5 Imminent Catalysts for Gold Stocks, Part II
February 11, 2011
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As promised, here is Part II of my discussion of 5 looming catalysts for gold mining stocks.
http://www.fool.com/investing/general/2011/02/11/3-imminent-catalysts-for-gold-stocks.aspxThanks as always for reading, reccing (at the article here, if you'd be so kind), and for sharing your Foolish thoughts on the topics discussed.
Excerpts:
3. Silver's slingshot effect slings both ways
Gold and silver, as the world's foremost monetary metals, are inextricably linked to each other in their own complex web of interconnection. As I have done for some time now, I like to visualize the two as being tethered together by the flexible cord of a slingshot. Near-term market conditions can permit either metal to stretch out ahead of the other, but ultimately the energy stored by that stretching tends to snap the two back into relative equilibrium.
Typically, gold has tended to play the role of the trailblazer, while silver has tended to lag gold's major movements before ultimately snapping into larger percentage moves. More recently, however, silver has grasped the precious reins and charged boldly from behind gold's shadow. In his recent analysis, "Silver Breaks its Golden Shackles," Adrian Douglas visually illustrates the dramatic way in which silver appears to have embarked upon a brand new price relationship to gold relative to that which held sway for the preceding seven years. We would have to sit down over a very large coffee to cover all the causes I ascribe to these developments, but suffice to say I believe that persistently acute tightness in physical silver supply gives silver the potential to further hasten the upward trajectory of both metals and their relevant stocks.
When hedge fund manager Eric Sprott launched the Sprott Physical Silver Trust ETF (NYSE: PSLV) in late 2010, the significant difficulty his company experienced in securing timely delivery of silver bullion offered a visceral illustration of the degree of undersupply. Incredibly, the trust's initial silver purchase of a modest 22.3 million ounces -- or slightly less than the estimated 2010 haul for Silver Wheaton (NYSE: SLW) -- required more than two long months before full delivery was made. Sprott grew "concerned about the illiquidity in the physical silver market", and added: "We believe the delays involved in the delivery of physical silver to the Trust highlight the disconnect that exists between the paper and physical markets for silver."
China ranked third among global silver producers in 2009, with a reported 89.1 million ounces of output. Miners such as Silvercorp Metals (NYSE: SVM) have pursued ambitious production growth, yet demand has far outpaced production gains and caused China to transition from a net exporter to a net importer of silver. China's net silver imports reportedly quadrupled in 2010 to reach 112 million ounces.
Acute physical tightness and reported illiquidity in the silver market -- further corroborated by the rare condition of backwardation observed within the COMEX silver futures market -- point strongly to the potential for silver to continue its dramatic upward charge. Sprott's chief investment strategist, John Embry, recently observed: "There is infinitely more demand for physical silver than there is supply. I mean, all of this stuff coming out of the ground is long since spoken for by traditional industrial and medical uses." My own assessment of the silver market affirms this view, and in a noteworthy departure from the preceding dynamic, I see gold and gold mining stocks riding a wave of silver's momentum in addition to its own unique catalysts.
After attempting herein to convey as many timely observations of this gold market as I could condense into a single 2-part series, I have this odd sensation like there's little left to say. I guess that's my cue to shut down this computer and go enjoy life for a few days. Have a great weekend, Fools.
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