Thursday, 14 April 2011

Headwinds for silver miners

Precious metals posted steady gains throughout the day, with gold fractionally above its previous ATH closing at $1475.8 up 1.25% and silver at a new 31year high at $42.18, up a stunning 3.7%.
On our GoldMinersPulse list, gains outnumber losses by 7:3. The gold miners index is up 1.6% to 994, yet silver miners are down 0.75% to 1313!

Here is why:

Bolivia to Steal Pan American Silver's Property
Anyone who owns equities with operations in the regressive socialist backwater of South America may want to consider how tempting it is going to be for blowhard populist demagogues to seize mines when silver is at $40+.
First up, Pan American Silver's San Vicente project in Bolivia. (...) It's hard to plan for irrational actions of a power-hungry state, what can you do?

PAAS was not the only victim, as Coeur d'Alène also got beaten up. With two heavyweight index components getting hurt badly, we end down in spite of record silver!
A high price to pay for the illusion of leverage: the global-X silver miners ETF (SIL) marks a historic low relative to the price of silver:

SIL relative to silver (spot), daily observations (click to enlarge)
Many major Silver Miners underperforming the stellar rise of the price of silver is nothing new. In an ominous posting at the end of February, I first pointed at this peculiarity. Ever since, the ratio of SIL to silver has dropped down twice:
  • Mid March, after the Japan earthquake and the Lybian social revolt turning into an armed conflict, silver miners were dragged down with general stock market weakness, in spite of precious metals holding firm.
  • Right now, threats of nationalisation/property seizure emphasizes once more the political risk faced by miners. New 31 year highs for silver and potential miner profits only fuel the incentive for power hungry politicians.
Ever higher silver prices drive the SIL/Silver ratio to a new historic low !

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