Gold and silver are our main focus, no doubt about it. But they are only a part of the precious metals market. Actually, there is another side of the market that could be overlooked by investors starting to look into the precious metals market. So, we would like to take some time to explain how this part is important and why you may be interested in it at all.

Spoiler alert, we are talking about mining stocks. These are the stocks of companies whose main activity is digging gold and silver up from the ground and selling it. It does not take a whole lot of imagination to realize that the profits of these companies are highly dependent on the price of precious metals. After all, if gold and silver become more expensive, then the profits of the mining companies are likely to go up. And so is the share price of such companies. Consequently, if gold and silver go up in value, then mining stocks are likely to go up as well. It’s as simple as that. And the opposite is also true: if precious metals depreciate, then mining stocks are likely to go lower. Mining stocks (or miners, as they are called) are directly related to the price of gold and silver, and this is why they are an important avenue of the market.

OK, so we got that covered. But why exactly would you like to know about that at all? Probably, because you would not want your potential profits to be limited by the magnitude of the move in gold or silver. Your read that right. It is possible to gain more on a move in gold or silver than the move itself. This seems like enough to be interested in this sector, so we will leave out some of the less important reasons.

Now a short explanation of why this is the case. For accounting reasons, when gold or silver move, the move can be magnified by the move in the share price of a given mining company (this could be called “leverage”). Whether it is actually magnified or not is highly dependent on what specific mining stock you are talking about. Some stocks do not even magnify the move but rather limit it. So, it is very important to focus on the ones that boost profits rather than the ones that limit them.

And how would you go about checking which stocks give you leverage relative to precious metals? You could try to calculate some metrics, but which ones really? Fortunately, we have already done this for you and we are keeping these metrics up to date, usually on a daily basis. The tools which give you the necessary information focus on pretty self-explanatory parts of the precious metals market: gold stocks and silver stocks.

Getting the Hang of Silver Stocks

We will go through the motions of using our stock tools using the example of one of the most exciting markets now in the precious metals space – the silver market. So, we focus on the silver stocks tool.

There are at least four direct hints you get from the tool. The first one is that it puts a number on how well a given silver miner tracks the price of silver. This number is called “Exposure”, it varies from 0% to 100%, and it shows how well the moves in silver miners are aligned with the moves in silver. If a given miner moves in line with the white metal most of the time, Exposure will be high. A very high Exposure would suggest that a miner goes up and down almost exactly when silver goes up and down. Naturally, being in the silver market, you would usually want to focus on stocks with high Exposure.

But Exposure is not the whole story. We are interested in how much leverage a miner shows. Here’s where the “Leverage” measure comes in – the second piece of information you get from the tool. It shows you how much bang for a buck a given miner offers. For example, if a silver miner has Leverage at 2, this means that if we see a move up in silver of 1%, the miner could potentially move up 2%. If silver moves up 10%, the stock could move up 20% and so on. We use “potentially” and “could” here, because this is based on historical relationships and there are no sure bets in any market. Of course, there is a flip side. If a stock has high Leverage and silver goes down, the stocks could magnify the move down. This sword cuts both ways.

Third, you could use Leverage to rank the stocks and this is precisely what we do. The ranking of silver stocks is the third piece of information our investment tool presents.

Finally, “Valuation” gives you and idea whether a stock is under- or overvalued relative to historical values. Negative numbers indicate undervalued states while positive readings suggest overvalued states.

Silver Stocks

Enough on theoretical explanations, let’s dig into what the ranking shows now and how that ties into what’s going on in the silver market. The first thing we get is the list of stocks. In this analysis, we limit it to the top 3. We use the long-term time horizon and medium level of risk tolerance (parameters for the tool). The calculations are based on data available on October 15, 2019. You can go and check out the rest on the companies on the silver stocks page.

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The stocks highlighted are: (1) Endeavour Silver Corporation, (2) First Majestic Silver Corporation and (3) Pan American Silver Corporation.

Right off the bat, the Endeavour Silver Corporation the highest Leverage at 2.70. This means that this stocks is the one that offers the biggest bang for the buck, at least historically, with the potential of going up 2.70% if silver goes up 1%. Conversely, it could go down -2.70% if silver goes down 1%. It is also the most undervalued stock with Valuation at -12.77%. Exposure stands at 64.96%, lower than the other two companies, which means that the stock tracks silver quite well, but not as good as the other two analyzed stocks.

The First Majestic Silver Corporation is “better” in terms of Exposure (80.16%) but offers less leverage. The Pan American Silver Corporation is similar to First Majestic in terms of Leverage but does a slightly worse job of tracking silver. What these indications boil down to is: “If you’re more concerned about getting the most of the move, you could go with Endeavour. If you’re more interested in tracking silver closely, First Majestic might be the better option.” Let’s assume that it is the magnitude of the move that you would like to maximize. We focus on Endeavour.

The Cream of the Crop

If you take a minute to ponder the characteristics of the Endeavour Silver Corporation, a specific picture emerges. Namely, it looks like a good stock to own, potentially, if silver were to go up some more. It tracks silver relatively well, it has the most leverage and it offers the most potential for a move up.

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The above chart shows the price of silver (horizontal axis) along with the price of the Endeavour Silver Corporation (vertical axis) for a given day. The red line shows that there in fact is a historical trend between the price of the yellow metal and the stock. In other words, Endeavour and silver did move together in the past. As the points are relatively close to the line, this confirms the relatively high Exposure. The high slope of the line confirms the high Leverage – moves in silver resulted in stronger moves in Endeavour in the past. The red dot allows you to compare the current relationship between silver and Endeavour to its historical trend. In other words, it shows the current price of silver (horizontal axis) against the current price of Endeavour (vertical axis), and the long-term relationship between the two (red trend line). The dot falls firmly below the trend line which suggests and undervalued state.

Grounded in Reality

It’s great to have such a depth of information on top silver stocks, but what we need to do is relate this to the current market environment. Let’s take a look at the real price of silver (daily chart courtesy of http://stockcharts.com):

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The picture we see is one of silver after at least two important moves down and after two lower highs. This paints a rather bearish picture. We highlight all the reasons for the bearish picture in the precious metals market in our Gold Trading alerts. What can we do with the indications of silver stocks given the fact that silver could potentially go lower instead of higher?

One idea could be to go short the Endeavour Silver Corporation instead of a classic long position. Exposure and Leverage would still be relevant. Simply put, such a position would magnify the profits in case silver goes lower. Going short can be tricky though and, perhaps, you are more interested in the long-term implications. Then, you could wait for a potential rebound in silver or even for an important bottom. This would be precisely the time when all the favorable characteristics of the Endeavour Silver Corporation could pay off.

Mind that the implications of the analysis of silver stocks can change over time and it is necessary to keep up to date with the tool. It’s easy, though – with a few clicks you can get the full picture at any time.

As you see, there is more than one way to use our silver stocks analysis. We have more ideas in store, but this is a discussion for another time.