silver Archives - MiningFeeds

First, they powered higher. But last week they ran into technical resistance levels that date back well beyond only a few years.

Starting with Gold, we can see that it has struggled to get through $1550/oz. That’s not a surprise as we pointed out this level as resistance since Gold surpassed $1370/oz.

The combination of multi-year resistance at $1550/oz and the current high net speculative position could force Gold down to a retest of $1400/oz.

Meanwhile, Silver has been the strongest component of the sector in the short-term.

It closed the month of August right at major resistance in the mid $18s, which as you can see, has been a key level for the last 11 years. A monthly close above $18.50 would be significant but it may not happen until October or November.

Turning to the stocks, we see that GDX has reached its 2016 high and 6-year resistance. A correction or consolidation for weeks or even a few months would be perfectly normal.

GDXJ has lagged much like Silver as it has yet to reach its 2016 high near $50. However, it is dealing with important resistance at $42 which dates back to 2014.

The retail crowd is looking to jump back in for the first time in years and the same can be said for many institutions.

In the big picture, this is the time to jump back in. You do want to get in before the sector makes its next break higher and before GDX and GDXJ surpass multi-year resistance.

Gold, Silver and gold stock ETFs all are at multi-year resistance levels. A correction and consolidation is perfectly normal and should be expected here.

The battered silver miners’ stocks surged in recent months, staging a strong rebound rally. That overdue turnaround was fueled by silver mean reverting higher on improving sentiment after gold’s decisive bull-market breakout. But silver miners still had a challenging Q2, as most of silver’s gains came after last quarter ended. They continued diversifying into gold to help weather silver’s endlessly-languishing low prices.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Required by the U.S. Securities and Exchange Commission, these 10-Qs and 10-Ks contain the best fundamental data available to traders. They dispel all the sentiment distortions inevitably surrounding prevailing stock-price levels, revealing corporations’ underlying hard fundamental realities.

The definitive list of major silver-mining stocks to analyze comes from the world’s most-popular silver-stock investment vehicle, the SIL Global X Silver Miners ETF. Launched way back in April 2010, it has maintained a big first-mover advantage. SIL’s net assets ran $476m in mid-August near the end of Q2’s earnings season, 5.3x greater than its next-biggest competitor’s. SIL is the leading silver-stock benchmark.

In mid-August SIL included 23 component stocks, which are weighted somewhat proportionally to their market capitalizations. This list contains the world’s largest silver miners, including the biggest primary ones. Every quarter I dive into the latest operating and financial results from SIL’s top 17 companies. That’s simply an arbitrary number that fits neatly into the table below, but still a commanding sample.

As of mid-August these major silver miners accounted for fully 94.1% of SIL’s total weighting. In Q2’19 they collectively mined 73.7m ounces of silver. The latest comprehensive data available for global silver supply and demand came from the Silver Institute in April 2019. That covered 2018, when world silver mine production totaled 855.7m ounces. That equates to a run rate around 213.9m ounces per quarter.

Assuming that mining pace persisted in Q2’19, SIL’s top 17 silver miners were responsible for over 34% of world production. That’s fairly high considering just 26% of 2018’s global silver output was produced at primary silver mines! 38% came from lead/zinc mines, 23% from copper, and 12% from gold. Nearly 3/4ths of all silver produced worldwide is just a byproduct. Primary silver mines and miners are quite rare.

Scarce silver-heavy deposits are required to support primary silver mines, where over half their revenue comes from silver. They are increasingly difficult to discover and ever-more expensive to develop. And silver’s challenging economics of recent years argue against miners even pursuing it. So even traditional major silver miners have shifted their investment focus into actively diversifying into far-more-profitable gold.

Silver price levels are best measured relative to prevailing gold prices, which overwhelmingly drive silver price action. In early July the Silver/Gold Ratio continued collapsing to its worst levels witnessed in 26.8 years, since October 1992! Those secular extremes of the worst silver price levels in over a quarter century sure added to the misery racking this once-proud sector. That compounded miners’ challenges in Q2.

The largest silver miners dominating SIL’s ranks are scattered around the world. 11 of the top 17 mainly trade in U.S. stock markets, 3 in the United Kingdom, and 1 each in South Korea, Mexico, and Canada. SIL’s geopolitical diversity is good for investors, but makes it difficult to analyze and compare the biggest silver miners’ results. Financial-reporting requirements vary considerably from country to country.

In the U.K., companies report in half-year increments instead of quarterly. Some silver miners still publish quarterly updates, but their data is limited. In cases where half-year data is all that was made available, I split it in half for a Q2 approximation. Canada has quarterly reporting, but the deadlines are looser than in the States. Some Canadian miners really drag their feet, publishing their quarterlies close to legal limits.

The big silver companies in South Korea and Mexico present other problems. Their reporting is naturally done in their own languages, which I can’t decipher. Some release limited information in English, but even those translations can be difficult to interpret due to differing accounting standards and focuses. It is definitely challenging bringing all the quarterly data together for these diverse SIL-top-17 silver miners.

But analyzing them in the aggregate is essential to understand how they are faring. So each quarter I wade through all available operational and financial reports and dump the data into a big spreadsheet for analysis. Some highlights make it into this table. Blank fields mean a company hadn’t reported that data by mid-August, as Q2’s earnings season wound down. Some of SIL’s components report in gold-centric terms.

The first couple columns of this table show each SIL component’s symbol and weighting within this ETF as of mid-August. While most of these stocks trade on US exchanges, some symbols are listings from companies’ primary foreign stock exchanges. That’s followed by each miner’s Q2’19 silver production in ounces, along with its absolute year-over-year change. Next comes this same quarter’s gold production.

Nearly all the major silver miners in SIL also produce significant-to-large amounts of gold! That’s truly a double-edged sword. While gold really stabilizes and boosts silver miners’ cash flows, it also retards their stocks’ sensitivity to silver itself. So the next column reveals how pure these elite silver miners are, approximating their percentages of Q2’19 revenues actually derived from silver. This is calculated one of two ways.

The large majority of these SIL silver miners reported total Q2 revenues. Quarterly silver production multiplied by silver’s average price in Q2 can be divided by these sales to yield an accurate relative-purity gauge. When Q2 sales weren’t reported, I estimated them by adding silver sales to gold sales based on their production and average quarterly prices. But that’s less optimal, as it ignores any base-metals byproducts.

Next comes the major silver miners’ most-important fundamental data for investors, cash costs and all-in sustaining costs per ounce mined. The latter directly drives profitability which ultimately determines stock prices. These key costs are also followed by YoY changes. Last but not least the annual changes are shown in operating cash flows generated and hard GAAP earnings, with a couple exceptions necessary.

Percentage changes aren’t relevant or meaningful if data shifted from positive to negative or vice versa, or if derived from two negative numbers. So in those cases I included raw underlying data rather than weird or misleading percentage changes. Companies with symbols highlighted in light-blue have newly climbed into the elite ranks of SIL’s top 17 over this past year. This entire dataset together is quite valuable.

It offers a fantastic high-level read on how the major silver miners are faring fundamentally as an industry and individually. The super-low silver prices for most of Q2 really weighed on operating cash flows and earnings last quarter. But the major silver miners’ years-old and still-ongoing diversification into gold helped them weather the brutal low-silver-price storm. They still need silver to power far higher to thrive again.

The silver miners had the cards stacked against them last quarter, so their Q2 results weren’t going to look good. In addition to slumping towards early July’s incredible 26.8-year secular low relative to gold, silver languished for most of Q2. By late May it had fallen 5.0% quarter-to-date, far worse than gold’s own 1.0% QTD loss. While it did rally 6.6% into quarter-end from that nadir, that lagged gold’s 10.2% rebound.

Overall in Q2’19, silver merely eked out a pathetic 1.3% gain despite gold’s blistering 9.1% rally. And silver prices averaged a miserable $14.88 last quarter, plunging 9.9% year-over-year from Q2’18’s levels! Silver was about as deeply out of favor as it can get, which naturally killed any interest at all in the silver-mining stocks. At worst in late May, SIL had dropped 12.2% year-to-date on silver’s own 7.2% YTD loss.

So there weren’t going to be any silver-stock fireworks coming out of such a dismal quarter. Considering that nigh-apocalyptic silver backdrop, the major silver miners fared reasonably well in Q2. They kept on plugging away despite the choking pall of despair. The chronically-weak silver prices continued to justify the years-old shift into gold by traditional silver miners, which was again evident in the top SIL miners’ outputs.

That 73.7m ounces of silver these SIL-top-17 miners produced last quarter fell 1.8% YoY from Q2’18’s levels. Over the 13 quarters since Q2’16 when I started this deep-quarterly-results research thread, the SIL-top-17 peak was 78.6m ounces in Q4’17. Silver production is waning even among traditional major silver miners, its economics have been too constrained. They are increasingly shifting into gold instead.

The collective gold production from these elite silver majors ran 1.5m ounces in Q2’19, shooting up 13.4% YoY! They’ve been increasingly diversifying into gold in recent years as silver languished, since the yellow metal has had way-superior economics. The bombed-out silver prices have heavily impaired silver mines’ generation of operating cash flows and profits. So the silver miners have been forced to adapt.

Silver mining is as capital-intensive as gold mining, requiring similar large expenses to plan, permit, and construct new mines, mills, and expansions. It needs similar fleets of heavy excavators and haul trucks to dig and move the silver-bearing ore. Similar levels of employees are necessary to run silver mines. But at recent years’ average precious-metals prices, silver mines generate far lower returns than gold mines.

So even longtime traditional silver miners have reallocated much of their capital investments into growing gold outputs at silver’s expense. According to the Silver Institute’s latest World Silver Survey, 2018 was the third year in a row of waning global silver mine production. The mined-silver-supply shrinkage is even accelerating, running 0.0% in 2016, 1.8% in 2017, and 2.4% in 2018! Peak silver could really be upon us.

SIL’s top 3 component stocks commanding fully 38.9% of its total weighting sure exemplify the yellowing of the major silver miners. Pan American Silver currently crowns this leading silver-stock ETF, and has a proud heritage of mining its namesake metal. Last quarter its silver output only grew 2.9% YoY, yet its gold production skyrocketed 190.1% higher to 155k ounces! Thus its silver purity collapsed to merely 34.1%.

PAAS acquired troubled silver miner Tahoe Resources back in mid-November. Tahoe had owned what was once the world’s largest primary silver mine, Escobal in Guatemala. It had produced 5.7m ounces in Q1’17 before that country’s government unjustly shut it down after a frivolous lawsuit on a trivial bureaucratic misstep by the regulator. PAAS hopes to work through the red tape to win approval to restart Escobal.

But the real prize in that fire-sale buyout was Tahoe’s gold production from other mines. That deal closed in late February, so that new gold wasn’t fully reflected until PAAS’s latest Q2 results. Now this former silver giant is forecasting midpoint production of 575.0k ounces of gold and 25.8m ounces of silver in 2019. That is actually deep into mid-tier-gold territory and a far cry from 2018’s output of 178.9k and 24.8m!

SIL’s second-largest component in mid-August as this latest earnings season ended was the Russian-founded but UK-listed Polymetal. Its silver production fell 11.8% YoY in Q2, yet its gold output soared 30.2% to 302k ounces. That actually makes this company a major gold miner, exceeding 1m ounces annually! So not surprisingly only 18.1% of its Q2 revenues were derived from silver, among the lowest of SIL.

SIL’s third-largest component is Wheaton Precious Metals. It used to be a pure silver-streaming play known as Silver Wheaton. Silver streamers make big upfront payments to miners to pre-purchase some of their future silver production at far-below-market unit prices. This is beneficial to miners because they use the large initial capital infusions to help finance mine builds, which banks often charge usurious rates for.

Back in May 2017 Wheaton changed its name and symbol to reflect its increasing diversification into gold streaming. In Q2’19 WPM’s silver output collapsed 20.6% YoY, but its gold surged 17.9% higher! That pushed its silver-purity percentage in sales terms to just 38.0%, way below the 50%+ threshold defining primary silver miners. This gold-heavy ratio is forecast to persist, with WPM allocating more capital to gold.

Pan American will probably soon follow in Wheaton’s footsteps and change its name and symbol to reflect its new gold-dominated future. As miserable as silver has fared in recent years, I’m starting to wonder if the word “silver” in a miner’s name has become a liability with investors. The major primary silver miners are a dying breed, as it’s exceedingly difficult to generate sufficient cash flows and profits mining silver alone.

Major silver miners are becoming so scarce that SIL’s fourth-largest component is Korea Zinc. Actually a base-metals smelter, this company has nothing to do with silver mining. It ought to be kicked out of SIL posthaste, as its presence and big 1/11th weighting really retards this ETF’s performance. Korea Zinc smelted about 64.0m ounces of silver in 2018, which approximates roughly 17% of its full-year revenue.

Global X was really scraping the bottom of the barrel to include a company like Korea Zinc in SIL. I’m sure there’s not a single SIL investor who wants base-metals-smelting exposure in what is advertised as a “Silver Miners ETF”. The weighting and capital allocated to Korea Zinc should be reallocated and spread proportionally across the other SIL stocks. The ranks of major silver miners are becoming more rarefied.

In Q2’19 the SIL-top-17 silver miners averaged just 36.4% of their quarterly revenues from that metal! That was on the lower side of the recent years’ range. Only 3 of SIL’s top-17 component stocks were still primary silver miners last quarter, First Majestic Silver, Silvercorp Metals, and Fortuna Silver Mines. SIL is effectively another gold miners’ ETF, where its holdings derive nearly 2/3rds of their revenues from gold!

With SIL-top-17 silver production sliding 1.8% YoY in Q2’19, the per-ounce mining costs should’ve risen proportionally. Silver-mining costs are largely fixed quarter after quarter, with actual mining requiring the same levels of infrastructure, equipment, and employees. So the lower production, the fewer ounces to spread mining’s big fixed costs across. But the major silver miners’ Q2’19 costs surged disproportionally.

There are two major ways to measure silver-mining costs, classic cash costs per ounce and the superior all-in sustaining costs. Both are useful metrics. Cash costs are the acid test of silver-miner survivability in lower-silver-price environments, revealing the worst-case silver levels necessary to keep the mines running. All-in sustaining costs show where silver needs to trade to maintain current mining tempos indefinitely.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of silver, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q2’19 these SIL-top-17 silver miners reported cash costs averaging $6.88 per ounce, which soared 73.9% YoY! While sounding catastrophic, that remains well under Q2’s average silver price.

That means the silver miners faced no existential threat last quarter despite its terrible silver prices. The reason cash costs soared is because Hecla Mining and Silvercorp Metals both reported negative cash costs in Q2’18 due to big byproduct credits. Excluding them, the comparable cash costs a year ago ran $6.49 which is much closer to last quarter’s levels. The silver miners are doing well holding the line on costs.

Way more important than cash costs are the far-superior all-in sustaining costs. They were introduced by the World Gold Council in June 2013 to give investors a much-better understanding of what it really costs to maintain silver mines as ongoing concerns. AISCs include all direct cash costs, but then add on everything else that is necessary to maintain and replenish operations at current silver-production levels.

These additional expenses include exploration for new silver to mine to replace depleting deposits, mine-development and construction expenses, remediation, and mine reclamation. They also include the corporate-level administration expenses necessary to oversee silver mines. All-in sustaining costs are the most-important silver-mining cost metric by far for investors, revealing silver miners’ true operating profitability.

The SIL-top-17 silver miners reporting AISCs in Q2’19 averaged $11.51 per ounce, which was only up 5.3% YoY. That was really impressive considering their waning silver production, and the challenges of producing this metal at such low prices. That was well under late May’s silver low of $14.34, as well as mid-November’s 2.8-year secular low of $13.99. The silver miners are nicely navigating silver’s vexing slump.

At Q2’19’s average silver price of $14.88 and average SIL-top-17 AISCs of $11.51, these miners were earning $3.37 per ounce. That’s not bad for a sector that investors mostly left for dead, convinced it must be doomed. Being so wildly undervalued relative to gold, silver has the potential to surge much higher in this resurgent gold bull. Historically the Silver/Gold Ratio has averaged around 55x, which has big implications.

At early July’s apocalyptic 26.8-year low relative to gold, the SGR plunged all the way to 93.5x! In other words, it took 93.5 ounces of silver to equal the value of a single ounce of gold. But silver was awoken from its zombified stupor soon after, thanks to gold’s decisive bull-market breakout to major new secular highs. So by mid-August as Q2’s earnings season wrapped up, silver had clawed back up to an 88.5x SGR.

By August 15 silver had regained $17.22 at best, which was merely an 18.4-month high. That was still a joke compared to gold though, which at $1524 had soared to its own 6.3-year secular high! In order to mean revert back up to historical norms compared to gold, silver has a long way to go. At $1524 gold, a 55x SGR implies a silver price of $27.71. That’s another 61% higher from silver’s still-weak mid-August levels.

Industry-wide all-in sustaining costs don’t change much regardless of prevailing silver prices. That is because they are largely determined during mine-planning stages, when engineers and geologists decide which ores to mine, how to dig to them, and how to process them to extract the silver. So higher silver prices yield explosive profits growth, which is what makes the volatile silver-mining stocks so alluring to traders.

A silver mean reversion to 1/55th the price of gold at its mid-August prices would catapult silver-mining profits 381% higher at Q2’s AISCs! Capital would deluge into this forsaken sector if these miners were earning $16.20 per ounce on $27.71 silver. And mean reversions out of extreme lows never stop at the historical averages, but their strong upside momentum carries them to proportional upside overshoots.

So the potential silver-miner earnings growth and thus stock-price gains when silver normalizes relative to gold are colossal. But lest that seem like a pie-in-the-sky pipe dream, consider just the first half of Q3’19 already in the books when Q2’s earnings season concluded. As of August 15th, silver had already risen to a $16.10 QTD average. That was 8.2% higher than Q2’s miserable $14.88, and very bullish for the miners.

Assuming Q3’s AISCs stay in line with Q2’s which is highly likely, silver-mining profits could be exploding 36.2% higher QoQ in this current quarter! That of course supports much higher silver-stock prices. All silver and its miners’ stocks need to thrive is for traders to be convinced gold is likely to keep climbing on balance. That necessary shift in overall precious-metals sentiment back to bullish is finally underway.

The caveat is the degree to which silver miners’ earnings amplify this metal’s upside is dependent on how much of their sales are still derived from silver as it reverts north. If the SIL top 17 are still getting 36% of their sales from silver, their stocks should surge with silver. But the more they diversify into gold, the more dependent they will be on gold-price moves. Those aren’t as big as silver’s since gold is a far-larger market.

