When it comes to silver, there’s a lot of speculation about whether or not the metal is headed for a breakout. Some investors are convinced that we’re on the brink of an upside breakout, while others believe that silver will continue to trade sideways. However, one thing is for sure: most investors will miss out on the biggest gains if they don’t buy in soon. Analysts have been discussing why silver is headed for a breakout and most investors will miss out on the opportunity if they are not in position ahead of time.
When silver prices rise, what are some of the knock-on effects? The first is that silver mining stocks will outperform the metal itself. This is because when silver prices go up, it takes more silver to produce each ounce of the metal. So, while the price of silver may double, the price of some silver miners may triple or quadruple. This is reflected in the stock prices for junior mining companies above all down the line as they often present the most upside potential in such an environment. Stocks may sell off in the short term, but often see large bullish momentum along with the rising silver prices. This could be the case for junior silver mining company Honey Badger Silver (TSX:TUF), which has had a string of acquisitions this year and continues to build its portfolio of high-value silver assets.
The latest was the company’s non-binding term sheet to acquire a 100% interest in the Cachinal De La Sierra silver-gold project in Chile from Aftermath Silver. The project has an existing resource that the company hopes to develop efficiently thanks to efficiencies due to the proximity of the Austral Gold’s Guanaco mine and mill complex.
Another effect of higher silver prices is that it will cause some investors to re-think their portfolio allocation. For example, an investor who is heavily invested in gold may start to sell some of their gold positions and buy silver instead. This is because silver is often seen as a more volatile metal than gold, and therefore has the potential for greater gains.
Finally, higher silver prices will also benefit industries that use silver in their products. For example, the electronics industry uses silver in circuit boards and other components. As silver prices go up, the cost of production for these companies will increase. However, they will be able to pass on some of these costs to consumers in the form of higher prices.
As silver prices work their way higher toward $50 in the coming quarters, the number of investors who are positioned to take advantage of the gains will shrink due to the risk-off sentiment in the markets. The result will be that a small number of investors will reap the rewards of outsized gains in the long term.
While commodity and equity prices have been more volatile lately, there are a few ways that investors reduce their risk. The first is buying shares in tranches, which is a technique where an investor buys a certain number of shares over several different periods. This allows the investor to average out their purchase price and reduces the risk of buying shares at the top of the market. For small-cap mining stocks, another way to reduce risk is by investing in a basket of stocks, which diversifies the portfolio and reduces the impact of any one stock.
Investors may also look for silver companies that are diversified in their investment approach. Honey Badger Silver’s three-pronged strategy of acquiring assets with ounces in the ground, royalty or streaming opportunities, or properties with exploration potential is just one example of this.
Investors who are looking for exposure to silver might consider buying into the metal and associated stocks now before it breaks out. Those who wait could miss out on some of the biggest gains.
HedgeThink.com is the fund industry’s leading news, research and analysis source for individual and institutional accredited investors and professionals