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XMFSinchiruna (27.83)

Profit from Silver's Sudden Weakness

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May 03, 2011 – Comments (37) | RELATED TICKERS: SLW , SLV , HL

Opinions about gold and silver are a fiat dime a dozen. If you are invested in this space, are you confident that you have acquired a perspective on these markets that will permit you to continue realizing long-term gains and eventually exit the sector with your gains intact? Have you conducted sufficient research and objective analysis in the process of developing your own long-term forecast for gold and silver prices or related trends to drive those prices? If you have not, you will discover same in the midst of a correction when your conviction is tested. That is the whole point of a correction ... to test the conviction of market participants and shake out the weak hands. The result is a far safer and less volatile space in which to invest. Will you be shaken? If so, when, and why? Or will you not be shaken, and join me in realizing epic gains from this sector going forward?

..................................

For investors who may have just recently dipped their toes into silver for the first time as the metal recorded a new all-time nominal high price near $50 per ounce, I imagine the present volatility might be rather terrifying.

Veteran silver investors who are sitting upon meaningful prior returns are bound to be less acutely concerned, but this brief update is designed to assess the context of these moves for the benefit of both camps.

Consolidation is fuel for the long-term fire

For starters, I am compelled to accentuate the crucial role that periods of intermittent consolidation play within a long-term secular bull market like the one ongoing for silver. Corrections shake excess speculation and leverage out of an advancing market, and ever since the COMEX futures exchange signalled a powerful short squeeze and a rare condition of backwardation, there has certainly been no shortage of frenzy behind the long side of this market. Silver had absolutely skyrocketed, from beneath $27 in late January to nearly $50 in just 3 months! Some measure of pause became not just more likely at the psychological $50 barrier, but downright critical to the interests of long-term silver investors.

Commodity guru Jim Rogers said it best:  "I own silver, but if it keeps going up, it could turn into a problem if it goes parabolic." He continued: "I certainly hope silver goes down for a while. I say it as somebody who owns it because if it goes down, I hope I would buy more and if it goes up too much too fast, then I have to sell." I agree wholeheartedly with that sentiment -- indeed I seldom find fault with his market perspectives -- and I welcome recent weakness (particularly in silver mining stocks) as an enticing opportunity to redeploy gains that I locked-in along the way.

Silver's hyper-charged arbitrage

You see, the mining stocks for both gold and silver failed to track the most recent price gains for the metals over the past several weeks. Silver Wheaton (NYSE: SLW) has swung from trading at a well deserved premium to the price of silver, to a substantial discount, and similar weakness throughout the relevant mining shares prompted this Foolish discussion last week. While the iShares Silver Trust (NYSE: SLV) tacked-on some 25% during the month of April alone, the Global X Silver Miners ETF (NYSE: SIL) essentially flatlined. Fools were not the only investors who took notice of that growing disparity in relative market performance between bullion and mining shares.

Hedge fund manager Eric Sprott caused some short-lived confusion Monday when it was revealed the consummate silver bull had liquidated some $34 million-worth of his own firm's Sprott Physical Silver Trust (NYSE: PSLV). To correct any misinterpretation of that action as signalling a change in his bullish outlook, Sprott avowed: "We haven’t lost our enthusiasm for silver". He added: "Every dollar of money that was raised by selling shares of [the Trust]... was reinvested in silver or silver equities." When one takes note of the significant premium over net asset value to which traders had bid the silver trust, the rapid return of greater than 100% realized by Sprott with the stake, and the irresistible underperformance by quality mining shares during the latter weeks of silver's journey, Sprott's decision can be properly viewed as an example of hyper-charged arbitrage.

The golden strategy for long-term silver gains

Fools eager to speculate on the near-term trajectory for silver are bound to be disappointed by agnostic take on the matter. This market is simply in far too volatile a condition to speculate with a reasonable expectation of success; requiring the corrolary that many short-term traders are likely to get burned.