Back to Q2’19 results, the SIL-top-17 silver miners’ hard accounting metrics mostly weakened. And that makes sense with average silver prices falling 9.9% YoY and these elite silver miners producing 1.8% less. They did manage to achieve a 2.4% gain in total revenues to $3.6b last quarter. That was solely thanks to their collective gold output growing 13.4% YoY. Without that gold, Q2 would’ve looked terrible.

Operating-cash-flow generation was weak, plunging 43.8% YoY to $555m across the SIL top 17. That makes it harder for these miners to invest in future production growth. Their total cash treasuries reported at the end of Q2 also fell 33.9% to $2.4b. Silver needs to rally considerably and stay higher for at least a few quarters before the silver miners can spin off strong cashflows again. Hopefully that’s now underway.

These major silver miners’ hard GAAP earnings in Q2’19 proved really weak, reflecting the miserable prevailing silver prices. Together they reported a collective net loss of $134m, compared to a $463m group profit in Q2’18. Out of the 13 of these SIL-top-17 miners that reported last quarter’s earnings, 8 were losses. Leading the way was the streaming giant Wheaton Precious Metals, which lost $125m alone.

WPM wrote down $166m on a streaming agreement it had overpaid for, a massive non-cash charge that helped torpedo the silver miners’ profits. But I didn’t see any other major writedowns, which was on the impressive side given last quarter’s super-low silver prices. Thankfully traders don’t buy silver stocks for how they’re faring today, but for how they are likely to do as silver mean reverts higher. It’s all about potential.

Silver’s last major upleg erupted in essentially the first half of 2016, when silver soared 50.2% higher on a parallel 29.9% gold upleg. SIL blasted 247.8% higher in just 6.9 months, a heck of a gain for major silver stocks. But the purer primary silver miners did far better. The purest major silver miner First Majestic’s stock was a moonshot, skyrocketing a staggering 633.9% higher in that same short span! SIL’s gains are muted.

The key takeaway here is avoid SIL. The world’s leading “Silver Miners ETF” is increasingly burdened with primary gold miners with waning silver exposure. And having over 1/11th of your capital allocated to silver miners squandered in Korea Zinc is sheer madness! If you want to leverage silver’s long-overdue mean reversion higher relative to gold, it’s far better to deploy in smaller purer primary silver miners alone.

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The bottom line is the major silver miners had a challenging Q2. Silver languished the entire quarter, on its way to horrific quarter-century-plus lows relative to gold. Silver didn’t start perking up until mid-July, after gold’s decisive bull-market breakout had lasted long enough to convince traders gold’s upside was real and sustainable. So silver miners’ operating cash flows and earnings were way down last quarter.

That will really change in Q3 as long as silver doesn’t plummet into quarter-end. It’s incredible how fast silver miners’ fundamentals improve with higher silver prices. And silver’s upside potential is enormous, as it has a vast way to go to normalize relative to prevailing gold prices. The more that precious-metals sentiment improves, the more capital will flow into the tiny silver sector catapulting miners’ stocks far higher.

Back during the bear market years (it’s nice to be able to write that now), I regularly would compare the declines in Gold, Silver and gold stocks to their past history. It gave us a visual representation of just how bad the forever bear market was and helped us decipher when it might end.

The recent low in Silver has several good comparisons, which include the lows in 1986, 1993 and 2003. We also included the 2008 low.

If Silver’s rebound were simply an average of the four rebounds shown then it would reach nearly $24 by the end of March 2020.

Gold is tricky because there is not an obvious bull comparison. Its major lows were essentially in 1970, 1985 and 1999 to 2001.

However, when we consider the preceding bear market, the best comparison to the recent bear and current bull is the late 1990s and early 2000s.

Mind you, we aren’t forecasting or predicting that 2003 to 2006 will be duplicated over the next three years. It’s possible, but we are simply arguing that the 2012 to 2019 period most resembles 1996 to 2003.

Turning to the gold stocks and specifically the junior gold stocks, here is how the 2016 bottom compares to the bottoms in 2001 and 2008.

Note that the basket of 20 stocks we used is quite strong compared to GDXJ. In other words, we erred on the side of positive performance.

In our new book (available at TheDailyGold.com), we argue that the 2016 low in gold stocks was very similar to the 1957 low.

There are numerous similarities between today and the early to mid 1960s. That includes the gold stocks and their incredible long-term value at the start of a major inflationary cycle.

Below we compare the 1957 and 2016 lows with data from the Barron’s Gold Mining Index, which appreciated over 40-fold from its 1957 low to the peak in 1980.

As you can see, if Gold remains in a real bull market then significant upside potential remains in place across the precious metals complex.

Fundamentally, Gold could remain in a bullish trend until the next economic recovery gains traction. That could be anywhere from a few to four years away.

If gold continues to follow the pattern of the early 2000s then it could reach $3000/oz by the start of 2023.

It was roaring higher until natural resistance kicked in and the U.S. Dollar grinded its way higher, towards its 2019 high. Factor in the Fed decision this week and it has created a natural “buy the rumor, sell the news” event.

We cannot know for certain what the Federal Reserve will do or even more importantly, how the market will react. But we can take note of key levels in these markets.

Gold has held above $1400/oz but has been unable to break past resistance at $1420-$1425/oz. A retest of $1385/oz is quite possible and so is a test of $1365/oz.

Silver has outperformed Gold since it broke above its 400-day moving average, which provided strong resistance dating back to the end of 2017.

Silver encountered resistance at $16.60-$16.70/oz and could test initial support at $16.20/oz. Below that is strong support at $15.95/oz.

Turning to the gold stocks, we find a clear setup between support and resistance.

GDX, the ETF for large gold producers has resistance at $28 but good support above $25.00, which was previous resistance for nearly three years. Look for initial support around $26.00.

GDXJ, the ETF for the “senior” junior companies, faces resistance at $40-$41. It has initial support around $37.50 with strong support at $36.00.

Regardless of what the Fed does or says, my expectation is precious metals will test these levels and ultimately hold them. The Fed and global central banks want to ease policy and this figures to be more than a one-off.

Investors who smartly positioned in recent months should continue to hold their winners. If the sector continues to correct then look to be a buyer at the aforementioned support levels.

Silver has blasted higher in the last couple weeks, far outperforming gold. This is certainly noteworthy, as silver has stunk up the precious-metals joint for years. This deeply-out-of-favor metal may be embarking on a sea-change sentiment shift, finally returning to amplifying gold’s upside. Silver is not only radically undervalued relative to gold, but investors are aggressively buying. Silver’s upside potential is massive.

Silver’s performance in recent years has been brutally bad, repelling all but the most fanatical contrarians. Historically silver prices have been mostly driven by gold, with the white metal amplifying moves in the yellow metal. Silver has generally leveraged gold by at least 2x in the past. And rarely silver skyrockets as higher prices and bullish sentiment feed on themselves in powerful virtuous circles fueling huge gains.

Silver’s legendary upside is largely the result of it being such a tiny market. Silver’s leading fundamental authority is the Silver Institute. In its latest World Silver Survey covering 2018, it reported that total world demand ran 1033.5m ounces last year. That was worth a mere $16.2b at 2018’s average silver prices, a rounding error in markets terms. That was just 1/11th the size of last year’s world gold demand worth $179.4b!

So when investors grow interested in silver again and start deploying capital, relatively-small inflows in absolute terms catapult silver far higher. This classic dynamic last worked in 2016. In roughly the first half of that year, silver rocketed 50.2% on the parallel 29.9% maiden upleg of this current gold bull. That made for 1.7x upside leverage to gold, remaining on the weaker side historically but still well worth riding.

Through gold suffered a severe correction in the second half of 2016, it still ended that year 8.5% higher. Silver’s 15.1% gain amplified that by 1.8x. The secret to gaming silver is it tends to act like a sentiment gauge for gold. When gold is relatively high and has been rallying, traders start assuming that will persist. And that’s when they want to buy silver. The white metal thrives mostly only when gold psychology is bullish.

In 2017 and 2018 gold fell deeper out of favor. The yellow metal wasn’t performing poorly, but it couldn’t break out to new bull-market highs. And contrarian investing was dying, with stock markets levitating to endless new record highs on hopes for big tax cuts soon and extreme Fed dovishness. With gold apathy stellar, silver didn’t stand a chance. Silver sentiment and thus price performance is totally controlled by gold.

Even though gold rallied a strong 13.2% in 2017, silver lagged at mere 6.4% gains. That 0.5x leverage to gold was terrible. The longer silver underperformed, the more traders capitulated on it and walked away. 2018 was even worse. Though gold only drifted 1.6% lower, silver plunged 8.6% making for horrendous 5.5x downside leverage. Silver wasn’t worth the big additional risk of its serious volatility compared to gold.

Thankfully silver’s dire fortunes started to change in early 2019, when I wrote my original essay on Silver Outperforming Gold. But unfortunately that was short-lived, as silver is slaved to gold. In mid-February the young gold upleg stalled out and reversed lower, after failing to break out to new bull-market highs. That kneecapped silver’s budding outperformance streak, casting it back to the underperformance wasteland.

By June 19th, silver was back to its recent miserable form. It was down 2.1% year-to-date despite gold enjoying a respectable 6.1% YTD rally. While we were taking advantage of the hellish sentiment to buy and recommend fundamentally-superior silver-mining stocks at crazy-low prices in our newsletters, it was hard to write about silver. Virtually no one was the least bit interested, with suffocating apathy universal.

But silver started awakening from its bearish haze on June 20th, kicked in the butt by an extraordinary watershed event. That day gold finally surged to its first new bull-market high since way back in early July 2016, when this bull’s maiden upleg peaked! Gold’s $1389 close was also its highest in 5.8 years, starting to unleash powerful new-high psychology. In the 5 weeks since, that has increasingly infected silver.

Silver didn’t respond immediately to gold’s decisive bull-market breakout. On breakout day it stuck to its languid ways, only rallying 1.8% on a major 2.1% gold up day. The silver price action actually stayed relatively weak for the next several weeks. By July 11th gold was 3.4% higher from the day before that major breakout, while silver slumped 0.3% lower. But something interesting was brewing behind the scenes.

Silver investment demand is notoriously difficult to monitor. The best fundamental data available for this white metal is again from the Silver Institute’s World Silver Survey. But as awesome as that is, it is only published once per year. There is a high-resolution proxy for silver investment demand available daily though, the physical-silver-bullion holdings of the world’s largest and dominant silver exchange-traded fund.

That is the American SLV iShares Silver Trust, which has a huge first-mover advantage after launching way back in April 2006. As of the end of 2018, the Silver Institute’s data showed SLV commanded fully 49% of all the silver held by all the world’s silver ETFs! SLV’s holdings are published daily, and when they climb it reveals American stock-market capital flowing into silver. This dynamic is important to understand.

SLV’s mission is to track the silver price, giving stock traders full silver exposure. But the SLV-share supply and demand is independent of silver’s own. If stock traders are buying SLV shares faster than silver itself is being bought, SLV’s price will decouple from silver’s to the upside. SLV’s managers prevent this by shunting that excess share demand back into physical silver itself. The mechanics are simple in concept.

When SLV prices are being bid up faster than silver, new SLV shares are issued to absorb that differential demand. The capital raised from selling those shares is then used to buy more physical silver bullion. This enables SLV to act as a conduit for stock-market capital to flow into and out of silver itself. When SLV shares are sold faster than silver, this process reverses. SLV holdings reveal silver investment trends!

While silver was drifting sideways to lower in the first half of July and looking unimpressive, American stock investors were starting to buy SLV. Between July 2nd and 9th, SLV enjoyed daily holdings builds averaging 0.7% in 4 out of 5 trading days! At the same time the leading gold ETF’s holdings, which is of course the GLD SPDR Gold Shares, were mostly draws. Silver was attracting investors while gold wasn’t.

With gold consolidating high and largely holding over $1400, precious-metals sentiment was improving. After long ignoring gold and silver, investors were starting to take another look. Silver had not only really lagged gold’s breakout rally since mid-June, but it was radically undervalued compared to its dominant primary driver gold. We’ll explore that shortly. So smart contrarians were starting to shift back into silver.

This didn’t first become evident in silver’s price action until July 15th, just a couple weeks ago. That day silver rallied 1.2% despite gold only edging 0.1% higher. That was peculiar and out of character for silver in recent years, so it could’ve been an anomaly. But it proved otherwise. As of this Wednesday’s data cutoff for this essay, silver has outperformed gold in a major way for 8 trading days in a row! That’s incredible.

On the 16th silver climbed 0.9% while gold fell 0.9%. On the 17th and 18th silver surged 2.6% and 2.3% on 1.5% and 1.4% gold up days. The 19th saw silver only retreat 0.7% as gold dropped 1.4%. Then on the 22nd and 23rd silver rallied 1.0% and 0.2% despite gold’s 0.1% and 0.5% declines. This Wednesday the 24th saw silver climb 1.1% outpacing gold’s 0.6%. Such a strong outperformance streak is important.

Thus in the past couple weeks or so, silver has blasted 9.7% higher despite a mere 1.3% gold rally! That makes for epic 7.4x upside leverage, the kind silver enthusiasts dream about. This outperformance stretch is even more impressive because it was driven by big capital inflows into SLV by American stock investors returning to silver. As of this Wednesday SLV saw strong holdings builds for 6 trading days in a row.

That started with a monster 2.6% SLV build on the 17th, which proved the biggest seen by far since way back in January 2013! Gold largely holding over $1400 rekindled American stock investors’ interest in silver in a way not seen in 6.5 years. Over the next 5 trading days ending Wednesday, SLV’s holdings grew another 0.8%, 1.0%, 2.6%, 0.5%, and 0.5%. This silver-investment-buying streak is pretty amazing.

While silver’s outperformance of gold has exploded only in the last couple weeks, it has totally changed how silver looks since gold’s decisive bull-market breakout on June 20th. As of Wednesday, silver has now rallied 9.3% over that 24-trading-day span compared to gold’s 4.8% gain. That’s right back up to that historical 2.0x-upside-leverage norm. SLV’s holdings enjoyed 13 build days, 11 flat days, and 0 draw days.

They have catapulted SLV’s holdings 12.6% higher since the day before gold’s breakout. Via this leading ETF, American stock investors are now holding 1/8th more silver in absolute-ounces terms in just 5 weeks. Over this same span GLD’s holdings only climbed 7.6%. And it only saw 8 holdings-build days, 5 flat days, and a whopping 11 draw days. Something special, major, and likely pivotal is underway in silver!

Nevertheless, silver remains in an ugly place compared to gold. YTD as of this Wednesday, silver was just up 7.1% compared to gold’s 11.1%. Gold’s $1445 upleg-to-date high achieved on July 18th was its best level seen in 6.2 years. Silver’s own upleg-to-date high of $16.55 this Wednesday was merely a 1.1-year one. So though silver has started to outperform gold again, it has a long way to go to look impressive.

There’s no sugarcoating it, the carnage in silver in recent years has been catastrophic. Thanos himself couldn’t have done worse with a fully-stoned Infinity Gauntlet! While there were a half-dozen silver charts I considered sharing this week, this one is the most telling. It shows the Silver/Gold Ratio over the past decade-and-a-half or so. This SGR is the best measure of whether silver prices are relatively high or low.

The SGR simply divides the daily silver close by the daily gold close, but yields hard-to-parse decimals like 0.0116 this Wednesday. So I prefer to use an inverted-axis Gold/Silver Ratio instead, which is the same thing but offers easier-to-understand numbers like 86.1 mid-week. Silver prices had almost never been lower relative to gold in modern history before recent weeks! Silver is climbing out of a stygian abyss.

Back in mid-June just before gold’s decisive bull-market breakout changed everything, the SGR had fallen to an absurd 90.4x. In other words it took 90.4 ounces of silver to equal the value of a single ounce of gold. That was wildly out of whack with historical precedent. From 2005 to just before 2008’s first stock panic in a century, the SGR averaged 54.9x. From 2009 to 2012 after that panic, it averaged a similar 56.9x.

The SGR had generally meandered in the mid-50s for decades, so miners had long used 55.0x as the leading proxy for calculating silver-equivalent or gold-equivalent ounces. The SGR also experienced great cycles, long secular periods of silver outperformance where the SGR generally fell followed by multi-year spans of silver underperformance where the SGR rose on balance. SGR extremes were short-lived.

As gold surged over this past month, the SGR spiraled higher still to a mind-boggling 93.5x on July 5th. That was an apocalyptic 26.8-year low, the worst silver levels relative to gold since October 1992. That is longer than the average investing lifespan of today’s traders, over a quarter century! And 93.5x isn’t much better than the worst SGR since 1970, 100.3x seen briefly in February 1991. Silver has just been slaughtered.

For an incredible 8.2 years the SGR had been rising on balance, showing chronic underperformance relative to gold. This secular cycle is far-overdue to turn, and after extreme lows historically silver has spent years mean reverting higher relative to gold. 2008’s extraordinary stock panic offers a fantastic recent example of how greatly silver can soar after being battered down to extreme lows relative to gold.

Back in November 2008 in that most-extreme market-fear event seen in our lifetimes, the SGR was crushed to 84.1x. Silver was radically undervalued relative to gold, investors wanted nothing to do with it. Such a great disconnect between silver and gold wasn’t sustainable given their relative market sizes and the ratio at which they are mined. So over the next 2.4 years into April 2011, silver skyrocketed 442.9% higher!

After SGR extremes silver doesn’t just revert to the mean, but overshoots proportionally towards the opposite extreme. The SGR fell as low as 31.7x when that silver bull peaked over $48 per ounce. Odds are the SGR will again overshoot and at least return to the 40s before silver’s next bull fully runs it course. With silver not far off its lowest levels compared to gold in modern times in early July, it has vast room to soar.

Gold’s current bull market was born in mid-December 2015, and is what has driven silver higher during gold-bull uplegs. Since then, the SGR has averaged just 77.8x. That is actually higher than during that wild stock-panic span in late 2008, incredibly extreme! Over the past several weeks or so, the SGR has already started mean reverting falling as low as 86.1x this week. Silver’s upside potential from here is epic.

At $1400 gold and this miserable gold-bull-average 77.8x SGR, silver would need to trade at $18.00. That’s another 9% higher from this week’s levels. But again mean reversions off extremes don’t just stop at the averages, but keep going like a pendulum. That yields an SGR target of 62.1x, implying $22.56 silver at $1400 gold. Silver would have to power another 36% higher to regain those still-pathetic SGR levels.

