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Press release
08 Oct 2019 | By Chris Mahoney

Silver shining and a focus on mining

Chris Mahoney, assistant manager of the Merian Gold & Silver Fund, Merian Global Investors

 

The last three months have been very favourable for gold investors with the US dollar price of the yellow metal rising strongly.

However, of particular interest to monetary metals investors is the performance of silver. Silver has outperformed gold over the last three months, achieving a price appreciation of 12.2% (as at 30 September), compared to 6.4% for gold. Silver’s eclipsing of gold is very typical when both metals are rallying, as they both move inversely to real interest rates, but the magnitude of silver’s price moves in percentage terms are often greater. However, given its absence from most benchmarks, it can take a little longer for capital to flow to the asset class.

Silver has now sprung into action and we are of the view that a multi-year bull market for both metals has only just begun. In particular, we believe that this rally will be characterised by outperformance of silver investments. This belief is largely informed by the gold/silver ratio, which measures the relative prices of gold and silver. The ratio is currently 86 (as at 30 September 2019) and at the higher end of its historical range (it has averaged 64 over the last 20 years). From a technical perspective the ratio has now breached a key support level, meaning the path is clear for a dramatic collapse.

Silver mining stocks

Just like gold, silver is actually a currency. Therefore to make a directional investment, one may wish to consider silver miners. The share prices of silver mining companies can outperform a rising silver price, given their operational gearing, and a number of the silver mining companies in our portfolio have recorded gains of more than 50% over the last three months.

 

COMPANY

% GAIN IN USD TERMS

DISCOVERY METALS CORP

91.55

NEW PACIFIC METALS CORP

88.81

INVESTIGATOR RESOURCES

67.51

SILVERCORP METALS INC

59.52

ALEXCO RESOURCE CORP

49.48

PAN AMERICAN SILVER CORP

25.14

COEUR MINING INC

19.06

FIRST MAJESTIC SILVER CORP

14.82

ENDEAVOUR SILVER CORP

9.35

AMERICAS SILVER CORP

6.05

Top 10 performing silver miners in the Merian Gold & Silver Fund. Source: Bloomberg 01/07/2019 – 30/09/2019

An example of a company we believe the market is undervaluing is Hochschild Mining plc, which owns mines across South America. The company is highly cost focused and has consistently grown production and added value through innovation. The management has a strong track record of acting in the best interests of shareholders and its long-term approach was demonstrated in the commitment to its flagship Inmaculada mine. Hochschild’s success is due in large part to the relationships that it has fostered with local communities. The company is cognisant of the unique social dynamics present in these communities and makes ongoing efforts to retain their endorsement. Hochschild’s commitment to the development of local communities can be seen in the provision of education programmes. We are optimistic about its sustainability agenda, drilling programme and the scope for operational efficiencies from ore sorting and mine digitisation. 

With central banks pursuing ever more accommodative monetary policy, the prospects for gold and silver are both good, but with silver still 181% away from its all-time-high, it seems there is plenty more fuel in the tank.

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