A confluence of enormously impactful crossroads has emerged, and it is capable of driving intense near-term volatility for silver in either direction:

On the one hand, the U.S. dollar has been Bernanked all the way down to threaten an historic re-test of the dollar index's all-time low of 71.32 from 2008; while on the other, a suddenly heightened focus upon acute debt concerns in Europe could conceivably offer a timely, near-term reprieve for the greenback and forestall what I consider an inevitable break to new lows. A dropping euro has proven supportive of precious metals in the past, but I have observed brief periods of confused correlation as the world's focus has shifted back and forth between the dollar and the euro. The Japanese yen is another currency wild card that commands Foolish attention.

Trading action in the COMEX pits over recent months has been dominated, in my estimation, by a growing market distinction between actual physical silver bullion and the leveraged paper proxies that are traded in its stead in many multiples of the available global physical supply. The speed of silver's recent run could well be interpreted as a distress signal, wherein the effective bluff of leveraged paper supply was being challenged by increasingly emboldened longs. The persistent condition of backwardation in silver, still present today even after the latest decline, offers some corroboration of that view. Because futures contracts are highly leveraged on both sides of the battle, the CME Group's third margin increase within the past two weeks triggered a sudden flushing of speculative volume, and may have triggered silver's near-term reversal. One can not rule out further margin increases going forward, so forecasting the timing of a rise through $50 remains highly problematic.

Finally, we are just two months away from observing -- for the first time in financial history -- what happens when a $600 billion program by a central bank to purchase sovereign debt is suddenly fixed at that level even as daunting economic headwinds remain. With the Dow Jones Industrial Average above 12,750, I view the potential for bond market dislocation to disrupt equity markets as a significantly elevated risk; albeit within a tremendously complicated economic landscape where multiple scenarios must be duly considered.

With those and other highly unpredictable, and potentially volatility heightening factors in play, I maintain that speculating as to the near-term trajectory of silver does not warrant our Foolish attention. Rather, my attention is focused upon increasing my silver exposure in a disciplined manner over the course of this increasingly volatile period. I would point out that Coeur d'Alene Mines' (NYSE: CDE) San Bartolome silver mine, and Pan American Silver's (Nasdaq: PAAS) San Vicente mine, for example, have reportedly been cleared as a potential target of mine nationalization by the Morales administration in Bolivia. Low-cost powerhouse Hecla Mining (NYSE: HL), trading beneath $8.25 per share at the time of this writing, stands less than $1 per share above the stock's 2009 high … at a time when silver stood beneath $20 per ounce! You get the idea: I strongly encourage Fools to countenance this silver correction with conviction regarding the long-term trend, and to follow Eric Sprott's example in seeking hyper-charged arbitrage among the miners of silver.

37 Comments – Post Your Own

#1) On May 03, 2011 at 6:34 PM, catoismymotor (33.56) wrote:

+ 1 Rec.

 

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#2) On May 03, 2011 at 6:45 PM, Valyooo (99.53) wrote:

I purchased more GPL today at $3.14.  I purchased some SVM at $12.20 and some SLW at $38.18.  I also bought 1 share of AGQ at $256.  If EXK gets crushed after its earnings this week I will pick up some of that too.

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#3) On May 03, 2011 at 7:03 PM, HarryCarysGhost (99.72) wrote:

+ 1 rec as always, if Slw drops any further I would be looking to pick up more shares.

Valyooo why do you think Exk will get crushed after earnings?

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#4) On May 03, 2011 at 7:34 PM, golddlog (< 20) wrote:

Chris, thank you for reminding us of the bigger picture amid the short term gyrations in the metals market.  The mining companies are still making considerable profits at prices 20% below silvers highs.  It's the fundamentals that remain in tact for the miners and when earnings come out the numbers will tell the story.

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#5) On May 03, 2011 at 8:01 PM, Jbay76 (< 20) wrote:

Valyoo,

EXK has had 7 years back to back of beating estimates, I would just buy EXK period!  Even if they have a bad quarter, they'll blow the years estimate out of the water like they have done consistently.

Good score on GPL!

And thanks Sinch for the great artilce.  I was bummed for awhile, but then realized I will have some free $$ by Friday and plan to get ISVLF.  Now life is good!:).I'm buckled in and ready for the long haul!