If gold’s young secular bull persists for years to come as it ought to based on historic precedent, silver is going to climb far higher greatly lowering the SGR. If it just mean reverts back to that longstanding 55.0x average with no overshoot, that means $25.45 silver at $1400 gold. These SGR-mean-reversion-and-overshoot silver-price targets grow far bigger at higher prevailing gold prices and proportional-overshoot SGR lows.

The point of all this is silver is so radically undervalued compared to its primary driver gold that it needs to soar vastly higher to reestablish normal relationships. While silver’s outperformance over the past couple weeks is impressive, it hardly even registers coming off such extreme lows. Digging out of such a deep hole relative to gold, silver needs to rally higher on balance for many months or even years to come!

While investment buying including via silver ETFs like SLV will be the primary driver, silver futures will also play a big role. A couple weeks ago I wrote about gold’s high short-term selloff risk due to how the gold-futures speculators are now positioned, with excessively-bullish bets that are actually very bearish over the near term. A healthy gold pullback or correction would certainly drag silver down with it for a spell.

The most-bullish situation possible for gold- and silver-futures is for speculators to be all-out long upside bets and all-in short downside bets. That leaves them nothing to do but buy. That is 0% longs and 100% shorts. In the latest weekly Commitments of Traders report, specs’ gold-futures bets were running 75% on the long side and 10% on the short side up into their entire bull-market trading ranges. That’s really bearish.

By bull-to-date precedent, gold-futures speculators had room to sell 347.4k contracts but only room to buy 80.5k. That made for an ominous 4.3x ratio of potential selling outweighing potential buying. I bring this up because speculators’ silver-futures positioning was nowhere near as menacing. They are running 66% on the long side and 44% on the short side up into their gold-bull-market trading ranges, much less bearish.

Speculators had room to sell 97.4k silver-futures contracts and buy 65.8k in the latest CoT report, for a way-more-moderate 1.5x ratio of potential selling to potential buying. The takeaway here is silver has a lot more near-term futures-buying-driven upside potential than gold does. Together silver investment buying and silver-futures buying are powerful forces to catapult silver higher. But it all depends on gold.

If gold continues to consolidate high above or near $1400, that will foster the bullish sentiment necessary for silver buying to persist. New-high psychology driving gold investment buying could make this happen. But if something spooks the gold-futures speculators, they have massive room to sell which would quickly cascade and hammer gold lower. That would suck in silver, driving both into healthy short-term corrections.

But once speculators’ excessively-bullish gold-futures bets normalize, gold and silver should be off to the races again with silver really outperforming. So any material weakness should be used to aggressively accumulate physical silver bullion, SLV shares, and stocks of fundamentally-superior silver miners. Their upside potential trounces silver’s because their profits growth really amplifies higher prevailing silver prices.

Again silver soared 50.2% higher in largely the first half of 2016. The leading SIL Global X Silver Miners ETF rocketed a colossal 247.8% higher in essentially that same span! That made for huge 4.9x leverage to silver’s gains. Every quarter I analyze the fundamentals of the major silver miners of SIL, with the latest essay covering Q1’19 results. Now is the time to do your homework before silver really starts running again.

To multiply your capital in the markets, you have to trade like a contrarian. That means buying low when few others are willing, so you can later sell high when few others can. In recent months well before gold’s breakout, we recommended buying many fundamentally-superior gold and silver miners in our popular weekly and monthly newsletters. Mid-week our unrealized silver-stock gains already ran as high as 113.8%!

To profitably trade high-potential gold and silver stocks, you need to stay informed about broader market cycles that drive them. Our newsletters are a great way, easy to read and affordable. They draw on my vast experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks. Subscribe today and take advantage of our 20%-off summer-doldrums sale! The biggest gains are won by traders diligently staying abreast, always learning.

The bottom line is silver really started outperforming gold again in the last couple weeks. Silver surged dramatically on heavy investment buying, as evidenced by big differential SLV-share demand. This looks like a sea-change sentiment shift getting underway in silver, especially after it was crushed to its lowest levels relative to gold in well over a quarter century. Silver is long overdue to mean revert vastly higher.

Silver effectively acts like a gold sentiment gauge, with investment demand dependent on gold’s fortunes. The longer gold consolidates high or grinds higher, the more silver will be bought. Coming out of such radically-undervalued levels, silver’s future bull-market upside should greatly exceed gold’s. But silver will also get sucked into periodic gold corrections, which can be used as lower entry points to add silver positions.

It was a huge week for the gold stocks. GDX gained nearly 7% while GDXJ surged over 10%.

Gold hit $1450/oz after Thursday before selling off Friday. Silver met the same fate on Friday but managed to close the week up over 6% and at a new 52-week high.

Gold closed the week just below $1427/oz. If it remains above $1420-$1425, then it is likely to trend towards $1475/oz, which is the only resistance between $1425 and $1525.

Silver has taken out resistance at its 400-day moving average in convincing fashion but needs to surpass its February 2019 high. Its next major resistance target is the mid $18s.

Turning to the stocks, we start with GDX which is closing in on its 2016 high. Should Gold trend towards $1475/oz then GDX would likely retest that 2016 high at $31.

Breadth remains strong and so too is GDX’ relative strength. GDX relative to the S&P made a 21-month high and relative to Gold made a 2-year high.

Both GDXJ (juniors) and the HUI (miners only) still have room to go before reaching their 2016 highs.

In fact, both are facing some immediate overhead resistance. For GDXJ which closed at $39.50, that resistance is at $40-$41. For HUI which closed at 211, that resistance is at 220.

If Gold and Silver maintain current levels, then the immediate bias remains higher and GDX could soon test its 2016 high.

GDXJ and HUI have roughly 30% upside to their 2016 highs. Such a move probably requires a move in Gold to at least $1525/oz.

However, if Friday was the start of a correction then GDX could test $26 and GDXJ could test $36.

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The silver miners’ stocks have been pummeled in recent months, plunging near major secular lows in late May. Sentiment in this tiny sector is miserable, reflecting silver prices continuing to languish relative to gold. This has forced traditional silver miners to increasingly diversify into gold, which has far-superior economics. The major silver miners’ ongoing shift from silver is apparent in their recently-released Q1’19 results.

The definitive list of major silver-mining stocks to analyze comes from the world’s most-popular silver-stock investment vehicle, the SIL Global X Silver Miners ETF. Launched way back in April 2010, it has maintained a big first-mover advantage. SIL’s net assets were running $294m in mid-May near the end of Q1’s earnings season, 5.6x greater than its next-biggest competitor’s. SIL is the leading silver-stock benchmark.

In mid-May SIL included 24 component stocks, which are weighted somewhat proportionally to their market capitalizations. This list includes the world’s largest silver miners, including the biggest primary ones. Every quarter I dive into the latest operating and financial results from SIL’s top 17 companies. That’s simply an arbitrary number that fits neatly into the table below, but still a commanding sample.

As of mid-May these major silver miners accounted for fully 94.4% of SIL’s total weighting. In Q1’19 they collectively mined 70.9m ounces of silver. The latest comprehensive data available for global silver supply and demand came from the Silver Institute in April 2019. That covered 2018, when world silver mine production totaled 855.7m ounces. That equates to a run rate around 213.9m ounces per quarter.

Assuming that mining pace persisted in Q1’19, SIL’s top 17 silver miners were responsible for about 33% of world production. That’s relatively high considering just 26% of 2018’s global silver output was produced at primary silver mines! 38% came from lead/zinc mines, 23% from copper, and 12% from gold. Nearly 3/4ths of all silver produced worldwide is just a byproduct. Primary silver mines and miners are fairly rare.

Silver price levels are best measured relative to prevailing gold prices, which overwhelmingly drive silver price action. In late May the Silver/Gold Ratio continued collapsing to its worst levels witnessed in 26.1 years, since April 1993! These secular extremes of the worst silver price levels in over a quarter century are multiplying the endless misery racking this once-proud sector. This silver environment is utterly wretched.

The largest silver miners dominating SIL’s ranks are scattered around the world. 10 of the top 17 mainly trade in U.S. stock markets, 3 in the United Kingdom, and 1 each in South Korea, Mexico, Peru, and Canada. SIL’s geopolitical diversity is good for investors, but makes it difficult to analyze and compare the biggest silver miners’ results. Financial-reporting requirements vary considerably from country to country.

In the U.K. companies report in half-year increments instead of quarterly. Some silver miners still publish quarterly updates, but their data is limited. In cases where half-year data is all that was made available, I split it in half for a Q1 approximation. Canada has quarterly reporting, but the deadlines are looser than in the States. Some Canadian miners really drag their feet, publishing their quarterlies close to legal limits.

The big silver companies in South Korea, Mexico, and Peru present other problems. Their reporting is naturally done in their own languages, which I can’t decipher. Some release limited information in English, but even those translations can be difficult to interpret due to differing accounting standards and focuses. It’s definitely challenging bringing all the quarterly data together for the diverse SIL-top-17 silver miners.

But analyzing them in the aggregate is essential to understand how they are faring. So each quarter I wade through all available operational and financial reports and dump the data into a big spreadsheet for analysis. Some highlights make it into this table. Blank fields mean a company hadn’t reported that data by mid-May, as Q1’s earnings season wound down. Some of SIL’s components report in gold-centric terms.

The first couple columns of this table show each SIL component’s symbol and weighting within this ETF as of mid-May. While most of these stocks trade on US exchanges, some symbols are listings from companies’ primary foreign stock exchanges. That’s followed by each miner’s Q1’19 silver production in ounces, along with its absolute year-over-year change. Next comes this same quarter’s gold production.

Nearly all the major silver miners in SIL also produce significant-to-large amounts of gold! That’s truly a double-edged sword. While gold really stabilizes and boosts silver miners’ cash flows, it also retards their stocks’ sensitivity to silver itself. So the next column reveals how pure these elite silver miners are, approximating their percentages of Q1’19 revenues actually derived from silver. This is calculated one of two ways.

The large majority of these top SIL silver miners reported total Q1 revenues. Quarterly silver production multiplied by silver’s average price in Q1 can be divided by these sales to yield an accurate relative-purity gauge. When Q1 sales weren’t reported, I estimated them by adding silver sales to gold sales based on their production and average quarterly prices. But that’s less optimal, as it ignores any base-metals byproducts.

Next comes the major silver miners’ most-important fundamental data for investors, cash costs and all-in sustaining costs per ounce mined. The latter directly drives profitability which ultimately determines stock prices. These key costs are also followed by YoY changes. Last but not least the annual changes are shown in operating cash flows generated and hard GAAP earnings, with a couple exceptions necessary.

It offers a fantastic high-level read on how the major silver miners are faring fundamentally as an industry and individually. The crazy-low silver prices really weighed on operating cash flows and earnings in Q1, and the silver miners’ years-old shift into gold continued. These companies are having no problem just surviving this silver-sentiment wasteland, but they probably won’t be thriving again before silver recovers.

SIL’s poor performance certainly reflects the challenges of profitably mining silver with its price so darned cheap. Year-to-date in late May, SIL had already lost 12.2%. Silver itself was down 7.2% YTD at worst, starting to threaten mid-November 2018’s 2.8-year secular low of $13.99. And that just extended last year’s losing trend, where SIL plunged 23.3% amplifying silver’s own 8.6% loss by 2.7x. This sector looks ugly.

Silver’s weakest prices relative to gold in over a quarter century have continued to devastate silver-mining sentiment. Investors understandably want nothing to do with the forsaken silver miners, so their stock prices languish near major lows. Even their own managements seem really bearish, increasingly betting their companies’ futures on gold rather than silver. Silver’s Q1 price action further supports this decision.

During Q1’19 silver ground another 2.3% lower despite a 0.8% gold rally, bucking its primary driver. Q1’s average silver price of $15.54 fell 7.1% YoY from Q1’18’s average. That was way worse than gold’s mere 1.9% YoY average-price decline. The silver-mining industry is laboring under a pall of despair. Although production decisions aren’t made quarter by quarter, the chronically-weak silver prices are choking off output.

Production is the lifeblood of silver miners, and it continued to slide. The SIL top 17 that had reported their Q1 results by mid-May again mined 70.9m ounces of silver. That was down 3.1% YoY from Q1’18’s silver production, excluding Silvercorp Metals. SVM’s fiscal years end after Q1s, and it doesn’t report its longer more-comprehensive annual results until well after Q1’s normal quarterly earnings season wraps up.

It’s not just these major silver miners producing less of the white metal, the entire industry is according to the Silver Institute’s latest World Silver Survey. 2018 was the third year in a row of waning global silver mine production. This shrinkage is accelerating too as silver continues to languish, running 0.0% in 2016, 1.8% in 2017, and 2.4% in 2018! Peak silver may have been seen with this metal so unrewarding to mine.

The traditional major silver miners aren’t taking silver’s vexing fading lying down. They’ve spent recent years increasingly diversifying into gold, which has way-superior economics with silver prices so bombed out. The SIL top 17’s total gold production surged 10.9% YoY to 1387k ounces in Q1! This producing-less-silver-and-more-gold trend will continue to grow as long as silver prices waste away in the gutter.

Silver mining is as capital-intensive as gold mining, requiring similar large expenses to plan, permit, and construct new mines, mills, and expansions. It needs similar fleets of heavy excavators and haul trucks to dig and move the silver-bearing ore. Similar levels of employees are necessary to run silver mines. But silver generates much-lower cash flows than gold due its lower price. Silver miners have been forced to adapt.

This is readily evident in the top SIL miners’ production in Q1’19. SIL’s largest component in mid-May as this latest earnings season ended was the Russian-founded but UK-listed Polymetal. Its silver production fell 15.0% YoY in Q1, but its gold output surged 41.1%! Just 17.5% of its Q1 revenues came from silver, making it overwhelmingly a primary gold miner. Its newest mine ramping up is another sizable gold one.

SIL’s second-largest component is Wheaton Precious Metals. It used to be a pure silver-streaming play known as Silver Wheaton. Silver streamers make big upfront payments to miners to pre-purchase some of their future silver production at far-below-market unit prices. This is beneficial to miners because they use the large initial capital infusions to help finance mine builds, which banks often charge usurious rates for.

Back in May 2017 Wheaton changed its name and symbol to reflect its increasing diversification into gold streaming. In Q1’19 WPM’s silver output collapsed 24.4% YoY, but its gold surged 17.4% higher! That pushed its silver-purity percentage in sales terms to just 38.8%, way below the 50%+ threshold defining primary silver miners. WPM’s 5-year guidance issued in February forecasts this gold-heavy ratio persisting.

Major silver miners are becoming so scarce that SIL’s third-largest component is Korea Zinc. Actually a base-metals smelter, this company has nothing to do with silver mining. It ought to be kicked out of SIL post-haste, as its presence and big 1/9th weighting really retards this ETF’s performance. Korea Zinc smelted about 64.0m ounces of silver in 2018, which approximates roughly 17% of its full-year revenue.

Global X was really scraping the bottom of the barrel to include a company like Korea Zinc in SIL. I’m sure there’s not a single SIL investor who wants base-metals-smelting exposure in what is advertised as a “Silver Miners ETF”. The weighting and capital allocated to Korea Zinc can be reallocated and spread proportionally across the other SIL stocks. The ranks of major silver miners are becoming more rarefied.

SIL’s fourth-largest component in mid-May is Pan American Silver, which has a proud heritage mining its namesake metal. In Q1’19 its silver production was flat with a negligible 0.4% YoY increase, yet its gold output soared 74.2%! Thus PAAS’s silver purity slumped to 40.9%, the lowest by far seen in the years I’ve been doing this quarterly research. And it’s going to get much more gold-centric in coming quarters.

PAAS acquired troubled silver miner Tahoe Resources back in mid-November. Tahoe had owned what was once the world’s largest silver mine, Escobal in Guatemala. It had produced 5.7m ounces in Q1’17 before that country’s government unjustly shut it down after a frivolous lawsuit on a trivial bureaucratic misstep by the regulator. PAAS hopes to work through the red tape to win approval for Escobal to restart.

But the real prize in that fire-sale buyout was Tahoe’s gold production from other mines. That deal closed in late February, so that new gold wasn’t fully reflected in PAAS’s Q1 results. Now this former silver giant is forecasting midpoint production of 27.1m ounces of silver and 595.0k ounces of gold in 2019! That is way into mid-tier-gold territory and a far cry from 2018’s output of 24.8m and 178.9k. PAAS has turned yellow.

Pan American will probably soon follow in Wheaton’s footsteps and change its name and symbol to reflect its new gold-dominated future. As miserable as silver has been faring, I’m starting to wonder if the word “silver” in a miner’s name is becoming a liability with investors. The major primary silver miners are going extinct, forced to adapt by diversifying out of silver and into gold as the former languishes deeply out of favor.

In Q1’19 the SIL-top-17 miners averaged only 35.4% of their revenues derived from silver. That’s also the lowest seen since I started this thread of research with Q2’16 results. Only two of these miners remained primary silver ones, and their silver-purity percentages over 50% are highlighted in blue. They are First Majestic Silver and Fortuna Silver Mines, which together accounted for just 7.6% of SIL’s total weighting.

With SIL-top-17 silver production sliding 3.1% YoY in Q1’19, the per-ounce mining costs should’ve risen proportionally. Silver-mining costs are largely fixed quarter after quarter, with actual mining requiring the same levels of infrastructure, equipment, and employees. So the lower production, the fewer ounces to spread mining’s big fixed costs across. SIL’s major silver miners indeed reported higher costs last quarter.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of silver, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q1’19 these SIL-top-17 silver miners reported cash costs averaging $7.39 per ounce. While that surged 23.6% YoY, it still remains far below prevailing prices. Silver miners face no existential threat.

The major silver miners’ average cash costs vary considerably quarter-to-quarter, partially depending on whether or not Silvercorp Metals happens to have edged into the top 17. This Canadian company mining in China has negative cash costs due to massive byproduct credits from lead and zinc. So over the past couple years, SIL-top-17 average cash costs have swung wildly ranging all the way from $3.95 to $6.75.

The SIL-top-17 silver miners reporting AISCs in Q1’19 averaged $12.70 per ounce, 7.2% higher YoY. That remained considerably below last quarter’s average silver price of $15.54, as well as late May’s ugly silver low of $14.34. So the silver-mining industry as a whole is still profitable even with silver drifting near quarter-century-plus lows relative to gold. And those AISCs are skewed higher by SSR Mining’s outlying read.

