flunk, Again - 30th July 15
Threat Of Cyber Warfare the “Other Reason To Own Physical Gold” Warns Rickards - 30th July 15
The 5 Biggest Myths and Lies about the Middle East - 30th July 15
Greece, Diversion, and the New World Order - 30th July 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stock Market Bubble in Trouble

Leveraging Silver Investments with Silver Stocks

Commodities / Analysis & Strategy Jan 20, 2007 - 09:41 PM GMT

By: Robert_Watson

Commodities I talked a couple of weeks back about how silver could be used to leverage the price of gold but what about silver mining stocks leveraging the price of silver? In that previous article a four-year rolling leverage of silver over gold was calculated to show how silver either out-performed or under-performed gold as bull markets waxed and waned. Applying the same principles, we have the following 4-year leverages for the mining companies that make up The Silver Analyst Stock Composite Index. The stocks are listed according to performance. The record maximum leverage is given to the right as well as the date on which it occurred.


The average of all the leverages is given at the bottom to show how this group as a whole is leveraging the price of silver. The average value of 1.76 tells us that over the last four years this basket of stocks returned 76% over and above any gains made by silver, it does not appear to be too dissimilar to how the HUI has leveraged the price of gold over the same period.

STOCK CURRENT MAXIMUM
EDR 5.05 72.58 (31 Dec 05)
EXN 2.80 5.28 (03 Sep 02)
SSRI 2.36 8.65 (18 Feb 04)
GPR 2.27 2.94 (23 Nov 06)
PAAS 1.41 4.29 (13 Dec 04)
CDE 1.19 3.50 (28 Nov 05)
OK 1.07 1.39 (07 Sep 05)
HL 0.71 8.05 (11 Nov 04)
SIL 0.41 2.29 (03 Sep 02)
SQI 0.28 3.67 (20 Jan 04)
AVERAGE 1.76

Clearly there is a wide range in performance amongst our representative shares. Anything around the 1 level is not worth owning as silver itself is as good as or outperforming that stock. That includes Orko, Hecla, Apex and Silver Quest here. Now these stocks may go onto greater things but until they make a decent breach above the "no leverage" level of one, caution is required in any investment decision.

However, looking at the leverage chart for Orko Silver below, we see some promise. After dropping to a miserable negative leverage of 0.6 last August, Orko has pushed onto 1.07 and is now slightly outperforming silver by 7% over a four-year measure. It also stands above its 200 day moving average value of 0.84 that needs to be maintained for a few weeks before one can consider this stock as solidly leveraging silver once more.

Leveraging Silver Investments with Silver Stocks

Meanwhile, Endeavour Silver sits at the top with an end of year leverage of 505% over silver. This is great but an apparent problem lies in the "Maximum" column, which states that this company returned a gargantuan leverage of 7258% over silver by the 31st December 2005. Since then it has dropped like a rock. Is this something to worry about? Not at all!

Leveraging Silver Investments with Silver Stocks

When one sees such huge gearings on the price of silver they are inevitably down to one thing. The company in question has seen significant reserve growth via discovery or acquisition. They have finally hit pay dirt with a big find or their current deposits have been substantially upgraded. Not surprisingly, in that 72.58 leverage timeframe, this company went from 2 cents a share to 2 dollars a share.

This is because a company leverages two quantities. It leverages the price of silver but it also leverages the amount of silver it has under its control. Once investors have assimilated this new reserves information and adjusted the share price accordingly, the leverage goes back to purely leveraging the market price of silver.

So we do not expect to see such leverage numbers again from Endeavour. Now the leverage is well below a historically skewed 200-day moving average of 15. But once the moving average works off those one off leverages, we expect the leverage to meet it and stay above it.

Quite simply, a leverage of 505% is enough to stay on board but if this number continues to drop in the face of a rising silver price, a re-evaluation will be required. For now the silver price is volatile and not in a well-established rising pattern, so this stock is a hold by default.

Finally, I may note that this four year rolling leverage chart is not the same as a chart produced by dividing the price of the equity by the price of silver. One must know that a stock's performance is calculated by comparing two prices over a certain time period. Dividing two distinct asset prices from the same day does not measure leverage although it can show in a qualitative manner that a stock is out-performing or under-performing silver in this case.

By using a leverage chart such as those examined in The Silver Analyst, the performance question can be quantified by the simple fact that if the leverage drops below 1 it is under-performing silver and if it goes above 1 it is out-performing silver. A simple stock to silver price ratio cannot convey this information.

By Robert Watson

This article is adapted from issue one of The Silver Analyst newsletter.Further analysis and comment on the silver market can be read in the subscriber-only Silver Analyst newsletter described at http://silveranalyst.blogspot.com where readers can obtain the first issue free. Comments and questions are also invited via email to silveranalysis@yahoo.co.uk .


© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History