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#6) On May 03, 2011 at 10:01 PM, Valyooo (99.53) wrote:

I'm pretty sure EXK ususally gets crushed after they report...may be the opposite this time though

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#7) On May 03, 2011 at 10:51 PM, mike2004 (< 20) wrote:

Does anybody know when AG is annoucing their earnings? Earnings Whispers gives a date 05/09/2011 after market close, but it is not confirmed, and the AG's website doesn't say anything yet.

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#8) On May 03, 2011 at 10:58 PM, 100ozRound (29.57) wrote:

According to thinkorswim they are announcing on the 9th.

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#9) On May 03, 2011 at 11:04 PM, skypilot2005 (< 20) wrote:

For the record, I have more than doubled the value of my 401Ks since 09’ primarily due to Sinch. pointing me in the right direction, performing my own additional D. D. and pulling the trigger.  I currently own over 70 companies.

Starting today, I am taking profits on my mining and oil stocks.  I expect to redeploy the funds sometime before, the end of the year.  I agree with Sinch’s musings but, my +30 years of investing has taught me that the market does not acted rationally and that we can not fight the “tape” ie. “Market Momentum”. 

I went into 2008 with 95% cash and profited handsomely.  Looking at the macroeconomic situation now, I feel I will have a chance to buy miners and oil companies much lower sometime between now and the end of the year. 

I have my stop loss orders placed and several of them “hit” today, locking in handsome profits.   I don’t disagree with Sinch.  He has my sincere gratitude for the fine quality research and writing he does week in and week out.  As an added bonus, I especially enjoy the titles of his articles. :)

I think it is too early to buy and it is the time to take profits. I feel there is going to be an all-encompassing drop of all companies, miners included, before now and the end of the year.  It may be gradual instead of all at once.  I feel we will be able to buy some great companies at prices lower than what they are now. 

I am not a market timer.  I feel that is impossible to do.  I feel Patience, a Watch List, limit orders, daily D. D.  and judicially reading Sinch’s musings will be key to making money this year. 

My 2 cents.

Sky Pilot

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#10) On May 03, 2011 at 11:11 PM, skypilot2005 (< 20) wrote:

Sinch,

http://www.yukon-nevadagold.com/s/News.asp

The resource estimates continue to increase and the stock continues to fall....  Go figure. 

 I am so mad I am thinking about another limit order at .40 this time.

 

:)

Sky Pilot

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#11) On May 04, 2011 at 12:19 AM, XMFSinchiruna (27.83) wrote:

skypilot2005

you may very well be right, of course. I only hope for the best possible outcome for our nation and for our people. 

Because I could also envision scenarios that call for only a deep but brief flushing of speculative froth, I prefer to maintain core exposure throughout the entirety of the secular bull market. I was a buyer today, and will continue to redeploy strategically on further weakness.

On #10 ... great minds think alike. ;P

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#12) On May 04, 2011 at 9:47 AM, 4everlost (29.48) wrote:

Chris,

Once again thanks for spreading the good word.  I agree that this is the time to reinvest funds from profits that have been locked in during the meteoric rise in PM prices. In fact, there is almost no choice! :-) 

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#13) On May 04, 2011 at 11:06 AM, outoffocus (22.91) wrote:

Hey Sinch, I just posted this comment in David's blog about gold.

#5) On May 04, 2011 at 11:02 AM, outoffocus (25.70) wrote:

Lets not all forget that precious metals are cyclical as well.  For the last 3 years we have experienced weakness in pms around this time of year only for the prices to charge higher during the fall of that year.   This is, was, and will be for a few years, the "buying season" for precious metals. When Bernanke and his cohorts stop being predictable, precious metal trading will stop being predictible.  In the meantime I hope you guys have some dry powder left...

 

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#14) On May 04, 2011 at 1:25 PM, magnetpal (< 20) wrote:

Yukon neveda is too much of a dilution to overcome with.

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#15) On May 04, 2011 at 2:31 PM, Gonzhouse (76.80) wrote:

I have seen my portfolio (real life) take a decent sized hit with the decline in silver over the last week - and I haven't lost a minute of sleep over it.  While doing some trading can be fun, the easiest and least stressful money is to be made in primarily a buy-and-hold strategy. 

I recommend you build up your PM portfolio to a point where you're comfortable with the total investment and let it ride.  Any additional money (not borrowed) can be used for trading.  I use options for the 'mad money' trading:  particularly deep in the money options with longer expirations where a short-term mis-timed trade can still play out profitably and then exit.