Another traditional silver miner that changed its name, this company used to be known as Silver Standard Resources. SSRM has shifted into gold too, gradually winding down its old Pirquitas silver mine resulting in abnormally-high AISCs of $19.76 per ounce. Excluding these, the SIL-top-17 average in Q1 falls to $10.94 which is a much-more-comfortable profits cushion between production costs and low silver prices.

Interestingly SSRM has been ramping up a new mine close to its old Pirquitas mill, and is starting to run that ore through. That makes SSR Mining one of the rare silver miners that’s going to see growing output this year. It is forecasting a midpoint of 4.9m ounces of silver production in 2019, a 74% jump from last year’s levels! Higher production should lead to lower AISCs going forward, pulling the average back down.

As hopeless as silver has looked in recent months, it won’t stay down forever. Sooner or later gold will catch a major bid, probably on surging investment demand as these dangerous stock markets roll over. Capital will start migrating back into silver like usual once gold rallies long enough and high enough to convince traders its uptrend is sustainable. Since the silver market is so small, that portends much-higher prices.

At Q1’19’s average silver price of $15.54 and average SIL-top-17 AISCs of $12.70, these miners were earning $2.84 per ounce. That’s not bad for a sector that investors have left for dead, convinced it must be doomed. Being so wildly undervalued relative to gold, silver has the potential to surge much higher in the next gold upleg. The average Silver/Gold Ratio since Q1’16 right after today’s gold bull was born was 77.1x.

At $1400 and $1500 gold which are modest upleg gains, silver mean reverting to recent years’ average SGR levels would yield silver targets of $18.16 and $19.46. That’s conservative, ignoring the high odds for a mean-reversion overshoot, and only 16.9% and 25.2% above Q1’s average price. Yet with flat AISCs that would boost the SIL top 17’s profits by 92.3% and 138.0%! Their upside leverage to silver is amazing.

The caveat is the degree to which silver miners’ earnings amplify this metal’s upside is dependent on how much of their sales are still derived from silver when it turns north. If the SIL top 17 are still getting 35% of their sales from silver, their stocks should surge with silver. But the more they diversify into gold, the more dependent they will be on gold-price moves. Those aren’t as big as silver’s since gold is a far-larger market.

On the accounting front the top 17 SIL silver miners’ Q1’19 results highlighted the challenges of super-low silver prices. These companies collectively sold $3.0b worth of metals in Q1, which actually clocked in at an impressive 10.8% YoY increase. That was totally the result of these companies mining 10.9% more gold in Q1. Though it dilutes their silver-price exposure, shifting into gold really strengthens them financially.

But operating-cash-flow generation looked much worse, collapsing 55.1% YoY to $237m across the SIL top 17 that reported them for Q1. There was no single-company disaster, but Q1’s average silver prices being 7.1% lower YoY eroded OCFs universally. That led to these miners’ collective treasuries shrinking 22.9% YoY to $2.3b. That’s plenty to operate on, but not that much to fund many mine builds or expansions.

Hard GAAP profits reported by the SIL top 17 silver miners were very weak too in Q1’19, plunging 54.9% YoY to $123m. But there were no major writedowns from these low silver prices impairing the value of silver mines and deposits. Investors don’t buy silver stocks for how they are doing today, but for what they are likely to do as silver mean reverts higher. Silver-mining earnings surge dramatically as silver recovers.

The key takeaway here is avoid SIL. The world’s leading “Silver Miners ETF” is increasingly burdened with primary gold miners with waning silver exposure. And having over 1/9th of your capital allocated to silver miners squandered in Korea Zinc is sheer madness! If you want to leverage silver’s long-overdue next mean reversion higher relative to gold, it’s far better to deploy in smaller purer primary silver miners alone.

One of my core missions at Zeal is relentlessly studying the silver-stock world to uncover the stocks with superior fundamentals and upside potential. The trading books in both our popular weekly and monthly newsletters are currently full of these better gold and silver miners. Mostly added in recent months as these stocks recovered from deep lows, their prices remain relatively low with big upside potential as gold rallies!

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The bottom line is the major silver miners are still struggling. With silver continuing to languish at quarter-century-plus lows relative to gold, the economics of extracting it remain challenging. That led to slowing silver production and higher costs in Q1. The traditional major silver miners continued their years-long trend of increasingly diversifying into gold. Their percentage of sales derived from silver is still shrinking.

There aren’t enough major primary silver miners left to flesh out their own ETF, which is probably why SIL is dominated by gold miners. While it will rally with silver amplifying its gains, SIL’s upside potential is just dwarfed by the remaining purer silver stocks. Investors will be far-better rewarded buying them instead of settling for a watered-down silver-miners ETF. Their stocks will really surge as silver mean reverts much higher.

The major silver miners have rallied higher on balance in recent months, enjoying a young upleg. That’s a welcome change after they suffered a miserable 2018. Times are tough for silver miners, since silver’s prices have languished near extreme lows relative to gold. That has forced many traditional silver miners to increasingly diversify into gold. The major silver miners’ recently-released Q4’18 results illuminate their struggles.

While 10-Qs with filing deadlines of 40 days after quarter-ends are required for normal quarters, 10-K annual reports are instead mandated after quarters ending fiscal years. Most silver miners logically run their accounting on calendar years, so they issue 10-Ks after Q4s. Since these annual reports are larger and must be audited by independent CPAs, their filing deadlines are extended to 60 days after quarter-ends.

The definitive list of major silver-mining stocks to analyze comes from the world’s most-popular silver-stock investment vehicle, the SIL Global X Silver Miners ETF. Launched way back in April 2010, it has maintained a big first-mover advantage. SIL’s net assets were running $362m in mid-March near the end of Q4’s earnings season, 6.1x greater than its next-biggest competitor’s. SIL is the leading silver-stock benchmark.

In mid-March SIL included 21 component stocks, which are weighted somewhat proportionally to their market capitalizations. This list includes the world’s largest silver miners, including the biggest primary ones. Every quarter I dive into the latest operating and financial results from SIL’s top 17 companies. That’s simply an arbitrary number that fits neatly into the table below, but still a commanding sample.

As of mid-March these major silver miners accounted for fully 97.7% of SIL’s total weighting. In Q4’18 they collectively mined 75.5m ounces of silver. The latest comprehensive data available for global silver supply and demand came from the Silver Institute in April 2018. That covered 2017, when world silver mine production totaled 852.1m ounces. That equates to a run rate around 213.0m ounces per quarter.

Assuming that mining pace persisted to Q4’18, SIL’s top 17 silver miners were responsible for about 35% of world production. That’s relatively high considering just 28% of 2017’s global silver output came from primary silver mines! 36% came from lead/zinc mines, 23% from copper, and 12% from gold. 7/10ths of all silver produced is merely an other-metals-mining byproduct. Primary silver mines and miners are fairly rare.

Silver price levels are best measured relative to prevailing gold prices, which overwhelmingly drive silver price action. Q4’18 saw the worst Silver/Gold Ratio witnessed in nearly a quarter century! The SGR collapsed to 86.3x in late November, an extreme 23.8-year secular low. The raw silver price fell under $14 in mid-November, a major 2.8-year low. With such a rotten silver environment, silver miners had to struggle.

The largest primary silver miners dominating SIL’s ranks are scattered around the world. 11 of the top 17 mainly trade in US stock markets, 3 in the United Kingdom, and 1 each in South Korea, Mexico, and Peru. SIL’s geopolitical diversity is good for investors, but makes it difficult to analyze and compare the biggest silver miners’ results. Financial-reporting requirements vary considerably from country to country.

In the U.K., companies report in half-year increments instead of quarterly. Some silver miners still publish quarterly updates, but their data is limited. In cases where half-year data is all that was made available, I split it in half for a Q4 approximation. Canada has quarterly reporting, but the deadlines are looser than in the States. Some Canadian miners trading in the U.S. really drag their feet in getting quarterly results out.

The big silver companies in South Korea, Mexico, and Peru present other problems. Their reporting is naturally done in their own languages, which I can’t read. Some release limited information in English, but even those translations can be difficult to interpret due to differing accounting standards and focuses. It’s definitely challenging bringing all the quarterly data together for the diverse SIL-top-17 silver miners.

But analyzing them in the aggregate is essential to understand how they are faring. So each quarter I wade through all available operational and financial reports and dump the data into a big spreadsheet for analysis. Some highlights make it into this table. Blank fields mean a company hadn’t reported that data by mid-March, as Q4’s earnings season wound down. Some of SIL’s components report in gold-centric terms.

The first couple columns of this table show each SIL component’s symbol and weighting within this ETF as of mid-March. While most of these stocks trade on US exchanges, some symbols are listings from companies’ primary foreign stock exchanges. That’s followed by each miner’s Q4’18 silver production in ounces, along with its absolute year-over-year change. Next comes this same quarter’s gold production.

Nearly all the major silver miners in SIL also produce significant-to-large amounts of gold! That’s truly a double-edged sword. While gold really stabilizes and boosts silver miners’ cash flows, it also retards their stocks’ sensitivity to silver itself. So the next column reveals how pure these elite silver miners are, approximating their percentages of Q4’18 revenues actually derived from silver. This is calculated one of two ways.

The large majority of these top SIL silver miners reported total Q4 revenues. Quarterly silver production multiplied by silver’s average price in Q4 can be divided by these sales to yield an accurate relative-purity gauge. When Q4 sales weren’t reported, I estimated them by adding silver sales to gold sales based on their production and average quarterly prices. But that’s less optimal, as it ignores any base-metals byproducts.

Percentage changes aren’t relevant or meaningful if data shifted from positive to negative or vice versa, or if derived from two negative numbers. So in those cases I included raw underlying data rather than weird or misleading percentage changes. This whole dataset together offers a fantastic high-level read on how the major silver miners are faring fundamentally as an industry. They definitely struggled in Q4.

SIL’s performance certainly reflects the challenges of profitably mining silver when its price languishes so darned cheap. In 2018 SIL plunged 23.3%, amplifying silver’s own 8.6% loss by 2.7x. Silver’s weakest prices relative to gold in almost a quarter century wreaked havoc on silver-mining sentiment. Investors didn’t want anything to do with silver miners, and their own managements seemed almost as bearish.

In Q4’18 silver’s average price dropped 12.9% YoY to just $14.53. That was disproportionally worse than gold, which saw its average price decline 3.8% YoY. Such deep lows exacerbated the pall of despair that is plaguing the silver-mining industry. While production decisions aren’t made quarter by quarter, it sure felt like the seriously-weak silver prices were choking off output. Production is the lifeblood of silver miners.

The SIL top 17’s collective silver production fell 3.9% YoY in Q4’18 to 75.5m ounces. Interestingly that’s right in line with what the major gold miners of GDX experienced that quarter, a 4%ish YoY slide when adjusted for mega-mergers. The major silver miners could be experiencing a peak-gold-like decline in their silver production. Peak silver isn’t discussed as much, but world silver mine output has been shrinking.

According to the Silver Institute’s latest annual World Silver Survey current to 2017, world silver mined supply peaked at 895.1m ounces in 2015. It nosed over a slight 0.7% in 2016, but accelerated sharply to another 4.1% drop in 2017. So the SIL top 17’s output contraction in Q4’18 is just continuing this trend. Silver mining has been starved of capital since 2013, when silver plummeted 35.6% on a 27.9% gold collapse!

Silver-mining stocks have been something of a pariah to even contrarian investors for much of the time since then. That’s left their prices largely drifting at relatively-low levels, making it more difficult to obtain financing to expand operations. Investors haven’t been interested in silver-stock shares, leaving miners wary of issuing more to raise capital with stock prices so low. That can really dilute existing shareholders.

With the major silver miners unable or unwilling to invest in developing new silver mines and expansions to offset their depleting output, it has to decline. 11 of the 15 top SIL components reporting Q4’18 silver production mined fewer ounces than in Q4’17. All 15 together averaged silver output shrinkage of 3.4% YoY. That’s a sharp contrast to these same miners’ gold production, which grew an average of 7.9% YoY.

In overall total terms, the SIL top 17’s 1.4m ounces of gold mined in Q4’18 still slipped 1.5% YoY. But with total silver production sliding more than gold, the major silver miners’ long ongoing diversification into the yellow metal continued. At the bombed-out silver prices of recent years, the economics of gold mining are way superior to silver mining. The traditional major silver miners are painfully aware of this and acting on it.

Silver mining is as capital-intensive as gold mining, requiring similar large expenses to plan, permit, and construct new mines, mills, and expansions. It needs similar fleets of heavy excavators and haul trucks to dig and move the silver-bearing ore. Similar levels of employees are necessary to run silver mines. But silver generates much-lower cash flows than gold due its lower price. Silver miners have been forced to adapt.

The major silver miners continued their trend of diversifying into gold at silver’s expense in Q4’18. SIL’s largest component Wheaton Precious Metals was a great example of this. It used to be known as Silver Wheaton, a pure silver-streaming play. Back in May 2017 it changed its name and symbol to reflect the fact it would increasingly diversify into gold. In Q2’17 WPM streamed 7,192k and 80k ounces of silver and gold.

Back then fully 61.9% of WPM’s sales still came from silver, qualifying it as a primary “miner”. Fast-forward to Q4’18 and WPM’s silver output plunged 27.1% YoY to 5,254k ounces! But its gold mined rose 10.5% YoY to 107k ounces. That pushed the implied percentage of WPM’s revenues down to just 36.8% silver, way below the 50% primary threshold. Like it or not, the silver-mining industry is increasingly turning yellow.

This strategic shift is good and bad. The major silver miners’ growing proportion of gold output is helping these companies weather this long dark winter in silver prices. But lower percentages of sales generated from silver leaves their stock prices and SIL less responsive to silver price moves. Silver stocks’ leverage to silver is the main reason investors buy them and their ETFs. Their shift into gold is really degrading that.

In Q4’18 the top 17 SIL silver miners averaged just 39.6% of their sales from silver. Only Pan American Silver, First Majestic Silver, Silvercorp Metals, and Endeavour Silver qualified as primary silver miners with over half their revenues from the white metal. While still low, that 39.6% average of SIL was actually considerably better than Q4’17’s 36.0% despite the ongoing transition into gold. But that’s not a trend shift.

In Q4’17 SIL’s components included Tahoe Resources, which was bought out by Pan American Silver in mid-November. Tahoe owned what was once the world’s largest silver mine, Escobal in Guatemala. It produced 5,700k ounces in Q1’17! But Guatemala’s government shut it down after a frivolous lawsuit by anti-mining activists. I last discussed the whole Tahoe saga in depth in my Q3’18 essay on silver miners’ results.

By Q4’17 Escobal’s production had dropped to zero, leaving Tahoe’s silver purity at 0.0%. That dragged down the SIL top 17’s average, leaving it artificially low. But Pan American buying Tahoe for both its gold production and hopes of convincing Guatemala to allow Escobal to reopen killed Tahoe’s stock and purged it from SIL’s ranks. Endeavour Silver edged into the top 17 to take its place, with 59.6% of sales from silver.

If Tahoe’s silver purity is excluded from Q4’17’s overall calculation while Endeavour is added, SIL would have averaged 39.9%. So in comparable terms Q4’18’s 39.6% remains a declining trend. Primary silver miners continue to get rarer, they may even be a dying breed. That has forced SIL’s managers to really scrape the bottom of the barrel to find components to fill their ETF. That’s what happened with Korea Zinc.

This is no silver miner, but a base-metals smelter! In mid-March it commanded a hefty 13.2% weighting in SIL, over 1/8th the total. I’ve searched and searched, but can’t find English financial reports for this company. But in 2017 it reported smelting 66.2m ounces of silver, a 16.6m quarterly pace. I bet there’s not a single SIL investor looking for base-metals-smelting exposure! Global X really ought to remove it entirely.

The capital allocated to Korea Zinc could be spread across the remaining SIL components proportionally, reallocating and modestly upping their weightings. But the fact Korea Zinc even ever made it into SIL is a testament to how rarified the ranks of major silver miners have become. That won’t reverse unless silver mean reverts dramatically higher relative to gold and remains at much-better price levels for years on end.

With SIL-top-17 silver production sliding 3.9% YoY in Q4’18, the per-ounce mining costs should’ve risen proportionally. Silver-mining costs are largely fixed quarter after quarter, with actual mining requiring the same levels of infrastructure, equipment, and employees. So the lower production, the fewer ounces to spread mining’s big fixed costs across. SIL’s major silver miners indeed reported far-higher costs last quarter.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of silver, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q4’18 these SIL-top-17 silver miners reported cash costs averaging $6.46 per ounce. While that surged 37.0% YoY, it still remains far below prevailing prices. Silver miners face no existential threat.

The major silver miners’ average cash costs vary considerably quarter-to-quarter, partially depending on whether or not Silvercorp Metals happens to be in the top 17 or not. This Canadian company mining in China has negative cash costs due to massive byproduct credits from lead and zinc. So over the past couple years, SIL-top-17 average cash costs have swung wildly ranging all the way from $3.95 to $6.75.

The SIL-top-17 silver miners reported average AISCs of $13.28 in Q4’18, surging 31.0% higher YoY! That is troubling, climbing vexingly close to silver’s latest major secular low of $13.99 in mid-November. While Q1’19’s average silver price of $15.55 so far is much better, these profit margins are still tight for a long-struggling industry. Thankfully the major silver miners’ cost structure is better than that number implies.

The highest AISCs by far in Q4 came from SSR Mining, which was formerly known as Silver Standard Resources. They climbed another 11.7% YoY to nosebleed levels of $20.45 per ounce! But that’s not a normal situation. SSRM too is shifting into gold, gradually winding down its old Pirquitas silver mine. As it depletes, there are fewer ounces to spread its fixed costs of mining across which drives up per-ounce costs.

Excluding SSRM, the rest of the SIL top 17 reporting AISCs in Q4’18 averaged a more-reasonable $12.48 per ounce. And these major silver miners providing AISC outlooks for 2019 projected similar levels near $12.70. This is still on the high side, as the SIL top 17’s AISCs ran $10.14, $10.92, $10.93, and $13.53 in the preceding four quarters. But $12.48 is still profitable even with silver seriously languishing relative to gold.

Silver-mining profits really leverage higher silver prices, and big earnings growth attracts in investors to bid up stock prices. In Q4’18 silver averaged $14.53 per ounce. At the SIL top 17’s average AISCs ex-SSRM of $12.48, that implies the major silver miners as an industry were earning profits of $2.05 per ounce. Those are going to grow majorly this quarter. The almost-over Q1’19 has seen silver average $15.55.

