Track record of the silver junior stocks

Silver Stock Report

by Jason Hommel, April 20, 2006

Today, we had a severe correction in silver, as silver was down nearly 20%.  But my portfolio of silver junior stocks was down only 3%.  So, in terms of silver, I actually gained about 18%, in terms of silver today, as the silver stocks outperformed silver, even on a down day.  Which is as it should be.

I was actually growing quite discouraged by the beginning of last week, as the silver stocks seemed to be lagging silver prices.  (Which, to me, is an indication that this short term move up is far from over, and that silver prices could reach about $20-25/oz.)  Then, by the end of the last week, I was encouraged, as the silver stocks started to outperform silver, especially today.  

A brief word about today’s silver price drop:  Apparently, the rumor is that the large bullion banks got together for an emergency session yesterday, and then, pulled all their bids today, and began selling in greater quantities, to break the price.  It worked.  But this is illegal activity to collude together on price action like this, and they primarily sell paper silver, not real silver, which they must buy.  But when they panic buy, they push prices up.  (And who is going to prosecute them, when they control the banks that control the nation?)  And I have not yet seen them panic buy silver, not yet!  I understand how they trade, because I do it myself. (But I cannot collude with myself, and so what I do is not illegal!)  If I’m buying a new stock, and pushing up the price, I may stop buying for a day, to let the price calm back down again.  But the price usually only goes down about 1/2 of where it was when I started buying.  So, if I buy at $10, and push the price to $11, and stop buying, the price drops back 50% to $10.50!  So, it appears to me that this dip may drop as low as about $11.50 at the lowest (about half way between $8 and $15).

One of the things I never realized, until now, is that the silver shorts, the short sellers, do not typically buy silver junior stocks!  I thought for sure, that they would!  But the silver shorts are the big banks who have assets in the multi billions, and they are simply too large, and too far removed from the mining industry, to buy tiny market cap silver stocks!  And they likely don’t even buy the large cap mining stocks!  So, if they have to short cover, they push up the price of silver, and they neglect to buy the silver juniors.  (Their neglect creates our opportunity!)  So, this week, I began to re-evaluate everything!  But in doing so, I was comforted.  I’m a value investor, and in the long run, value investing wins, as I will show.

But first, a word about the COMEX.  Charleston Voice wrote about increasing margin requirements for holders of silver contracts (longs).  I investigated, and noted that margin rates remain around 3-7%, and average about 5%.  It seems natural that the margin should increase as the value of a contract increases, and that your leverage remains about 20 to one at 5% margin.  What is unnatural is that this is an exchange, and that it should not matter if you are trading apples for oranges, oranges for apples, silver for dollars, or dollars for silver.  In other words, there should be no fundamental difference between a short and a long.  Each has a debt: that which they have pledged to deliver.  The short must deliver silver, and the long must deliver dollars.  Each may default.  Therefore, if silver longs must deposit 5% of the value of the contract in dollars, a silver short should deposit 5% of the silver that they pledge to deliver.  But it does not work this way.  They system is rigged against those who would try to acquire silver.  And, in fact, if these were two groups of honest gamblers, they would deposit 100% of what they pledge to deliver in their “bets”, and let the house hold the whole thing.  After all, that’s what you do if you are an honest gambler and betting on a Football game, you put your money in a hat, held by a third party.  See also my essay,

In the years 2000 to 2002, I was researching and discovering that silver had much better fundamentals than gold, because more silver was consumed by industry each year than is mined, and that there is no room for any investment demand for silver, whatsoever.  I also learned about the excessive short position at the COMEX (nearly 800 million ounces when just over 100 million oz. are at the exchange).  I also learned about the non-transparant, unknown, over the counter, short position, that consists of silver certificates and bank loans.  And so, my family began investing in silver stocks.  Unfortunately, we could not find very many silver stocks to buy.  There were about five big ones: Apex Silver (SIL), Hecla Mining (HL), Cour d’Alene (CDE), Pan American (PAAS) and Silver Standard, (SSRI).  By 2003, I felt those five companies were starting to get rather overvalued.  I was right.  In January 2003, I wrote my first article on a silver stock, and after that, I received many stock tips in email, which greatly helped me find many other, better, silver stocks to buy.  By the fall of 2003, I knew of 19 silver stocks, and I wrote my first Silver Stock Report Silver Stocks–Comparative Valuations – 1 – 22 September 2003, comparing those 19 companies.  

Since that first report in the fall of 2003, the silver stocks that were “sells” gained an average of 161%.
Since that first report in the fall of 2003, the silver stocks that were “buys” gained an average of 360%.