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#16) On May 04, 2011 at 2:38 PM, cbwang888 (25.97) wrote:

Many miners coming back as I expected a reversal. So I speculate the end of silver correction is about to end today ...

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#17) On May 04, 2011 at 3:17 PM, magnetpal (< 20) wrote:

Hopefully nobody bought yukon nevada today. Just lost 68%. sitting at 0.15 now.

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#18) On May 04, 2011 at 3:49 PM, silverminer (31.50) wrote:

magnetpal

It's decidedly ugly action, and I'm curious to know the news behind it, but I'm wondering where you are seeing a $0.15 strike. I show an intraday low of $0.27.

I may call the company tomorrow to see if I can get some answers.

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#19) On May 04, 2011 at 4:49 PM, magnetpal (< 20) wrote:

Sinch, I am seeing it from YNG.V, the canadian counter part. It seems YNGFF (pink) did not reflect that. Somebody sold 438k of shares from 0.47 to 0.15. Currently it sits at 0.36.

 

 

 

 

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#20) On May 04, 2011 at 5:15 PM, skypilot2005 (< 20) wrote:

Sinch,

I bought some Hondo Minerals Corp. this AM.  Formerly Tycore Ventures.  OTC:BB: HMNCD,  HMNC.OB in Yahoo or HMNC @ one of my brokers.

"Hondo Minerals Corporation (“Hondo”) is engaged in the acquisition and exploration of historically significant, mining claims and mining real estate in North America with mineral reserves primarily consisting of precious metals."

I don't want to "clutter up" your blog but, this one looks promising.

Let me know if, you want me to post more information.  I've done some preliminary D. D.

Sky Pilot

 

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#21) On May 04, 2011 at 5:54 PM, skypilot2005 (< 20) wrote:

On May 04, 2011 at 3:17 PM, magnetpal wrote:

Hopefully nobody bought yukon nevada today. Just lost 68%. sitting at 0.15 now.

**

Two of my brokers have identical information for, today.  Both are major brokers: close @ .3850.  Volume of 1,163,260. High: .5380 Low: .2700.

The listing YNG.TO: .36 - .50 today on the TSX.

I don’t see how .15 is in the realm of possibility. Perhaps, you may need to use a little Windex on your computer screen.  :)

I am using the symbol YNGFF to purchase shares at both brokers

Sky Pliot

 

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#22) On May 04, 2011 at 6:31 PM, magnetpal (< 20) wrote:

Sorry Sky pilot, I still see the drop to 0.15. You can check in google finance 1 day map.

http://www.google.com/finance?q=TSE%3AYNG

 I saw it in real time in my Interactive Brokers account when I posted. Not sure what happened though.

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#23) On May 04, 2011 at 8:35 PM, elboxeo (< 20) wrote:

jesus...

they talking about a 4th uptick in margin requirments for silver...wtf...  jpchase must be shook... and nervous.. they throwing the kitchen sink to keep sliver down...

 instead of going in incrimints of 2k they should just go all out and start doubling the marg req... thatll show em...

 at this point thinkin of taking off agq and going inverse silver short...

 also would it be too much to ask for them to raise the marg recs for oil so that it dont cost me over 50 bucks to fill up a honda accord in california... oh wait.. whos short oil... certainly not jpmorgan...lol

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#24) On May 04, 2011 at 10:22 PM, skypilot2005 (< 20) wrote:

Magnetpal,

You were looking at the 52 week range.  Possbly, an investment in a visit to an optometrist would be a wise investment for you.  :)

 Fool On,

Sky Pilot

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#25) On May 04, 2011 at 10:25 PM, skypilot2005 (< 20) wrote:

PINK:YNGFF  TSE:YNG

I did some poking around and here is what I’ve found:

http://classicvalueinvestors.com/i/2011/01/yukon-nevada-gold-corp-turnaround-story-yngff/