With Q4’s AISCs among the highest silver miners have reported in years, they could very well decline in Q1. But assume they remain stable near $12.48. That implies the major silver miners earned about $3.07 per ounce in Q1. A mere 7.0% quarter-on-quarter silver rally could catapult silver-mining profits a massive 49.8% higher QoQ! This awesome profits leverage to silver is why silver stocks amplify silver’s upside.

Of course the greater a silver miner’s exposure to silver, the more its stock will surge as silver advances. First Majestic Silver had the highest silver purity in Q4 at 63.7% of its revenues derived from silver. Thus AG’s stock should thrive with higher silver prices. But SSR Mining’s mere 12.5% silver purity pretty much leaves silver irrelevant. As SSRM is overwhelmingly a primary gold miner, higher silver won’t move the needle.

So investors who want classic silver-stock exposure to leverage silver uplegs need to be smart about how they deploy capital. While buying SIL is easy, it is dominated by primary gold miners. And who on earth wants over 1/8th of their investment wasted in a giant base-metals smelter? The greatest gains in future silver uplegs will come in the stocks with the most silver exposure. They are what investors need to own.

Despite slowing silver production and their ongoing diversification into gold, the major silver miners still remain well-positioned to see huge profits growth as silver marches higher. Especially the primary ones. But with silver hammered to major secular lows in Q4’18, the accounting results of the SIL-top-17 silver miners were quite weak. 3.9%-lower production combined with 12.9%-lower average silver prices wasn’t pretty.

The following accounting comparisons exclude SIL’s largest component WPM. For some reason it waits until the end of March to report Q4 results, which is incredibly disrespectful to its shareholders. Q4 data is getting stale with Q1 ending. There’s no excuse to delay reporting with modern automated accounting systems gathering all data in real-time. For workflow reasons I had to write this essay before WPM reported.

Ex-WPM, the SIL top 17 sold $3.4b worth of metals in Q4’18, which was down 10.9% YoY. Given lower silver production and much-lower silver prices that was relatively good. But cash flows generated from operations collapsed 52.5% YoY to $444m in Q4. That means less capital available to finance mine expansions and new mine builds. Overall corporate treasuries at these companies fell 33.0% YoY to $2.6b.

Surprisingly the hard-GAAP-earnings picture actually improved over Q4’17, though still remained weak. Excluding WPM, the SIL-top-17 silver miners lost $202m in Q4’18. That cut in half Q4’17’s total losses of $412m. But both quarters’ accounting profits were skewed by big non-cash impairment charges. When lower-silver-price forecasts reduce economic reserves at mines, those perceived losses must be recognized.

AG wrote off $168m of its mines’ carrying value on its books in Q4’18 due to lower reserves driven by lower metals prices. The grades within individual ore bodies vary widely. Silver that is economic to mine at $20 might not be worth extracting at $15, so companies have to cut their reserves and flush those non-cash losses through their income statements. PAAS reported a smaller $28m impairment charge as well.

Together these two $196m writedowns alone accounted for 97% of the major silver miners’ Q4 losses. But even without them most of the other SIL top 17 still reported mild-to-moderate GAAP losses with the silver prices so darned low. The comparable Q4’17 results had big writedowns too, primarily $547m by Volcan to meet new accounting standards demanded by another company that bought 55% of its stock.

While the major gold miners had no excuse for their huge impairment charges in Q4’18 since gold was stable last year, silver miners did since silver was hammered. As silver mean reverts higher with gold and outpaces its rallying, the major silver miners’ GAAP profits will improve radically. That will attract in a lot more investors, especially to the primary silver miners. Those capital inflows ought to drive massive gains.

The key takeaway here is avoid SIL. The world’s leading silver-stock ETF is increasingly burdened with primary gold miners with insufficient silver exposure. And having over 1/8th of your capital allocated to silver miners squandered in Korea Zinc is sheer madness! If you want to leverage silver’s coming huge mean reversion higher relative to gold, it’s far better to deploy in smaller purer primary silver miners alone.

One of my core missions at Zeal is relentlessly studying the silver-stock world to uncover the stocks with superior fundamentals and upside potential. The trading books in both our popular weekly and monthly newsletters are currently full of these better gold and silver miners. Mostly added in recent months as these stocks recovered from deep lows, our unrealized gains are already running as high as 87% this week!

If you want to multiply your capital in the markets, you have to stay informed. Our newsletters are a great way, easy to read and affordable. They draw on my vast experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks. As of Q4 we’ve recommended and realized 1076 newsletter stock trades since 2001, averaging annualized realized gains of +16.1%! That’s nearly double the long-term stock-market average. Subscribe today for just $12 per issue!

The bottom line is the major silver miners are struggling. With silver falling to nearly a quarter-century low relative to gold in Q4, the miners’ results were naturally weak. Mining costs surged as production kept waning, reflecting the ongoing trend of major silver miners increasingly diversifying into gold. But silver-mining profits are still primed to explode higher as silver continues climbing in its young upleg with gold.

I’m quite excited about the pullback in gold because the fundamentals are getting better and the technical action is healthy.

Kirkland is a leader in the gold stock sector and it’s now in one of the important Investor’s Business Daily growth stock indexes.

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Silver recently started outperforming gold again, a watershed event. For long years this white metal has mostly lagged the yellow one, relentlessly battering silver sentiment. But gold surging into year-end 2018 finally sparked some life into moribund silver. This is a bullish sign, as silver has soared in the past once rising prices reach critical mass in attracting new investment capital. Silver looks to be nearing that point again.

Despite a good finish, 2018 was a rough year for silver. Its price slumped 8.6%, way worse than gold’s -1.6% performance. And that still masks miserable intra-year action. At worst in mid-November, silver had plunged 17.3% year-to-date. That was 2.2x gold’s comparable loss, and at $13.99 silver languished at a major 2.8-year low. A soul-crushing 96% of its early-2016 bull market had been reversed and lost!

Back in December 2015 silver had bottomed a few days before gold at a deep 6.4-year secular low. Over the next 7.6 months silver soared 50.2% higher, outpacing gold’s parallel new-bull upleg by 1.7x. That promising start didn’t pan out though, silver crumbed once gold’s advance stalled and failed. Ever since its August 2016 peak of $20.56, silver mostly ground sideways sandwiched between two major downlegs.

It was the latter one that finally bottomed in mid-November 2018, with hope lost and silver bearishness universal and suffocating. Silver’s fortunes are heavily dependent on gold, and silver effectively acts like a gold sentiment gauge. The weak silver prices reflected the lack of enthusiasm for gold, which wasn’t far above its own 19.3-month low of mid-August. Gold had slumped to $1200, and threatened to break below.

For better or worse, gold drives silver. Traders usually ignore the tiny silver market until gold has rallied long enough and high enough to convince them its upside momentum is sustainable. So when gold itself is down in the dumps, silver doesn’t have a prayer. But gold bottomed that day and started clawing back higher, so silver joined along in the bounce. That gradually grew into a new silver upleg over the next 8 weeks.

By early January, silver had rallied 12.4% on a 7.7% gold rally. That made for 1.6x upside leverage to gold, which is still on the low side historically. But it was a welcome change after silver spent much of last year sliding considerably. A sub-span of that advance really caught my attention. Between the hawkish FOMC meeting on December 19th to the young new year on January 3rd, silver surged 7.9% in 9 trading days.

That was 1.9x gold’s 4.2% advance, and silver’s best outperformance relative to gold since that major upleg in H1’16! Something was changing in the left-for-dead silver market, with capital starting to return after more than a couple years of self-imposed exile. Over this past week silver enjoyed another solid stretch of outperformance, offering further confirmation. It started last Friday when gold itself soared 1.7%.

Gold ignited after a Wall Street Journal article claiming the Fed was considering ending its quantitative tightening early! That dovishness hit the U.S. dollar and catapulted gold higher. Over the next 4 trading day’s silver surged 4.8% on gold’s 3.0%, for 1.6x leverage. If that buying can push silver high enough to reach a psychological critical mass and become self-feeding, it portends major silver upside in coming months.

The more silver rallies, the more speculators and investors will want to buy it. The more capital they push into silver, the faster it will ascend. Buying begets buying in silver just like almost everywhere else in the markets. While upside momentum in itself is bullish anytime, silver’s upside potential is far greater than usual because it has been so darned undervalued. That’s made room for massive mean-reversion gains.

Silver’s “valuation” can be inferred relative to gold, its dominant driver. While the global silver and gold supply-and-demand profiles are independent with little direct linkage, these precious metals are joined at the hip psychologically. Silver rarely rallies materially unless gold leads the way. Silver traders look to gold for cues, which makes silver amplify gold’s moves. Silver’s technical relationship to gold is ironclad.

All this makes the Silver/Gold Ratio the most-important fundamental measure of silver-price levels. It is technically calculated by dividing daily silver closes by daily gold closes. But that yields tiny decimals that are hard to parse mentally, like the mid-week SGR of 0.012x. It is far more brain-friendly to consider this ratio from the opposite direction, via the Gold/Silver Ratio. This week it ran at an easier-to-comprehend 82.2x.

Mathematically the SGR is identical to an inverted GSR. So charting the GSR with an upside-down scale yields the same line as the SGR, but with way-more-intelligible numbers. Here this inverted-GSR SGR proxy in blue is superimposed over the silver price in red. Silver has rarely been lower relative to gold than it was in recent months. That portends monster upside as silver mean reverts higher leveraging gold.

At that latest secular silver low in mid-November, the SGR fell to 85.9x. In other words, it took nearly 86 ounces of silver to equal the value of one ounce of gold. While silver started recovering, it initially lagged gold enough to force the SGR lower still. At the end of November it slumped as low as 86.3x on close, an astounding level. That was actually an extreme 23.8-year secular low in the SGR, nearly a quarter-century!

Silver hadn’t been lower relative to gold since early March 1995, practically a lifetime ago considering all that’s happened in the financial markets since. Even during the greatest market fear event in our lifetimes the SGR wasn’t lower. During late 2008’s first-in-a-century stock panic, the SGR just briefly hit 84.1x in mid-October. Being highly-speculative and super-sensitive to sentiment, silver had plummeted leading into it.

That stock-panic episode of extreme SGR lows shows what’s probable after silver inevitably reverses and mean reverts higher. Over the 3.7 years since 2005 leading into that panic, the SGR averaged 54.9x. That was right in line with the mid-50s that had been normal for decades. Silver had generally oscillated around 1/55th the price of gold, so miners had long used 55x as the proxy for calculating silver-equivalent ounces.

With silver so radically out of whack relative to gold, those extreme SGR panic lows weren’t sustainable. Like a beachball pushed too far under water, silver was ready to explode higher to reestablish its normal relationship with gold. That indeed happened during the post-panic years. After plummeting as low as $8.92 in late-November 2008, silver more than doubled by early December 2009 with a 115.4% gain.

While silver was really outperforming gold after its anomalous lows, at best in that initial post-panic rally the SGR only regained 58.6x. That was still below the 55x secular average. So silver continued slowly grinding higher on balance into late 2010. Then gold started surging again, creating the right sentiment conditions to unleash self-feeding silver buying. Silver skyrocketed from there, surging far faster than gold!

The faster silver soared into early 2011, the more traders wanted to own it and the more capital they poured into it. This psychological phenomenon of higher prices being more attractive runs through nearly all markets. The crazy bitcoin mania in late 2017 was a recent example. Silver’s virtuous circle of surging and new capital inflows finally climaxed in late April 2011 at $48.43 per ounce. That was one heck of a bull.

Starting from those extreme stock-panic lows radically undervalued relative to gold, silver had rocketed 442.9% higher in 2.4 years! And that massive run didn’t simply stop at a 55x SGR, but instead the huge buying momentum drove a proportional upside overshoot. The SGR peaked at 31.7x, which was 4/5ths as far above that long-term 55x mean as the SGR was below it at stock-panic lows. This principle is crucial.

After longstanding price relationships driven by some kind of inexorable fundamental or psychological links are forced to extremes, they don’t just mean revert. That reversion momentum blasts them right through their average to overshoot proportionally towards the opposing extreme! This behavior is very pendulum-like. The farther the SGR is pulled one way, the stronger its swing towards the other side of the arc.

Interestingly that massive mean-reversion-overshoot bull following 2008’s stock panic ultimately dragged the SGR high enough to average 56.9x in those post-panic years between 2009 to 2012. Despite great volatility in this ratio, it continued to gravitate towards that 55x secular mean. That persisted until early 2013 when the Fed’s unprecedented open-ended third quantitative-easing campaign greatly distorted markets.

That year alone the Fed conjured $1020b of QE capital out of thin air to inject into the markets! That forced the flagship US S&P 500 broad-market stock index 29.6% higher that year. Such blistering gains made investors forget about gold and silver, so they fell precipitously. That shattered fragile sentiment leading to multi-year bear markets in the precious metals. Silver leveraged gold’s downside like usual.

Thus the SGR slowly collapsed between early 2013 to early 2016 as gold and silver languished in Fed-driven bear markets. That was a very-challenging time psychologically, scaring away the great majority of contrarian speculators and investors. Ultimately silver plunged so far that the SGR fell to 83.2x at worst in late February 2016. That was an extreme low rivaling the 2008 stock panic’s, which truly defies all reason.

Again such SGR extremes weren’t sustainable, so silver blasted higher with gold and amplified its gains in roughly the first half of 2016. Unfortunately that new-bull upleg was cut short, capping silver at mere 50.2% gains and the SGR at 65.9x. Silver’s typical mean reversion out of extreme SGR lows was indeed underway, but unfortunately it was short-circuited by Trump’s stunning surprise election victory that November.

The stock markets started surging on hopes for big tax cuts soon with Republicans controlling the House, Senate, and presidency. So stock traders dumped gold-ETF shares which hammered the gold price and sucked silver down with it. Silver continued underperforming gold on balance until late November 2018 and that latest extreme 86.3x SGR low. Silver both fell faster than gold and rallied slower than it over this span.

Again that crazy nearly-quarter-century low in silver prices relative to gold prices was more extreme than both during late 2008’s stock panic and after late 2015’s secular low. Shockingly the SGR average since Q4’15 is now running 76.2x, which is actually worse than the 75.8x in the four months in late 2008 hosting that stock panic! Silver has languished far too low relative to gold in recent years, an unsustainable anomaly.

That guarantees a massive mean reversion higher for silver as gold’s young upleg continues to unfold. Seeing gold power higher on balance will motivate speculators and investors to redeploy into silver, which will fuel outsized gains in the white metal. That process is already underway, as proven by silver’s sharp gains relative to gold straddling the dawn of this new year. Silver is starting to outperform gold and mean revert!

Let’s assume the worst-case scenario, a silver upleg that fizzles prematurely due to an exogenous shock like Trump’s election win was back in late 2016. If the SGR merely revisits 65x, at $1250 gold that would mean silver near $19.25. While that’s only a 38% upleg from the mid-November lows, it is still well worth riding. At $1300 and $1350 gold, that very-low 65x SGR would yield silver prices near $20.00 and $20.75.

But with the stock markets almost certainly rolling over into a major new bear, it’s unlikely gold’s upleg will be truncated small again. As long as stocks generally weaken, gold investment demand will remain high driving up gold prices. That will keep traders excited about silver, chasing its gains and bidding it ever higher. It’s hard to imagine the SGR not at least mean reverting to its 55x secular average in this scenario.

At 55x and $1250, $1300, and $1350 gold, silver would power up near $22.75, $23.75, and $24.50. Such levels would make for a total silver upleg of 63%, 70%, and 75% from those deep mid-November lows. So even without a proportional overshoot, silver’s upside potential is big after being hammered to such deep lows relative to gold. Some magnitude of mean reversion higher is certain after such extreme SGR lows.

It would take a major gold upleg running for a couple years to fuel an SGR overshoot. In essentially the first half of 2016, this gold bull’s first upleg powered about 30% higher. That is actually on the small side by historical gold-upleg standards. Apply it to gold’s deep mid-August lows driven by record short selling in gold futures, and that yields an upleg target near $1525. That would work wonders for silver sentiment.

Once gold breaks decisively above its bull-to-date peak of $1365 from July 2016, excitement will explode driving outsized self-feeding investment demand. That should fuel a proportional mean-reversion overshoot in silver. Silver far outperforming gold as capital flooded in could even push the SGR up near 35x briefly. While such an upside extreme wouldn’t last any longer than downside ones, silver would soar.

At $1400, $1450, and $1500 gold, a mean-reversion-overshoot SGR of 35x would catapult silver way up near $40.00, $41.50, and $42.75 per ounce! That implies silver upleg gains ranging from 186% to 206% from mid-November’s low. The key takeaway here is after extreme SGR lows, silver’s resulting mean-reversion gains can grow massive. Silver far outperforms gold for a long time after underperforming for years.

That inevitable outperformance already started through late December and early January, when the SGR recovered sharply from 86.3x to 82.0x. That rapid rebound in silver prices is a strong indication that a major mean reversion is now underway. And history proves that once silver starts moving, it tends to rally fast as momentum builds. Buying begets buying, with higher silver prices fueling larger capital inflows.

As always the biggest gains will be won by the fearless contrarians who buy in early before everyone else figures this out. Investors and speculators alike can play silver’s big coming upside in physical bullion, its leading SLV iShares Silver Trust silver ETF, and the silver miners’ stocks. But only the latter will leverage silver’s gains, making them exceptionally attractive. Consider their example from that last major silver upleg.

Again in 7.6 months in mostly the first half of 2016, silver powered 50.2% higher before Trump’s surprise election win short-circuited that rally. The leading SIL Global X Silver Miners ETF rocketed an immense 247.8% higher in essentially that same span! That made for huge 4.9x upside leverage to silver’s gains, which is pretty awesome. The major silver miners’ stocks will amplify silver’s upside in its next big upleg too.

At Zeal we recognized the extreme anomalous lows in the SGR in late 2015 and early 2016 and deployed aggressively in both gold and silver stocks. The resulting gains were outstanding, with the stock trades in our popular weekly and monthly newsletters averaging +111.0% and +89.7% annualized realized gains in 2016! We’ve filled our trading books again in recent months in anticipation of the next big gold and silver uplegs.

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The bottom line is silver has started outperforming gold again. After getting pummeled near a quarter-century low relative to gold, silver started surging late last year. Following past extreme SGR lows, silver powered higher in major-to-massive mean-reversion uplegs and bull markets. Their advents have been signaled by silver beginning to rally faster than gold after suffering long periods of underperformance.

