PI Financial’s Chris Thompson and Philip Ker say investors should watch for a potent reversal and widening of the gold-to-silver ratio to historic highs (roughly 86:1) which will favour accumulating select silver-focused stocks over gold stocks.
Investor sentiment for precious metals mining stocks improved in 2018’s fourth quarter, led higher by gold and silver prices. This represented an improvement from the metal price weakness experienced throughout the summer, historically a time of sluggish price performance, particularly for precious metals.
An improvement in the price of gold to 2018 second-quarter levels of about US$1,280 per ounce drove a sharp reversal in larger- and small-cap precious metal equity performance to within about 10 per cent of mid-year highs.
Summing it up, precious metals equities clearly lagged precious metal prices for much of the second half of last year but bounced back in December driven by an uptick in investor sentiment for precious metals.
Look for a turnaround in 2019
We anticipate a better 2019 (compared to 2018) for precious metals and precious metals stocks alike. Based on late-December and 2019 year-to-date performance, we are off to a good start.
Generally speaking, lukewarm investor sentiment for precious metals continues to be demonstrated by a high gold-to-silver ratio (about 82:1, slightly lower than the roughly 25-year record high of 86:1 seen in November 2018), reflective of silver price weakness relative to gold and general investor apathy for the precious metals sector. Silver’s weaker performance (versus gold) last year was driven by silver being perceived more as a base, rather than a precious, metal and lacklustre supply and demand fundamentals.
Silver may outperform gold in 2019
The escalating US-China trade war and a weaker Chinese economic outlook weighed heavily on base metals (and hence silver) prices last year. We see silver potentially outperforming gold in 2019, driven by renewed precious metals sentiment but tempered somewhat by an ongoing supply surplus. We note silver’s recent outperformance versus gold (since November 2018).
Investors should watch for a potent reversal and widening of the gold-to-silver ratio to historic highs (roughly 86:1) which will favour accumulating select silver-focused equities over gold equities. While copper and zinc prices rebounded from an approximately two-year low in the third quarter of 2018, both metals finished the year at depressed levels (especially copper). Where nickel and platinum prices finished the year at or close to annual lows, palladium wrapped 2018 up at a record high spot price.
Stocks with free cash flow and exploration upside
Attractively-valued companies that demonstrated an ability to generate attractive free cash flow from operations and demonstrate exploration upside from operations in mining-friendly (low geopolitical risk) jurisdictions were rewarded in positive share price performance during 2018.
These include: Wesdome Gold Mines Ltd. (TSX—WDO), up 110 per cent (thanks to low geopolitical risk and outstanding exploration results from Eagle River); Kirkland Lake Gold Ltd. (TSX—KL; NYSE—KL), up 78 per cent; K92 Mining Inc. (TSXV—KNT), up 62 per cent (strong exploration results from Kainantu); OceanaGold Corp. (TSX—OGC), up 51 per cent (low geopolitical risk, despite Philippine exposure); SSR Mining Inc. (TSX—SSRM; NASDAQ—SSRM), up 47 per cent; and Atlantic Gold Corp. (TSXV—AGB), which grew 11 per cent.
Developers and explorers that outperformed peers include SilverCrest Metals Inc. (TSXV—SIL), up 117 per cent (outstanding exploration results from Las Chispas).
Chris Thompson is PI Financial’s head of mining research. Philip Ker is a precious metals analyst for PI Financial.
This is an edited version of an article that was originally published for subscribers in the January 25, 2019, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
Investor’s Digest of Canada, MPL Communications Inc.
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