Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Update - Nadeem_Walayat
2.Will Deutsche Bank Crash The Global Stock Market? - Clif_Droke
3.Gold Price In Excess Of $8000 While US Dollar Collapses - Hubert_Moolman
4.BrExit UK Economic Collapse Evaporates, GDP Forecasts for 2016 and 2017 - Nadeem_Walayat
5.Gold Stocks Massive Price Correction - Zeal_LLC
6.Stock Market Predicts Donald Trump Victory - Austin_Galt
7.Next Financial Crisis Will be Far Worse than 2008/09 - Chris_Vermeulen
8.The Gold To Housing Ratio As A Valuation Indicator - Dan_Amerman
9.GDXJ Gold Stocks - A Diamond in the Rough - Rambus_Chartology
10.Gold Boom! End Game Nears As Central Banks Buying Up Gold Mining Companies! - Jeff_Berwick
Last 7 days
Why There is Trump - 27th Sept 16
Save Up to 70% in Shopping Expenses for Daily Items - 27th Sept 16
Gold’s Moving Averages and Long-Term Outlook - 26th Sept 16
September Stock Market - The Not So Silent Demise of Deutsche Bank - 26th Sept 16
SPX sell signal confirmed - 26th Sept 16
SPX is testing the next level of support - 26th Sept 16
Outrageously Entertaining US Presidential Campaign Final Stages - What Happens Next? - 26th Sept 16
BoJ, FOMC and Where To Now? - 26th Sept 16
Stock Market New All Time Highs Next - 26th Sept 16
Why Trump Will Win US General Election 2016 Prediction Forecast - 26th Sept 16
Martial Law Rolls Out Across the US As Jubilee Nears - 26th Sept 16
Stock Market More Correction Likely - 25th Sept 16
US Presidential Election Forecast 2016 - Trump Riding BrExit Wave into the White House - 25th Sept 16
US Economy GDP Growth Estimates in Free-Fall: FRBNY Nowcast 2.26% Q3, 1.22% Q4 - 24th Sept 16
Gold and Gold Stocks Corrective Action Continues Despite Dovish Federal Reserve - 24th Sept 16
Global Bonds: Why Our Analyst Says Things Just Got "Monumental" - 24th Sept 16
Where Did All the Money Go? - 23rd Sept 16
Pension Shortfalls Could Be 4X To 7X Greater Than Reported - 23rd Sept 16
Gold Unleashed by the Fed - 23rd Sept 16
Gold around U.S Presidential Elections - 23rd Sept 16
Here’s Why Eastern Europe Is Doomed - 23rd Sept 16
Nasdaq NDX 100 Big Cap Tech Breakout ? - 23rd Sept 16
The Implications of the Italian Banking Crisis Could Be Disastrous - 22nd Sept 16
TwinLakes Theme Park Summer Super 6 FREE Return Entry for Real? - 21st Sept 16
Has the Silver Bullet Run Out of Fire Power? - 21st Sept 16
Frack Sand: The Unsung Hero Of The OPEC Oil War - 21st Sept 16
What’s Happening With Gold? - 21st Sept 16
Gold vs. Stocks and Commodities, Pre-FOMC - 20th Sept 16
BrExit UK Inflation CPI, RPI Forecast 2016, 2017 - 20th Sept 16
European banks may be more important than the Fed this week - 20th Sept 16
Gold, Silver, Stocks and Bonds Grand Ascension or Great Collapse? - 20th Sept 16
Mass Psychology in Action; Instead of Selling Gilead it is Time to Take a Closer Look - 20th Sept 16
Hillary - Finally Well Deserved Recognition for Deplorables - 20th Sept 16
Fascist Business Model: Reich Economics - 19th Sept 16
Multiweek Correction in Gold and Silver Markets Continues - 19th Sept 16
Stock Market May Turn Ugly This Week - 19th Sept 16
China Is Digging Itself into a Deeper Hole - 19th Sept 16
Yellen’s Footnote 8 Would Put Interest Rates on Autopilot - 19th Sept 16
Central Bank Digital Currencies: A Revolution in Banking? - 19th Sept 16
UK Government Surrenders to China / France to Build Nuclear Fukushima Plant At Hinkley Point C - 19th Sept 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Power of the Wave Principle

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 .


© 2005-2016 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

Catching a Falling Financial Knife