That’s now happening again, which is a super-bullish omen for silver. Capital inflows are accelerating as gold’s gains restore more-favorable sentiment. As long as gold continues meandering higher on balance, silver buying will beget more silver buying. That portends big gains coming in silver and especially the stocks of its miners. Silver mean reversions higher out of extreme lows relative to gold can run for years.

Special Offer For Website Readers: Please send me an Email to freereports4@gracelandupdates.com and I’ll send you my free “Silver Stocks Rock!” report. I highlight the SIL and SILJ ETF component stocks that are poised to enter January like silver bullets shot out of a golden gun! I include key tactics to keep investors on the winning side of the action in both the short and long term!

Author’s note: I have covered Northern Vertex (NHVCF) previously in 2018 in these articles here, here, and here.

The purpose of this article is to update you on the recent streaming deal with Maverix Metals (OTCPK:MACIF) as well as the $8 million funds earned through a private stock placement. Both deals were aimed at cleaning up the debt on the balance sheet as well as providing cash for operations and some further exploration of the Moss mine area.

I interviewed Kenneth Berry who is President, CEO, and a Director with the company. CFO Christopher Park and Communications Manager Chris Curran were also in attendance.

In addition to those points, Northern Vertex has options to increase exploration of the Moss mine area in the Oatman district with award winning exploration team Perry Durning and Bud Hillemeyer.

In addition to the exploration upside, now that Northern Vertex has solidified their financial standing, the company is positioned to take advantage of possible expansion. Some research provided to the company shows the power of increasing both production rates and reserves in terms of market liquidity, higher market capitalization, and more analyst coverage.

Optionality Analysis for Maverix and Northern Vertex

Here is my optionality analysis for both companies given different possible silver prices, including spot price as of time of writing the article.

Maverix is making out pretty well on this deal, staying under the current floor for the silver price. If silver price does rise substantially, Maverix’s total cost of silver as a percent of the spot price falls precipitously.

Northern Vertex gets immediate partial monetization of their silver and higher byproduct credits, per project gold ounce, as the price of silver rises. The original project feasibility study had the AISC (all in sustaining cost) of gold at $603 given the silver byproduct credits. Since this deal was put into place, we can expect the AISC to rise somewhat due to sharing the silver profits with Maverix.

However, the project is still low cost with respect to the average gold mining costs found in the industry. And Northern Vertex just eliminated a lot of risk from their balance sheet by eliminating the Sprott debt and adding to their cash reserves. This move should provide plenty of runway to optimize their mine and get to their expected production rates without having to take on additional debt.

What the Deal Says About Confidence in the Project

The new financing shows that streaming companies such as Maverix Metals have confidence in the company to deliver on production targets.

Maverix Metals has an established streaming agreement with Pan American Silver at La Colorada in Mexico and Endeavour Mining in Burkina Faso, so it is no stranger to making deals with strong, established precious metals mining companies.

But Maverix’s strategy also seems to be financing smaller development projects with solid price upside. In the case of this deal with Northern Vertex, they saw an opportunity to finance a new operator and obtain undervalued silver assets that give them a very cash flow positive optionality play on the upside price for silver.

The best time to make this deal was right after Northern Vertex began production, had some debts to pay for developing the mine, and had not delivered the bulk of the metals in the project yet.

Further, the Maverix option includes total mine output well beyond the initial 2.99 million recoverable silver ounces. The agreement agrees to purchase 100% of silver ounces up to 3.5 million. Also, the deal gives Maverix the ability to purchase 50% of silver beyond the 3.5 million ounces, suggesting Maverix thinks there is more gold and silver to be found on the property, perhaps in the Western and Eastern extensions as shown in the graphic above.

Maverix is not the only company that has shown confidence in Northern Vertex to produce on the project. Sprott had provided a $100 million line of credit initially which Nortern Vertex had drawn $20 million against. I am told by management that the possibility of further financing with Sprott, should the company want to expand, is still an option as they have maintained their positive relationship. Paying off the debt early and strengthening the balance sheet certainly helps the case if they needed to use that option.

What are the Risks?

The main risk that I took away from the conversation with Ken Berry was that Northern Vertex is not ready to estimate their current AISC. To be fair, they have not had enough production time to calculate actual production costs plus additional expenditures to expand operations. It will take more time for data to be made available to come up with a tangible, reliable AISC number.

Further, he stated that the initial production costs of gold are above the feasibility number, which was $603 per gold ounce. I am not overly worried about that right now for two reasons:

However, there is still a risk that the costs are substantially higher than the feasibility study would indicate, which would drive the overall project value down. Northern Vertex’s current market cap is currently valued well below their project NPV.

The research provided in the graphic above from Haywood Research shows that overall sector market caps are priced within ranges and not tied directly to project NPVs, but more on sentiment indicators like analyst coverage and overall project size. Investors have not appeared to spent enough time in precious metals sector to appropriately value projects and make their bets.

As the general stock market volatility continues into 2019, I believe investors will spend time analyzing their options and find that the precious metals markets are sorely undervalued.

I believe this to be an arbitrage opportunity right now for smart value investors looking at cheaply priced assets, and perhaps licking their wounds from falling stock values in the wildly popular technology sector which has been punished since October.

I think the market scenario has played into Northern Vertex’s hands as it has allowed them to develop the mine largely unnoticed, while still showing the ability to finance their operations with two established industry partners who know how precious metals mining works.

When the broad market takes notice of the sector, Northern Vertex will likely be one of the companies that catches some of that new investor money coming in due to their relatively low level risk factors.

Stay Tuned

We are much closer to the Renaissance in precious metals markets than we have been since the last major market crash. The macro story is playing into the hands of precious metals, and will reward the miners and investors with key positions.

Therefore, for 2019 I will be adding coverage for more companies in the precious metals sector that I also believe are undervalued. And lastly, I will continue to provide coverage for Northern Vertex throughout 2019 as production continues to ramp up and major news events happen.

What a day! This is incredible! We called it with our wave counts, and now it’s really happening as the Fed may have just blinked!

Within wave .iii. we are now working on our first impulsive sequence, as shown on our “Daily Gold Chart”.

Within that first impulsive sequence we believe that we are working on a subdividing wave $iii$. Within wave $iii$, wave !i! ended at the 1246.00 high and all of wave !ii! at 1196.60.

Within wave !iii! it looks like we are subdividing again as shown on the Daily Gold Chart. It looks like wave ?i? ended at 1230.90 and that we are now falling in wave ?ii?.

We expected that gold should drop a little further before all of wave ?ii? ends, and that’s exactly what happened.

We do have higher projections. Of course, wave .iii. should subdivide into a 5 wave impulsive sequence in its journey higher.

In the very short term, silver has been correcting the rally from 13.86 to 14.54. Silver could be ready to move higher again quite soon.

We are working on the assumption that all of wave ii ended at the 13.86 low and that we are now starting to work higher…

Silver will accelerate higher (and perhaps quite dramatically) with gold once the 95.93 low in the USDX gives way.

We also need to break above our red downtrend line that is shown on the Daily Silver Chart that connects 17.35 and 14.92.

We have now updated our count to suggest that all of wave ^i^ ended at the 19.92 high and that all or most of wave ^ii^ at the 18.72 low.

If that is the case then we should now be moving higher in wave ^iii^, as the next big event in this market.

We are now working on the assumption that all of wave -ii- is complete at the 18.26 low and that we are now rallying in wave -iii-.

Kinross: Has now completed its minimum requirements for a completed wave (ii), at the 2.38 low. Wave (iii) rally is now underway.

Barrick: We have completed the minimum requirements for a completed wave (ii) at the 9.53 low. Wave (iii) rally is now underway.

HUI: We have completed the minimum requirements for a completed wave (ii), at the 131.12 low. Wave (iii) rally is now underway.

XAU: We have completed the minimum requirements for a completed wave 2 at the 60.59 low. Wave 3 rally is now underway.

Trading Recommendation: We continue to suggest buying all of the above gold stocks and indices, for a long term hold.

Active Positions: We are long the GDX, ABX, KGC, NEM, SSR, and TSX:XGD with no stops!!

Free Offer For Website Readers: Please send me an Email to admin@captainewave.com and I’ll send you our free “Gold could Hit $1300 By Christmas!” report. We highlight our new weekly wave counts chart for GDX, which suggests that $1300 gold by Christmas can really happen! We discuss tactical approaches to make money on the play!

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The major silver miners’ stocks have been largely abandoned this year, spiraling to brutal multi-year lows. Such miserable technicals have exacerbated the extreme bearishness plaguing this tiny contrarian sector. While profitable silver mining is challenging at today’s exceedingly-low silver prices, these miners are chugging along. Their recently-reported Q3’18 results show their earnings are ready to soar as silver recovers.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Companies trading in the States are required to file 10-Qs with the US Securities and Exchange Commission by 40 calendar days after quarter-ends. Canadian companies have similar requirements at 45 days. In other countries with half-year reporting, many companies still partially report quarterly.

Unfortunately the universe of major silver miners to analyze and invest in is pretty small. Silver mining is a tough business both geologically and economically. Primary silver deposits, those with enough silver to generate over half their revenues when mined, are quite rare. Most of the world’s silver ore formed alongside base metals or gold. Their value usually well outweighs silver’s, relegating it to byproduct status.

The Silver Institute has long been the authority on world silver supply-and-demand trends. It published its latest annual World Silver Survey covering 2017 in mid-April. Last year only 28% of the silver mined around the globe came from primary silver mines! 36% came from primary lead/zinc mines, 23% copper, and 12% gold. That’s nothing new, the silver miners have long produced less than a third of world mined supply.

It’s very challenging to find and develop the scarce silver-heavy deposits supporting primary silver mines. And it’s even harder forging them into primary-silver-mining businesses. Since silver isn’t very valuable, most silver miners need multiple mines in order to generate sufficient cash flows. Traditional major silver miners are increasingly diversifying into gold production at silver’s expense, chasing its superior economics.

So there aren’t many major silver miners left out there, and their purity is shrinking. The definitive list of these companies to analyze comes from the most-popular silver-stock investment vehicle, the SIL Global X Silver Miners ETF. In mid-November at the end of Q3’s earnings season, SIL’s net assets were running 6.6x greater than its next-largest competitor’s. So SIL continues to dominate this tiny niche contrarian sector.

While SIL has its flaws, it’s the closest thing we have to a silver-stock index. As ETF investing continues to eclipse individual-stock picking, SIL inclusion is very important for silver miners. It grants them better access to the vast pools of stock-market capital. Differential SIL-share buying by investors requires this ETF’s managers to buy more shares in its underlying component companies, bidding their stock prices higher.

In mid-November as the silver miners were finishing reporting their Q3’18 results, SIL included 23 “Silver Miners”. Unfortunately the great majority aren’t primary silver miners, most generate well under half their revenues from silver. That’s not necessarily an indictment against SIL’s stock picking, but a reflection of the state of this industry. There aren’t enough significant primary silver miners left to fully flesh out an ETF.

This disappointing reality makes SIL somewhat problematic. The only reason investors would buy SIL is they want silver-stock exposure. But if SIL’s underlying component companies generate just over a third of their sales from silver mining, they aren’t going to be very responsive to silver price moves. And most of that ETF capital intended to go into primary silver miners is instead diverted into byproduct silver miners.

So silver-mining ETFs sucking in capital investors thought they were allocating to real primary silver miners effectively starves them. Their stock prices aren’t bid high enough to attract in more investors, so they can’t issue sufficient new shares to finance big silver-mining expansions. This is exacerbating the silver-as-a-byproduct trend. Only sustained much-higher silver prices for years to come could reverse this.

Silver miners’ woes are really exacerbated by silver’s worst performance in decades. In mid-November silver sunk to a 2.8-year low of $13.99. That naturally dragged down SIL to a similar 2.7-year low. But relative to gold which usually drives it, silver was faring far worse. The Silver/Gold Ratio sunk to 85.9x in mid-November, meaning it took almost 86 ounces of silver to equal the value of a single ounce of gold.

The SGR hadn’t been lower, or silver hadn’t been more undervalued relative to gold, since all the way back in March 1995! That’s pretty much forever from a markets perspective. With silver languishing at an exceedingly-extreme 23.7-year low relative to gold, it’s hard to imagine it doing much worse. So the silver miners are weathering one of the toughest environments they’ve ever seen, which we have to keep in mind.

Every quarter I dig into the latest results from the major silver miners of SIL to get a better understanding of how they and this industry are faring fundamentally. I feed a bunch of data into a big spreadsheet, some of which made it into the table below. It includes key data for the top 17 SIL component companies, an arbitrary number that fits in this table. That’s a commanding sample at 96.9% of SIL’s total weighting!

While most of these top 17 SIL components had reported on Q3’18 by mid-November, not all had. Some of these major silver miners trade in the UK or Mexico, where financial results are only required in half-year increments. If a field is left blank in this table, it means that data wasn’t available by the end of Q3’s earnings season. Some of SIL’s components also report in gold-centric terms, excluding silver-specific data.

The first couple columns of this table show each SIL component’s symbol and weighting within this ETF as of mid-November. While most of these stocks trade on US exchanges, some symbols are listings from companies’ primary foreign stock exchanges. That’s followed by each miner’s Q3’18 silver production in ounces, along with its absolute year-over-year change. Next comes this same quarter’s gold production.

Nearly all the major silver miners in SIL also produce significant-to-large amounts of gold! That’s truly a double-edged sword. While gold really stabilizes and boosts silver miners’ cash flows, it also retards their stocks’ sensitivity to silver itself. So the next column reveals how pure these elite silver miners are, approximating their percentages of Q3’18 revenues actually derived from silver. This is calculated two ways.

The large majority of these top SIL silver miners reported total Q3 revenues. Quarterly silver production multiplied by silver’s average price in Q3 can be divided by these sales to yield an accurate relative-purity gauge. When Q3 sales weren’t reported, I estimated them by adding silver sales to gold sales based on their production and average quarterly prices. But that’s less optimal, as it ignores any base-metals byproducts.

Percentage changes aren’t relevant or meaningful if data shifted from positive to negative or vice versa, or if derived from two negative numbers. So in those cases I included raw underlying data rather than weird or misleading percentage changes. This whole dataset together offers a fantastic high-level read on how the major silver miners are faring fundamentally as an industry. They are hanging in there quite well.

Production is naturally the lifeblood of the silver-mining sector. The more silver and increasingly gold that these elite miners can wrest from the bowels of the earth, the stronger their fundamental positions and outlooks. These top 17 SIL miners’ overall silver production slipped 2.2% YoY to 75.5m ounces in Q3’18. But their shift into more-profitable gold mining continued, with aggregate production up 1.6% YoY to 1.4m ounces.

According to the Silver Institute’s latest WSS, total world silver mine production averaged 213.0m ounces per quarter in 2017. So at 75.5m in Q3, these top 17 SIL components were responsible for 35.4% of that rate. There is one unusual situation that slightly skewed this result. SSR Mining, which used to be known as Silver Standard Resources, saw its silver production plummet 57% YoY as its lone silver mine is depleting.

The winding down of SSRM’s old Pirquitas silver mine is proceeding as forecast and has been going on for some time. This once major silver miner is morphing into a primary gold miner, which accounted for a record 94% of its revenue in Q3. Excluding SSRM, the rest of these top SIL silver miners saw their silver production retreat an immaterial 1.3% YoY. That’s pretty impressive given this year’s collapse in silver prices.

Q3’s average silver price was just $14.96, down a major 11.2% YoY. That was far-worse performance than gold, with its quarterly average merely sliding 5.3% lower between Q3’17 to Q3’18. Considering how miserable this silver-price environment is with the worst relative performance to gold in decades, the major silver miners are doing well on production. They continue to hold out for silver mean reverting higher.

Silver is likely so down in the dumps because it effectively acts like a gold sentiment gauge. Generally big silver uplegs only happen after gold has rallied long enough and high enough to convince traders its gains are sustainable. Then the way-smaller silver market tends to start leveraging and amplifying gold’s moves by 2x to 3x. But gold sentiment was so insipid over this past year that no excitement was sparked for silver.

Unfortunately at these bombed-out silver prices the economics of silver mining are way inferior to gold mining. The traditional major silver miners are painfully aware of this, and have spent years actively diversifying into gold. In Q3’18, the average percentage of revenues that these top 17 SIL miners derived from silver was just 36.9%. That’s right in line with the prior 4 quarters’ 39.3%, 35.3%, 36.8%, and 36.3%.

Silver mining is every bit as capital-intensive as gold mining, requiring similar large expenses for planning, permitting, and constructing mines and mills. It needs similar heavy excavators and haul trucks to dig and move the silver-bearing ore. Similar levels of employees are necessary to run these mines. But silver generates much lower cash flows due to its lower price. Consider hypothetical mid-sized silver and gold mines.

They might produce 10m and 300k ounces annually. At last quarter’s average prices, these silver and gold mines would yield $150m and $363m of yearly sales. Thus regrettably it is far easier to pay the bills mining gold these days. So primary silver miners are increasingly becoming a dying breed, which is sad. The traditional major silver miners are adapting by ramping their gold production often at silver’s expense.

With major silver miners so rare, SIL’s managers are really struggling to find components for their leading ETF. So in Q3’17 they added Korea Zinc, which is now SIL’s largest component at over 1/7th of its total weighting. In my decades of studying and trading this tiny sector, I’d never heard of it. So I looked into Korea Zinc and found it was merely a smelter, not even a miner. It really needs to be kicked out of SIL.

Every quarter since I’ve tried to dig up information on Korea Zinc, but its English-language disclosures are literally the worst I’ve ever seen for any company. Its homepage gives an idea of what to expect, declaring “We are Korea Zinc, the world’s one of the best smelting company”. I’ve looked and looked and the latest production data I can find in English remains 2015’s. I can’t find it from third-party sources either.

That year Korea Zinc “produced” 63.3m ozs of silver, which averages to 15.8m quarterly. That is largely a byproduct from its main businesses of smelting zinc, lead, copper, and gold. Korea Zinc certainly isn’t a major silver miner, and has no place in a “Silver Miners ETF”. No silver-stock investor wants to own a base-metals smelter! Korea Zinc should be removed, its overweighting reallocated to the rest of SIL’s holdings.

SIL investors ought to contact Global X to ask them to stop tainting their ETF’s utility and desirability with Korea Zinc. If they want it to be successful and grow, they need to stick with their mission of owning the major silver miners exclusively. Silver-stock exposure is the only reason investors would buy SIL. There is another situation investors need to be aware of with Tahoe Resources and its held-hostage Escobal mine.