“May 3, 2011 at 7:12 pm | Permalink

The reason why the stock is down is because investors are simply stupid. However, they need a reason for their stupidity. Originally, Yukon told investors that they would need about $150 million for capex. Investors wanted the company to finance this from operations. As a result, they tried but because of the severe winter, they failed. Now they are moving to plan B which is raising money for this capex. Based on my conversation with the management, the financing will be in the form of debt, equity, and forward sales. This is the reason for the postponement. Now obviously raising equity is not a good thing because it dilutes shareholders. But once they have this $150 million, nothing will stop them anymore. All the issues are short term and they are fixable with money. So you spend $150 million to get about $2 billion of value. Not bad. This is how I see it but obviously sellers are panicking and selling like the company was going to go bankrupt tomorrow. In my personal opinion, they will be sorry very soon. But this doesn’t mean that the stock won’t go any lower. Nothing surprises me anymore.”

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#26) On May 04, 2011 at 10:26 PM, skypilot2005 (< 20) wrote:

“May 4, 2011 at 3:46 am |

Here is more info that can help you understand why the stock went down. Read the following release:

Luxembourg. Jean-Edgar de Trentinian, President of Orifer SA (“Orifer”) announces that Orifer intends to sell up to 140,400,000 Share Purchase Warrants of Yukon-Nevada Gold Corp. (“YNG”) from its control base. This sale will not result in a reduction of Orifer’s and Mr. de Trentinian’s direct and indirect shareholdings of 190,480,500 shares, representing 25.20% of the issued and outstanding share capital (755,816,679 shares) of YNG, but if completed will reduce the number of Orifer’s presently held warrants to zero. The securities will be distributed privately. The proposed commencement date of the sale is April 28, 2011.

Based on my conversation with Yukon, the exercise price is $0.32. The new buyer is required to exercise. This will bring about $45 million to the company which is good. But here is the bottom line. The new buyers are buying Yukon shares at $0.32 because they are required to do so and then they are probably turning around and selling it on the open market for a quick gain. Because their shares represent a huge part of all the shares outstanding, they are causing the stock to dive.”

I can't vouch for the website.  It was my first visit there.  But, it seems plausible.

Sky Pilot

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#27) On May 04, 2011 at 10:39 PM, skypilot2005 (< 20) wrote:

Sinch,

I am thinking this Analyst in 25 & 26, is monitoring your blog.  See # 10 & and your reply in 11, above. Not a surprise to me.  :)

 

Sky Pilot

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#28) On May 05, 2011 at 12:41 AM, magnetpal (< 20) wrote:

"...Possbly, an investment in a visit to an optometrist would be a wise investment for you.  :) ..."

Hello, thanks for your concern about my eyes. I appreciate that. But did you mind to click the link I sent and try to look at the 1-day GRAPH? I also the 52-week range, am NOT talking about that.

See this yahoo message board. Somebody also noted about 68% down what I am talking.

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_Y/threadview?m=te&bn=85614&tid=345&mid=345&tof=1&frt=2#345

 Thank you and no more messages from me in this regard.

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#29) On May 05, 2011 at 2:31 AM, Horiemon (< 20) wrote:

magnetpal

I saw it today as well, but I'm also using IB.  When I saw it, did quick research to try to find what happened and went back to buy but it had already gone quite a bit back up.

If the price drops below or near $0.32 however, and assuming that the expiry date is close to the proposed sale date, who would buy it and why would Orifer sell it at a near null premium?  

Either way YNG gets their financing of $45mil regardless of who holds the warrants, shares get diluted down to approx 84% of their pre-warrant value. If pre-warrant value per share was .57 (as per April 29th's opening price) , then current share price would be .462 = people are still way overreacting.  And that's even if you don't take the value of the newly discovered resources into account.

 I'll be honest - I don't really know how to value YNG but if historical share price is any guide, then it would spell a buying opportunity for me.

*All share prices are from YNG.TO, not YNGFF 

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#30) On May 05, 2011 at 7:03 AM, skypilot2005 (< 20) wrote:

May 05, 2011 at 12:41 AM, magnetpal (< 20) wrote:

"...Possbly, an investment in a visit to an optometrist would be a wise investment for you.  :) ..."

"Hello, thanks for your concern about my eyes."

Magnetpal,

You are right.  Yahoo's graph shows the same "dip".  I wonder why that dip isn't reflected in the reported daily trading range?

