What happened
Shares of the precious metal miner Endeavor Silver (NYSE: EXK) it rose to 17% on July 21. Although the action was one of the biggest winners, it was hardly alone: America gold and silver (NYSEMKT: USAS) it was up almost 16%; Silvercorp Metals (NYSEMKT: SVMLF) almost 13%; Fortuna Silver Mines (NYSE: FSM)12%; Coeur mining (NYSE: CDE) approximately 11.5%; Great mining panther (NYSEMKT: GPL)eleven%; Gold resource corporation (NYSEMKT: GORO) just under 11%; and Majestic First Silver (NYSE: AG), up to almost 10.5%.
All of these gold and silver miners gave up some of their earnings as the day wore on, but at 2 p.m. EDT, they were all hanging on to single-digit advances to teenagers on leave.
And that
Gold and silver prices were higher today. Gold rose approximately 1.5% at 2 pm EST, with silver 6.5% more impressive. That continues an impressive silver race that started in mid-March: the metal has increased by more than 75%, using iShares Silver Trust as a proxy. Gold, by comparison, has risen more, but not nearly to the same degree, advancing approximately 23% from its March lows, using SPDR Gold Shares as a proxy.
Image source: Getty Images.
The most interesting thing about the silver rally is that it follows a period when gold materially outperformed silver. This is best captured in the gold / silver ratio, which shows how many ounces of silver it takes to buy one ounce of gold. The average ratio in the past 20 years is around 65, but earlier this year, that number peaked at more than 120.
Investors in precious metals often see this as an indicator of time to switch between the two metals, buy silver when it is cheap relative to gold, and vice versa. A gold to silver ratio of 120 suggested that silver was extremely cheap, so the great silver recovery may not be as surprising as it sounds. That said, both silver and gold are reaching remarkable levels, with gold at price points not seen since late 2011 and silver trading at around four-year highs.
What’s interesting about most of the names here is that they are relatively small miners. For example, Endeavor Silver, Americas Gold and Silver, Great Panther Mining, and Gold Resource Corporation have market limits between approximately $ 300 million and $ 500 million. That makes them junior miners, who often benefit more than bigger, more established names when precious metal prices rise. In many cases, this is because they have high operating expenses. When metal prices move above the mining costs of these companies, they can quickly change from red to black ink. And remarkably, once these companies are in the black, profits can quickly accrue.
First Majestic Silver, Coeur Mining, Silvercorp Metals, and Fortuna Silver Mines are slightly larger entities, with market limits ranging from $ 1.2 billion to $ 2.75 billion. These are mid-level miners, but they generally have cost structures that are not as good as the industry giants, which benefit much more from economies of scale.
SLV data by YCharts.
To provide some context, industry giant Barrick Gold it only rose approximately 0.5% at 2 pm EDT. But digging a little deeper helps explain the difference. To keep the math easy, we’ll use a hypothesis that is close to the change of the day, with our example of gold prices rising around $ 25 an ounce.
For our purposes, that brings the metal from a good round from $ 1,820 an ounce to $ 1,845 (a gain of about 1.5%). Barrick’s total maintenance costs, which is what it costs the company to mine an ounce of gold and maintain its mines, is about $ 950 an ounce. So, at the beginning of this hypothetical day, the company was making around $ 870 per ounce of gold. After the price increase in the metal, that profit increased to $ 895 per ounce. Not bad.
Great Panther’s total maintenance costs on its main gold-producing asset were approximately $ 1,740 per ounce in the first quarter. That’s really high, and the company hopes to reduce that number to between $ 1,150 and $ 1,250 year-round (total maintenance costs can be significantly affected by capital investment efforts). But using that first quarter cost will help show how big the difference really is.
Great Panther’s profit per ounce of gold at the start of this hypothetical day was $ 80. But based on the rise in the price of gold, it increased to $ 105 per ounce. In absolute terms, that doesn’t sound like much and it’s certainly not as impressive as what Barrick is doing in absolute terms.
However, that’s the point, and this is where things get interesting. Barrick’s earnings per ounce rose about 9%, hardly anything to complain about. But because Great Panther’s costs were so much higher, its profit per ounce increased just a touch over 30%! That is a huge increase.
For smaller miners with higher cost structures, a relatively small movement in the price of gold and silver can have a big impact on profitability. This helps explain why these names increased so much today.
Now what
Investor sentiment plays a huge role in the price of silver and gold. Right now, investors are very interested in both metals, likely due to concerns about COVID-19 and the impact it is having on economies around the world. That could go on for some time, or as fast as this breakthrough has taken shape, it could go away and precious metals could start to fall.
A few major price increases are not a particularly good reason to start investing in the highly volatile space of gold and silver. A better approach is to view the metals and miners that unearth them as diversifying assets, including just a few percentage points of precious metal exposure in your portfolio at all times.
That said, most investors would be better off targeting larger, more established miners or transmission companies when considering precious metal stocks, precisely because their stocks are generally not as volatile as the smaller names here. These companies are best suited for investors willing to invest the time and effort to become industry experts.