Tahoe was originally spun off by Goldcorp to develop the incredible high-grade Escobal silver mine in Guatemala, which went live in Q4’13. Everything went well for its first few years. By Q1’17, Escobal was a well-oiled machine producing 5700k ounces of silver. That provided 1000+ great high-paying jobs to locals and contributed big taxes to Guatemala’s economy. Escobal was a great economic boon for this country.

But a radical group of anti-mining activists managed to spoil everything, cruelly casting their fellow countrymen out of work. They filed a frivolous and baseless lawsuit against Guatemala’s Ministry of Energy and Mines, Tahoe wasn’t even the target! It alleged this regulator hadn’t sufficiently consulted with the indigenous Xinca people before granting Escobal’s permits. They don’t even live around this mine site.

Only in a third-world country plagued with rampant government corruption would a regulator apparently not holding enough meetings be a company’s problem. Instead of resolving this, a high Guatemalan court inexplicably actually suspended Escobal’s mining license in early Q3’17! Tahoe was forced to temporarily mothball its crown-jewel silver mine, and thus eventually lay off its Guatemalan employees.

That license was technically reinstated a couple months later, but the activists appealed to a higher court. It required the regulator to study the indigenous people in surrounding areas and report back, and then needs to make a decision. The government also needs to clear out an illegal roadblock to the mine site by violent anti-mine militants, who have blockaded Escobal supplies and physically attacked trucks and drivers!

So Escobal has been dead in the water with zero production for 5 quarters now, an unthinkable outcome. This whole thing is a farce, a gross miscarriage of justice. I hope this isn’t a stealth expropriation, that Guatemalan bureaucrats will get their useless paperwork done sooner or later and let Escobal come back online. Within a year, Escobal’s silver production should return to pre-fiasco levels of 5700k ounces a quarter.

At that rate, Escobal would retake the throne of being the world’s largest primary silver mine! It would boost overall SIL-top-17 production by a massive 7.6%. Last year no one expected this unprecedented Escobal debacle to last very long, as the economic damage to Guatemala was too great. But as it drags on and on, TAHO stock has been decimated. It slumped to a brutal all-time record low in mid-November.

Sadly for long-suffering TAHO shareholders, management capitulated. In mid-November they agreed to sell the company to Pan American Silver at rock-bottom prices despite a 55% premium over that all-time low. That’s devastating for TAHO investors but a steal for PAAS, which is SIL’s 4th-largest component at 11.9% of its total weighting. That keeps Escobal’s huge production in SIL if PAAS can finesse its reopening.

Unfortunately SIL’s mid-November composition was such that there wasn’t a lot of Q3 cost data reported by its top component miners. A half-dozen of these top SIL companies trade in South Korea, the UK, Mexico, and Peru, where reporting only comes in half-year increments. There are also primary gold miners that don’t report silver costs, and a silver explorer with no production. So silver cost data remains scarce.

Nevertheless it’s always useful to look at what we have. Industrywide silver-mining costs are one of the most-critical fundamental data points for silver-stock investors. As long as the miners can produce silver for well under prevailing silver prices, they remain fundamentally sound. Cost knowledge helps traders weather this sector’s left-for-dead unpopularity without succumbing to selling low like the rest of the herd.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of silver, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q3’18, these top 17 SIL-component silver miners that reported cash costs averaged $6.58 per ounce. While that surged 35.3% YoY, it still remains far below today’s anomalously-low silver prices.

There are a couple of extreme cash-cost outliers that are skewing this average, but offsetting each other. SSRM’s depleting silver mine is producing less with each passing quarter, forcing fewer ounces to bear the fixed costs of mining. Its crazy-high $17.41 per ounce in Q3 isn’t normal. But on the other side of this is Silvercorp Metals, which produces silver in Chinese mines yielding enormous base-metals byproducts.

Selling those and crediting their value across the silver ounces mined dragged down SVM’s cash costs to an unbelievable negative $3.37 in Q3! Excluding these extreme outliers, the rest of the SIL top 17 saw average cash costs of $6.40. That’s not too far above the past 4 quarters’ $4.86, $4.66, $5.05, and $3.95. As long as silver prices remain over those low levels, the silver miners can keep the lights on at their mines.

In Q3’18 these top 17 SIL miners reporting AISCs averaged $13.53 per ounce, which also surged 39.0% YoY. Again that was skewed in both directions by SSRM’s extremely-high $22.39 on Pirquitas’ depletion and SVM’s exceedingly-low $2.54 on those huge base-metals byproducts. Without them, the rest of the top 17 averaged $13.96 AISCs. That was much higher than the past 4 quarters’ $9.73, $10.16, $10.92, and $10.93.

The lower production was definitely a factor, which is inversely proportional to per-ounce costs. Silver-mining costs are largely fixed quarter after quarter, with actual mining requiring roughly the same levels of infrastructure, equipment, and employees. So the lower production, the fewer ounces to spread mining’s big fixed costs across. The major silver miners also reported lower ore grades, exacerbating the decline.

Nevertheless, the top 17 SIL miners’ AISCs both with and without the outliers still remained under silver’s weak average $14.96 price in Q3. So even with silver faring its worst relative to gold in decades thanks to devastated sentiment, the silver mines were profitable. And interestingly the closer AISCs crowd the prevailing silver prices, the more profits leverage the miners have to silver mean reverting much higher.

In mid-November silver and SIL slumped to their lowest levels since back in January and March 2016. That was early in a new silver bull which emerged from conditions like today’s where silver was despised. Over 7.6 months between December 2015 and August 2016, silver soared 50.2% higher as gold surged in its own new bull. And with silver moving again, investors eagerly started returning to the battered silver stocks.

Thanks to that silver-bull upleg, SIL skyrocketed 247.8% higher in just 6.9 months in essentially that first half of 2016! That ought to give embattled silver-stock investors some hope. All it will take to turn silver stocks around is a typical gold-driven silver upleg, and then they will soar again. The reason that silver miners’ stocks blast dramatically higher with silver is their high inherent profits leverage to silver prices.

Assume another 50% silver upleg, which is pathetically small by historical standards, from silver’s recent secular low in mid-November. That would catapult silver back up to $21 per ounce for the first time since July 2014. At Q3’18’s top-17-SIL-stock average AISCs of $13.53, profits were just $0.47 per ounce at $14 silver. But at $21 assuming stable AISCs, they would soar an astounding 1489% higher to $7.47 per ounce!

You better believe silver-stock prices would skyrocket with that kind of earnings growth. The higher their AISCs, the greater their upside profits leverage. Now consider this same 50% silver upleg using the rolling-past-4-quarter top-17-SIL-stock average AISCs of $10.43 per ounce. That implies the $3.57 profit seen at $14 silver would only balloon 196% to $10.57 per ounce at $21 silver. So higher costs aren’t necessarily bad.

As long as AISCs are below prevailing silver prices, the major silver miners can weather anything. The closer their AISCs creep to silver, the greater their earnings growth when silver mean reverts higher. So the major silver miners’ upside from here is truly explosive as silver recovers, just like back in early 2016. And silver will power much higher soon as the record silver-futures shorts of early September continue to be covered.

While all-in sustaining costs are the single-most-important fundamental measure that investors need to keep an eye on, other metrics offer peripheral reads on the major silver miners’ fundamental health. The more important ones include cash flows generated from operations, GAAP accounting profits, revenues, and cash on hand. As you’d expect given the miserably-low silver prices, they were on the weak side in Q3.

Operating cash flows among these SIL top 17 reporting them fell 23.0% YoY to $830m, which is totally reasonable given the 2.2%-lower silver production and 11.2%-lower average silver prices. Sales fell 9.5% YoY to $2717m, with some of the silver-side weakness offset by the 1.6%-higher gold production. And cash on hand fell 9.8% YoY to a still-hefty $2419m, giving these silver miners plenty of capital to weather this storm.

The hard GAAP accounting profits looked pretty ugly though, plunging to a $243m loss from being $88m in the black in Q3’17. But most of those losses didn’t reflect operations. TAHO alone wrote off a massive $170m for the impairment of Escobal, which reflected an estimated restart date of the end of 2019. Coeur Mining reported a smaller $19m writedown for one of its mines. These two non-cash charges alone were $189m.

Without them GAAP profits would’ve sunk from $88m in Q3’17 to a milder $54m loss in Q3’18. That’s still poor, but not unexpected given the lowest silver prices seen in almost several years. Again silver-mining earnings will soar if not skyrocket as silver inevitably mean reverts higher from here. All it takes for silver to surge in major bull-market uplegs is for gold itself to power higher, and huge gold upleg fuel abounds now.

The silver-mining stocks are doing way better fundamentally than they’ve been given credit for. Their higher Q3’18 mining costs still remained below the recent deep silver lows. And the compressed gap between their AISCs and low prevailing silver prices guarantees epic profits upside as silver recovers and mean reverts higher. That will attract back investors fast, catapulting silver stocks up sharply like in early 2016.

While traders can play that in SIL, this ETF has problems. Its largest component is now a base-metals smelter of all things! And the great majority of its stocks are primary gold miners with byproduct silver production. The best gains by far will be won in smaller purer mid-tier and junior silver miners with superior fundamentals. A carefully-handpicked portfolio of these miners will generate much-greater wealth creation.

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The bottom line is the major silver miners’ fundamentals remain solid based on their recently-reported Q3’18 results. They continue to mine silver at all-in sustaining costs below even mid-November’s deep silver lows. Their profits will multiply dramatically as silver rebounds higher driven by gold’s own upleg and record silver-futures short covering. Investment capital will flood back in, catapulting silver stocks up violently.

So traders need to look through the recent forsaken herd sentiment to understand the silver miners’ hard fundamentals. These left-for-dead stocks are seriously undervalued even at today’s low silver prices, let alone where silver heads during the next major gold upleg. Silver can’t languish at extreme anomalous multi-decade lows relative to gold for long. And once it catches a bid, silver stocks will really amplify its upside.

Lupaka Gold’s (TSX-V: LPK) Invicta Gold Project is on the brink of production, set to become Peru’s next producing gold mine.

What has been quietly observed is that (1) the grades are coming in higher than the PEA and (2) the company is already making plans to increase production above the PEA throughout rate of 350 tpd. All this means higher levels of production and cash flow once the actual mining commences later this year.

Recent underground sampling of mineralization is revealing an asset that offers more than originally outlined in the company’s April 2018 Preliminary Economic Assessment (“PEA”) which gives investors additional upside for any increases in mine output, improvement of grade and additional ounces to the overall resource.

The April 2018 PEA for the Invicta Mine outlined a mineral resource of 3 million tonnes of Indicated Mineral Resources at 5.78 grams per tonne (“g/t”) gold equivalent (“AuEq”) ounces using a 3.5-g/t cut-off grade (“COG”), and 600,000 tonnes of Inferred Mineral Resources at 5.49 g/t AuEq.

Within that resource the Company has a PEA that outlines an initial 6-year mine life that will produce produce a total of 669,813 tonnes of mineralized material processing 350 tonnes per day (“tpd”) at an average grade of 8.6 g/t Au-Eq. Lupaka’s grades included estimated metallurgical recoveries, and the true grade will likely be even higher than 8.5 g/t AuEq.

Just to highlight, with an all in sustaining cost (“ASIC”) of $575 per gold ounce equivalent, Lupaka Gold will be one of the lowest cost junior producers.

As part of the development work to put Invicta into production, Lupaka has been conducting channel sampling every 5 metres on all workings during development.

The results have demonstrated continuity of the high grade mineralization and additional potential that the Aetnea vein hosts.

In June, Lupaka released further results from a underground sampling program on the newly developed 3430 production sublevel.

In addition to the sampling, development and rehabilitation of the Invicta mine has provided ~6,500 tonnes of mineralized material from the 3400 Level and when sampled on surface returned an average grade of 7.21 g/t AuEq.

Grade consistency is always a problem with mining. However, it is appearing that the Invicta PEA outlined a muted gold grade on a smaller area of the known mineralization which does not highlight the potential for higher grade zones and the prospectivity of the area.

Higher grades could improve the bottom line as mining proceeds through the Aetnea vein and into the other zones around the current area of operational focus.

Past exploration at the Invicta mine property indicates that the property has considerable potential for mineral resource expansion through exploration.

Structural studies, geophysical and geochemical work conducted to date strongly suggest the potential for mineral resource expansion along existing mineralized structures.

Past sampling around Invicta revealed the exploration potential with many areas reporting grades greater than 6 g/t AuEq. mine

All in all, the focus on a smaller area for the PEA and initial mine plan reveals that the company’s plan has been to bring production online with a well defined resource with the Aetnea vein through underground mining with minimal capital expenditures, rather than trying to finance and build a large scale operation off the back.

With the commencement of limited toll mining in September, and the beginning of full scale production hopefully in October, Lupaka will have the necessary cash flow to conduct exploration and prove up more ounces in the ground and significantly alter the assumptions of the April 2018 PEA to extend the life of mine.

The next milestone is the final mining exploitation licence, which requires an inspection by the Peruvian Ministry of Mines and Energy.

The inspection will be performed before the end of October and upon receipt of the exploitation licence, the company will have the go ahead to produce at a rate of 400 tonnes per day, or 12,000 tonnes per month.

However, with the permit to operate at 400 tpd, the company could see its potential production increase by 14% from the 350 tpd production assumption outlined in the PEA, boosting the project’s cash flow.

Currently, shares in Lupaka gold are trading near year-lows which discounts a years’ worth of work and development that has improved access to the mine, defined a PEA, divestment of non primary assets, cash flow from initial toll mining and on the cusp of full scale mining.

The company laid out a plan to bring into production the Invicta mine with a small area of operational focus and a humble gold grade in comparison to recent sampling.

The plan is working and it is starting to reveal that there is more to the story than initially outlined…a good thing for investors.

*The author of this article was compensated for the creation of this article in cash. The author picked up shares in the public market, ranging from prices of 14 cents to 20 cents over the past year. This article is meant to serve informational and marketing purposes only and not a technical report and does not constitute a buy recommendation. As always, please do your own diligence.

*The Mineral Resource Statement for the Invicta Project is tabulated to a cut-off grade of 3.0 g/t Au-Eq. Cut-off grades are based on a price of US$1,250 per ounce of gold, US$17.00 per ounce of silver, US$3.00 per pound of copper, US$1.05 per pound of lead and US$1.20 per pound of zinc. The equivalent gold calculation assumes mill recoveries of 85 percent for gold, 80 percent for silver, 82 percent for copper and lead and 77 percent for zinc

The major silver miners’ stocks have been thrashed, pummeled to brutal multi-year lows. They suffered serious collateral damage as silver plunged on gold’s breakdown, driven by crazy-extreme all-time-record silver-futures short selling. All this technical carnage left investors reeling, devastating sentiment. The silver miners’ recently-reported Q2’18 results reveal whether their anomalous plunge was justified fundamentally.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Companies trading in the States are required to file 10-Qs with the US Securities and Exchange Commission by 45 calendar days after quarter-ends. Canadian companies have similar requirements. In other countries with half-year reporting, many companies still partially report quarterly.

So there aren’t many major silver miners left out there, and their purity is shrinking. The definitive list of these companies to analyze comes from the most-popular silver-stock investment vehicle, the SIL Global X Silver Miners ETF. In mid-August at the end of Q2’s earnings season, SIL’s net assets were running 6.7x greater than its next-largest competitor’s. So SIL continues to dominate this small niche contrarian sector.

In mid-August as the silver miners were finishing reporting their Q2’18 results, SIL included 23 “Silver Miners”. Unfortunately the great majority aren’t primary silver miners, most generate well under half their revenues from silver. That’s not necessarily an indictment against SIL’s stock picking, but a reflection of the state of this industry. There aren’t enough significant primary silver miners left to fully flesh out an ETF.

While most of these top 17 SIL components had reported on Q2’18 by mid-August, not all had. Some of these major silver miners trade in the UK or Mexico, where financial results are only required in half-year increments. If a field is left blank in this table, it means that data wasn’t available by the end of Q2’s earnings season. Some of SIL’s components also report in gold-centric terms, excluding silver-specific data.

The first couple columns of this table show each SIL component’s symbol and weighting within this ETF as of mid-August. While most of these stocks trade on US exchanges, some symbols are listings from companies’ primary foreign stock exchanges. That’s followed by each miner’s Q2’18 silver production in ounces, along with its absolute year-over-year change. Next comes this same quarter’s gold production.

Nearly all the major silver miners in SIL also produce significant-to-large amounts of gold! That’s truly a double-edged sword. While gold really stabilizes and boosts silver miners’ cash flows, it also retards their stocks’ sensitivity to silver itself. So the next column reveals how pure these elite silver miners are, approximating their percentages of Q2’18 revenues actually derived from silver. This is calculated two ways.

The large majority of these top SIL silver miners reported total Q2 revenues. Quarterly silver production multiplied by silver’s average price in Q2 can be divided by these sales to yield an accurate relative-purity gauge. When Q2 sales weren’t reported, I estimated them by adding silver sales to gold sales based on their production and average quarterly prices. But that’s less optimal, as it ignores any base-metals byproducts.

Percentage changes aren’t relevant or meaningful if data shifted from positive to negative or vice versa, or if derived from two negative numbers. So in those cases I included raw underlying data rather than weird or misleading percentage changes. This whole dataset together offers a fantastic high-level read on how the major silver miners are faring fundamentally as an industry. Was their recent plunge righteous?

Production is naturally the lifeblood of the silver-mining sector. The more silver and increasingly gold that these elite miners can wrest from the bowels of the earth, the stronger their fundamental positions and outlooks. These top 17 SIL silver miners failed to increase their mining tempos over this past year. Their collective silver and gold production deteriorated 4.4% and 2.1% YoY to 75.1m and 1327k ounces mined.

According to the Silver Institute’s latest WSS, total world silver mine production averaged 213.0m ounces per quarter in 2017. So at 75.1m in Q2, these top 17 SIL components were responsible for 35.3% of that rate. And their overall production decline last quarter is misleading, heavily skewed by two outliers with unusual situations. Tahoe Resources and SSR Mining reported huge 100.0% and 46.3% YoY production plunges!

Without TAHO and SSRM, the rest of these elite silver miners were able to grow their collective silver production by a decent 2.0% YoY. That’s impressive considering the miserable silver-price environment. Between Q2’17 and Q2’18, the average quarterly silver price slumped 3.9% to $16.51. That was really weak compared to gold, which actually rose 3.9% in quarterly-average terms to $1306 across these quarters.