I've made an appointment with MY Optometrist!

Fool On.

 

Sky Pilot

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#31) On May 05, 2011 at 10:07 AM, GiftOfNewLife (< 20) wrote:

http://blogs.barrons.com/focusonfunds/2011/05/04/pressure-builds-cme-to-hike-silver-rates-4th-time-carlos-slim-selling/?mod=BOLBlog

It looks like CME wants speculators out of the silver market.

If Fed hikes the rates later this year or early next year, do you think the commodity prices will go down significantly? I am trying to figure out if investing in silver is good for the long term or is it just for the short term until Fed hints abour rate hikes. Thanks

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#32) On May 05, 2011 at 10:47 AM, silverminer (31.50) wrote:

Yukon Nevada has a press release out, which is encouraging:

http://www.yukon-nevadagold.com/s/NewsReleases.asp?ReportID=455293&_Type=&_Title=Yukon-Nevada-Gold-Corp.-Comments-on-Unusual-Trading-Activity

Vancouver, BC -- May 5, 2011 -- Yukon-Nevada Gold Corp. (TSX: YNG) (Frankfurt Xetra Exchange: NG6) reports that there have been no material changes to its operations or its business affairs, and the Company is not aware of any undisclosed developments that would account for the unusual trading activity of its shares on May 3, 2011.

The Company is actively pursuing various forms of financing to fund the capital budget requirements for Jerritt Canyon, its gold producing property in Nevada, and is in an advanced stage of negotiations with financial institutions. The Company anticipates being in a position to disclose the results of these negotiations in the near future.

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#33) On May 05, 2011 at 10:51 AM, silverminer (31.50) wrote:

I had been looking at $36 silver as a possible point of support to hold. Let's see how it performs. CME is obviously out for blood by piling on another margine hike in the midst of the carnage. Fascinating to watch this unfold.

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#34) On May 05, 2011 at 11:11 AM, reinman60 (< 20) wrote:

Amazing things are happening at the COMEX.  Total open interest actually rose by over 1300 contracts.  No long liquidation yet, in fact just the opposite.  Whoever the longs are, it seems that the have as deep pockets as do the shorts.  It's getting very interesting.

If 36 doesn't hold, we'll probably go to 34.  Could we get a possible selling climax today?  The wildest market I've seen in a long time.

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#35) On May 05, 2011 at 12:55 PM, magnetpal (< 20) wrote:

Sinch, I think the support will be BELOW 36$. I am thinking of 33$. It may reach 30$ too by seeing latest action.

Seems another CME hike is on the cards on  Monday. That will definitely make it below 36$.

 Add to that, the talks of QE ending in June. Expected bad quaterly results due to japan situation. I think there is a possibility for a major general stock market correction in Jun/july time frame. Dont know how it affects the PM market since it is already plummetting now.

In my view, initiating some PM positions when silver is at 31$ or so, will be a good  long term plan.

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#36) On May 05, 2011 at 1:23 PM, magnetpal (< 20) wrote:

Horiemon,

In my short term investment career,  I realized choosing good PM stocks, who has very tight share structure is beneficial in the long term. I realized how much good they come up with news, the share prices will keep on falling for bloated share structure.

With the tight share structure, its the other way. When the good news comes, the share price increases in vertical. Take for example INM.V (international northair mines). When they come up with great drilling results, it simply jumed 400% within two months span. Still nobody is selling. Pine tree capital sheldon just bought 1 million shares at 0.65 where 5 more drilling results to be released. After seeing the likes of INM.V and WS.V(wildcat silver) performance, I realized going with tight share structure helps a lot whether its upside or downside.

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#37) On May 05, 2011 at 11:23 PM, skypilot2005 (< 20) wrote:

On May 05, 2011 at 10:47 AM, silverminer (99.83) wrote:

"Yukon Nevada has a press release out, which is encouraging:"

Sinch,

Here’s even more encouraging news:  It closed at .51, today.  Up over 31%!  I doubled up, yesterday.

I take no credit.  You pointed me towards the stock some time ago.  Per your advice, I check my portfolio daily for developments.

My only quandary is how to keep the info. from 2 of my Exs.  :)

Thanks, again.

Sky Pilot

 

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