The Best Small Cap Silver Miner in the Universe
It's happening...
Most of the major media outlets are now publishing articles about silver - and more specifically that silver is inexpensive right now.
It's taken some time, and usually when we see a story become widespread it's time to exit the trade and move on to something else. But not in this case: there are several reasons why silver is still an attractive investments right now.
In fact, I just added a silver mining small cap company to the Small Cap Investor PRO portfolio so subscribers can capitalize on the opportunity in silver right now. Since I added it shares have risen 9 percent. I have a 'buy up to' price on shares that is rapidly approaching - so if you're interested in a great small cap silver miner you should check this company out soon. Click here to find out more about this great little company.
The Gold:Silver Ratio: Should you Care?
A ratio that is frequently referred to by precious metal investors is the gold:silver ratio. The gold:silver ratio is calculated by dividing the spot price of gold by the spot price of silver. Doing so gives a picture of the relative value of both metals, and when viewed over time yields an average, or mean ratio. Depending on your time horizon, this 'mean' ratio tends to track around 55. That means that the price of gold, on average, tends to be around 55-times the price of silver.
This is much easier to explain with the aid of a chart, so I've included a 20-year chart of the gold:silver ratio below. As you can see, the ratio of 55 looks a bit low when viewed over this period, but over a longer horizon it is relatively accurate.
What you'll also notice if you analyze the time periods in the above chart, is that the gold:silver ratio tends to rise in periods when market risk elevates, such as in the years around the dot.com bubble and the most recent financial crisis.
In periods of sustained and relatively stable economic growth, the ratio tends to be lower. Remember that this ratio is giving us the relative value of silver and gold, so when the ratio is higher that means gold is more expensive relative to silver. And conversely, when the ratio is lower silver is more expensive relative to gold.
Right now, the ratio is around 65.5, implying that gold is expensive relative to silver. To calculate this ratio divide the price of gold ($1256) by the price of silver ($19.17) and you get 65.5.
***Part of my investment thesis for the silver mining company I just recommended to Small Cap Investor PRO subscribers is based on my belief that we will see the gold:silver ratio begin to revert back toward its mean of 55. For this to happen, silver must rise in price (thus lowering the ratio because the denominator increases), or gold must fall in price (the numerator falls). I don't believe gold is going to fall - but I do believe silver will rise.
To see what would need to happen for the gold:silver ratio to revert back to 55 divide the current price of gold ($1256) by 55, and you get a silver price of $22.8. This implies that the price of silver has 20 percent upside.
However, if gold were to rise to $1500 an ounce, a very possible occurrence, silver would need to rise by 42 percent to $27.27 for the gold:silver ratio to fall back in line with the historical average.
If you believe in mean reversion, as I do, then either of these scenarios points toward higher silver prices (assuming gold doesn't fall).
***Of course, this ratio only tells half of the story since it just illustrates relative value. Nominal value is still important. And from this angle, silver looks even more attractive.
Take a look at the following chart, which plots the price of both silver (left side scale) and gold (right side scale) over the last 10 years.
Both of these precious metals are rising in price, and I believe this trend will continue. So regardless of what the gold:silver ratio tells us, there is still momentum for the nominal value of silver to rise.
Both the gold:silver ratio and the positive momentum behind the price of silver support my investment theses for the company I just recommended. The third piece of the pie is that this company has a solid track record of performance and is on the cusp of its first profitable year in history. Results for the first quarter of 2010 showed a small per share profit, and a full year of profitability could send shares soaring.
The final thing that I need to impress upon you is that this company's stock price tracks very closely to that of silver. This shouldn't come as a surprise given that it is a silver mining company, but it bears reminding. As you can see from the one year chart below, the company's stock and the price of silver frequently cross - but right now this company is trading 'below' the price of silver. The fact that this is likely to change in the near term helped to support my buy decision of the stock.
I know there is a lot to digest here. However, both the gold:silver ratio, as well as nominal values for the two precious metals should be on the watch list of all investors.
I hope you find the above useful, and I'll come back to the subject in future letters. I'm bullish on both silver and gold and now own the two best small cap mining companies in the universe in the Small Cap Investor PRO portfolio.
As always, I encourage you to do your own homework before entering any stock orders. But if you'd like some help screening for the best companies, I encourage you to sign up for Small Cap Investor PRO. It's only $199 a year and I offer a 30-day money back guarantee. Click here to get started with the service.
Where do you see silver and gold prices going in the future? Let me know by sending an email to: editorial@smallcapinvestor.com.