Silver has always been driven by gold, effectively acting like a gold sentiment gauge. Generally big silver uplegs only happen after gold has rallied long enough and high enough to convince traders its gains are sustainable. Then the way-smaller silver market tends to start leveraging and amplifying gold’s moves by 2x to 3x. But gold sentiment was so insipid over this past year that no excitement was sparked for silver.

Yet the top 17 SIL silver miners excluding TAHO and SSRM were able to buck those silver headwinds to still grow production. That is setting up these companies for stronger profits growth once silver’s price inevitably mean reverts higher. It’s important to understand what’s going on with TAHO and SSRM though, as these are long-time favorites among American investors. TAHO’s silver production should return.

But a radical group of anti-mining activists managed to spoil everything, cruelly casting their fellow countrymen out of work. They filed a frivolous and baseless lawsuit against Guatemala’s Ministry of Energy and Mines, Tahoe wasn’t even the target! It alleged this regulator had not sufficiently consulted with the indigenous Xinca people before granting Escobal’s permits. And they don’t even live around this mine site.

That license was technically reinstated a couple months later, but the activists appealed to a higher court. It required the regulator to study the indigenous people in surrounding areas and report back, and now needs to make a decision. The government also needs to clear out an illegal roadblock to the mine site by violent anti-mine militants, who have blockaded Escobal supplies and physically attacked trucks and drivers!

So Escobal has been dead in the water with zero production for an entire year, an unthinkable outcome. This whole thing is a farce, a gross miscarriage of justice. Sooner or later the Guatemalan bureaucrats will get all their useless paperwork done and Escobal will come back online. After a few quarters or so of spinning back up, Escobal’s silver production should return to pre-fiasco levels around 5700k ounces a quarter.

That would boost SIL’s top 17 components’ current overall silver production by 7.6%. In my decades of intensely researching and actively trading mining stocks, I’ve never seen anything like this Escobal debacle. While TAHO’s cashflows are really impaired without this silver mine which was actually the world’s largest primary, it can weather this nightmare because of its other gold mines that yielded 102.6k ounces in Q2’18.

Thankfully SSR Mining’s silver-production plunge is far less dramatic. This company used to be known as Silver Standard Resources, and its old Pirquitas silver mine is simply depleting as forecast. SSRM is exploring in the area trying to extend the life of this old mine, which was joint-ventured and renamed the Puna Operations. But most of SSRM’s resources are being poured into its far-more-profitable gold mines.

That gold focus among these top silver miners is common across SIL’s components. As the silver-percentage column above shows, most of these elite silver miners are actually primary gold miners by revenue! Only 3 of these 17 earned more than half of their Q2’18 sales from mining silver, and they are highlighted in blue. WPM, PAAS, and TAHO are also top-34 components in the leading GDX gold miners’ ETF!

While they only comprised 7.8% of GDX’s total weighting in mid-August, this highlights how difficult it is to find primary silver miners. SIL’s managers have an impossible job these days with the major silver miners increasingly shifting to gold. They are really scraping the bottom of the barrel to find more silver miners. In Q3’17 they added Korea Zinc, and it’s now SIL’s 3rd-biggest holding with a hefty 11.9% total weighting.

That was intriguing, as I’d never heard of this company after decades deeply immersed in this small silver-mining sector. So I looked into Korea Zinc and found it was merely a smelter, not even a miner! Its English-language disclosures are atrocious, starting with its homepage reading “We are Korea Zinc, the world’s one of the best smelting company”. The latest production data I can find in English is still 2015’s.

That year Korea Zinc “produced” 63.3m ozs of silver, which averages to 15.8m quarterly. That is largely a byproduct from its main businesses of smelting zinc, lead, copper, and gold. The fact SIL’s managers included a company like this that doesn’t even mine silver as a top SIL component shows how rare major silver miners have become. The economics of silver mining at today’s prices are way inferior to gold mining.

The traditional major silver miners are painfully aware of this, and have spent years actively diversifying into gold. In Q2’18, the average percentage of revenues these top 17 SIL miners derived from silver was only 36.3%. That’s right in line with the recent trend, with the prior four quarters seeing 36.1%, 39.3%, 35.3%, and 36.4%. This relatively-low silver exposure is why SIL isn’t as responsive to silver as investors expect.

They might produce 10m and 300k ounces annually. At last quarter’s average prices, these silver and gold mines would yield $165m and $392m of yearly sales. Unfortunately it is far easier to pay the bills mining gold these days. So primary silver miners are increasingly becoming a dying breed, which is sad. The traditional major silver miners are adapting by ramping their gold production often at silver’s expense.

This industry’s flagging silver purity and thus deteriorating responsiveness to silver price trends will be hard to reverse. Silver would need to far outperform gold, rocketing higher in one of its gigantic uplegs while gold lags. And it would have to stay relatively strong compared to gold for years after that to entice big capital spending back into primary silver mines. While possible, that seems like a stretch in today’s markets.

Unfortunately SIL’s mid-August composition was such that there wasn’t a lot of Q2 cost data reported by its top component miners. A half-dozen of these top SIL companies trade in the UK, South Korea, Mexico, and Peru, where reporting only comes in half-year increments. There are also primary gold miners that don’t report silver costs, and a silver explorer with no production. So silver cost data remains scarce.

Nevertheless it’s always useful to look at what we have. Industrywide silver-mining costs are one of the most-critical fundamental data points for silver-stock investors. As long as the miners can produce silver for well under prevailing silver prices, they remain fundamentally sound. Cost knowledge helps traders weather this sector’s occasional fear-driven plunges without succumbing to selling low like the rest of the herd.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of silver, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q2’18, these top 17 SIL-component silver miners that reported cash costs averaged just $3.95 per ounce! That plunged a whopping 37.6% YoY, making it look like these miners are getting more efficient.

But that’s misleading. Because of hefty byproduct credits from gold and base metals, Hecla Mining and Fortuna Silver Mines both reported negative cash costs in Q2. They are an accounting fiction, as mining silver still costs a lot of money. But crediting byproduct sales to silver can slash reported cash costs. In the comparable quarter a year earlier, there were no negative cash costs at any of SIL’s top 17 miners.

Those super-low cash costs offset SSR Mining’s crazy-high $14.73 per ounce. That’s not normal either, the result of that winding down of its lone silver mine. Excluding these extreme outliers, the remaining handful of silver miners had average cash costs of $4.83 per ounce. As long as silver prices stay above those levels, the silver miners can keep the lights on at their mines. Sub-$5 silver is wildly inconceivable!

In Q2’18 these top 17 SIL miners reporting AISCs averaged just $10.93 per ounce! That was down 6.3% YoY, and was way below silver’s average price of $16.51 last quarter. Even if the two extreme outliers are thrown out, SSRM’s abnormally-high mine-depletion $17.66 AISC and SVM’s incredibly-low huge-byproduct-credit $0.41 AISC, the remaining average is similar at $11.56. Silver mining remains very profitable!

Even at worst in August’s plunge driven by speculators’ crazy-extreme all-time-record silver-futures short selling, silver merely hit $14.44 on close. That’s still way above this industry’s total production costs any way you slice it. That implies even at peak fear the elite top silver miners of SIL were still earning hefty 24% profit margins! So there’s no doubt the recent frantic silver-stock selling wasn’t fundamentally righteous.

SIL getting hammered to deep 2.5-year lows in mid-August was the product of irrational fear run amok, it had nothing to do with how the silver miners are faring. At Q2’s average silver price and AISCs, these miners were earning $5.58 per ounce. Most other industries would die for such 34% margins. And those are going to explode higher as silver inevitably mean reverts back up again, probably violently given this setup.

Silver stocks plunged in August because silver did. That was driven by truly-extreme silver-futures short selling by speculators. They ramped their shorts to a wild new all-time record high of 114.5k contracts in mid-August! All that short selling is guaranteed proportional near-future buying, as excessive shorts must be closed by buying offsetting long contracts. Short-covering rallies are self-feeding, catapulting silver higher.

The more speculators buy to cover, the faster silver surges. The faster it surges, the more they have to buy to cover or face catastrophic losses due to the extreme leverage inherent in silver futures. It would take 73.0k contracts of buying to return spec shorts to their 52-week low seen in mid-September 2017. That’s the equivalent of 364.9m ounces, or nearly 43% of last year’s entire global mined supply! Talk about big.

And today’s silver prices are super-low relative to prevailing gold levels, portending huge mean-reversion upside. The long-term average Silver/Gold Ratio runs around 56x, which means it takes 56 ounces of silver to equal the value of one ounce of gold. Silver is greatly underperforming gold so far in 2018, with the SGR averaging a stock-panic-like 80.2x thus far in August! So silver is overdue to catch up with gold.

At a 56x SGR and $1200 gold, silver is easily heading near $21.50. That’s 30% above its Q2 average. Assuming the major silver miners’ all-in sustaining costs hold, that implies profits per ounce soaring 89% higher! And the record silver-futures short covering necessary after record silver-futures short selling is very likely to fuel a massive mean-reversion overshoot, making the silver-mining-profits upside much greater.

And silver miners’ AISCs generally don’t change much regardless of prevailing silver prices, since silver-mining costs are largely fixed during mine planning and construction. The top 17 SIL miners’ AISCs in the past four quarters averaged $11.66, $9.73, $10.16, and $10.92. So Q2’18’s $10.93 was right in line. Costs aren’t going to rise much as silver recovers, and higher production may even push them lower still.

While all-in sustaining costs are the single-most-important fundamental measure that investors need to keep an eye on, other metrics offer peripheral reads on the major silver miners’ fundamental health. The more important ones include cash flows generated from operations, GAAP accounting profits, revenues, and cash on hand. They were all decent to healthy in Q2’18 despite the low silver prices and weak sentiment.

These SIL-top-17 silver miners’ collective revenues only fell 1.5% YoY to $3114m. That reflects higher gold prices which offset the lower silver ones. That drove operating-cash-flow generation of $758m, which was 27.0% lower YoY. That’s not unreasonable given the 3.9% lower average silver prices from Q2’17 to Q2’18 and the 4.4% lower silver production among these elite silver majors. Cash flows remain fine.

These silver miners’ balance-sheet cash and short-term investments still powered 18.0% higher YoY to $3637m. The bigger their cash hoards, the easier the elite silver miners can weather these weak silver prices. Big treasuries also give them more capital to expand existing mines and buy or build new ones. A fundamental surprise seemed to come in hard GAAP accounting profits though, which soared 110.6% YoY!

But the $343m total earnings in Q2’18 were wildly skewed by a huge $246m non-recurring gain Wheaton Precious Metals reported. 77% of its massive $318m in profits came from gains on the sale of one of its silver streams. Back that out of overall top-17-SIL-component earnings, and they actually plunged 40.3% YoY. But they were still positive at $97m, and have incredible upside potential as silver’s price inevitably recovers.

The silver-mining stocks are doing way better fundamentally than they’ve been given credit for. Their mining costs remain far below prevailing silver levels, driving strong profitability even at August’s deep silver-price lows. That capitulation silver-stock plummeting fueled by cascading selling as stop losses were sequentially run wasn’t justified fundamentally. It was an extreme sentiment anomaly that can’t persist.

So a big mean-reversion rebound higher is inevitable and imminent. While traders can play that in SIL, that’s mostly a bet on primary gold miners with byproduct silver production. The best gains by far will be won in smaller purer mid-tier and junior silver miners with superior fundamentals. A carefully-handpicked portfolio of these miners will generate much-greater wealth creation than ETFs dominated by non-primary miners.

At Zeal we’ve literally spent tens of thousands of hours researching individual silver stocks and markets, so we can better decide what to trade and when. As of the end of Q2, this has resulted in 1012 stock trades recommended in real-time to our newsletter subscribers since 2001. Fighting the crowd to buy low and sell high is very profitable, as all these trades averaged stellar annualized realized gains of +19.3%!

The key to this success is staying informed and being contrarian. That means buying low when others are scared, before undervalued silver stocks soar much higher. An easy way to keep abreast is through our acclaimed weekly and monthly newsletters. They draw on my vast experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks. Subscribe today while great silver stocks remain dirt-cheap!

The bottom line is the major silver miners’ fundamentals remain solid based on their recently-reported Q2’18 results. They continue to mine silver at all-in sustaining costs far below even mid-August’s deep silver lows. Their still-impressive profits will multiply as silver rebounds higher violently on record futures short covering. Investment capital will flood back into this tiny sector, catapulting silver stocks up sharply.

So traders need to look through the recent frightened herd sentiment to understand the silver miners’ hard fundamentals. These forsaken stocks are radically undervalued even at today’s low silver prices, let alone where silver heads during the next major gold upleg. Silver is poised to rocket higher soon as that mandatory extreme short covering gets underway. So the opportunities to buy dirt-cheap miners are fleeting.

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Early summer is the weakest time of the year seasonally for gold, silver, and their miners’ stocks. With traders’ attention diverted to vacations and summer fun, their precious-metals interest and investment demand wane considerably. Thus this entire sector, and often the markets in general, suffer a seasonal lull this time of year. But these summer doldrums offer the best seasonal buying opportunities of the year.

This doldrums term is very apt for gold’s summer predicament. It describes a zone in the world’s oceans surrounding the equator. There hot air is constantly rising, creating long-lived low-pressure areas. They are often calm, with little or no prevailing winds. History is full of accounts of sailing ships getting trapped in this zone for days or even weeks, unable to make any headway. The doldrums were murder on ships’ morale.

Crews had no idea when the winds would pick up again, while they continued burning through their precious stores of food and drink. Without moving air, the stifling heat and humidity were suffocating on these ships long before air conditioning. Misery and boredom were extreme, leading to fights breaking out and occasional mutinies. Being trapped in the doldrums was viewed with dread, it was a very trying experience.

Gold investors can somewhat relate. Like clockwork nearly every summer, gold starts drifting listlessly sideways. It often can’t make significant progress no matter what the trends looked like heading into June, July, and August. As the days and weeks slowly pass, sentiment deteriorates markedly. Patience is gradually exhausted, supplanted with deep frustration. Plenty of traders capitulate, abandoning ship.

Thus after decades of trading gold, silver, and their miners’ stocks, I’ve come to call this time of year the summer doldrums. Junes and Julies in particular are usually desolate sentiment wastelands for precious metals, totally devoid of recurring seasonal demand surges. Unlike the rest of the year, these summer months simply lack any major income-cycle or cultural drivers of outsized gold investment demand.

The vast majority of the world’s investors and speculators live in the northern hemisphere, so markets take a back seat to the great joys of summer. Traders take advantage of the long sunny days and kids being out of school to go on extended vacations, hang out with friends, and enjoy life. And when they aren’t paying much attention to the markets, naturally they aren’t allocating much new capital to gold.

Given gold’s dull summer action historically, it’s never wise to expect too much from it this time of year. Summer rallies can happen, but they aren’t common. So expectations need to be tempered, especially in June and July. That early-1990s Gin Blossoms song “Hey Jealousy” comes to mind, declaring “If you don’t expect too much from me, you might not be let down.” The markets are ultimately an expectations game.

Quantifying gold’s summer seasonal tendencies during bull markets requires all relevant years’ price action to be recast in perfectly-comparable percentage terms. That’s accomplished by individually indexing each calendar year’s gold price to its last close before market summers, which is May’s final trading day. That’s set at 100 and then all gold-price action that summer is calculated off that common indexed baseline.

So gold trading at an indexed level of 105 simply means it has rallied 5% from May’s final close, while 95 shows it’s down 5%. This methodology renders all bull-market-year gold summers in like terms. That’s critical since gold’s price range has been so vast, from $257 in April 2001 to $1894 in August 2011. That span encompassed gold’s last secular bull, which enjoyed a colossal 638.2% gain over those 10.4 years!

So 2001 to 2011 were certainly bull years. 2012 was technically one too, despite gold suffering a major correction following that powerful bull run. At worst that year, gold fell 18.8% from its 2011 peak. That was not quite enough to enter formal bear territory at a 20% drop. But 2013 to 2015 were definitely brutal bear years, which need to be excluded since gold behaves very differently in bull and bear markets.

In early 2013 the Fed’s wildly-unprecedented open-ended QE3 campaign ramped to full speed, radically distorting the markets. Stock markets levitated on the Fed’s implied backstopping, slaughtering demand for alternative investments led by gold. In Q2’13 alone, gold plummeted by 22.8% which proved its worst quarter in an astounding 93 years! Gold’s bear continued until the Fed’s initial rate hike of this cycle in 2015.

The day after that first rate hike in 9.5 years in mid-December 2015, gold plunged to a major 6.1-year secular low. Then it surged out of that irrational rate-hike scare, formally crossing the +20% new-bull threshold in early March 2016. Ever since, gold has remained in this young bull. At worst in December 2016 after gold was crushed on the post-election Trumphoria stock-market surge, it had only corrected 17.3%.

So the bull-market years for gold in modern history ran from 2001 to 2012, skipped the intervening bear-market years of 2013 to 2015, and resumed in 2016 to 2018. Thus these are the years most relevant to understanding gold’s typical summer-doldrums performance, which is necessary for managing your own expectations this time of year. This spilled-spaghetti mess of a chart is actually simple and easy to understand.

The yellow lines show gold’s individual-year summer price action indexed from each May’s final close for all years from 2001 to 2012 and 2016 to 2017. Together they establish gold’s summer trading range. All those bull-market years’ individual indexes are then averaged together in the red line, revealing gold’s central summer tendency. Finally the indexed current-year gold action for 2018 is superimposed in blue.t

While there are outlier years, gold generally drifts listlessly in the summer doldrums much like a sailing ship trapped near the equator. The center-mass drift trend is crystal-clear in this chart. The vast majority of the time in June, July, and August, gold simply meanders between +/-5% from May’s final close. This year that equates to a probable summer range between $1233 and $1363. Gold tends to stay well within trend.

Understanding gold’s typical behavior this time of year is very important for traders. Sentiment isn’t only determined by outcome, but by the interplay between outcome and expectations. If gold rallies 5% but you expected 10% gains, you will be disappointed and grow discouraged and bearish. But if gold rallies that same 5% and you expected no gains, you’ll be excited and get optimistic and bullish. Expectations are key.

History has proven it’s wise not to expect too much from gold in these lazy market summers, particularly June and July. Occasionally gold still manages to stage a big summer rally, which is a bonus. But most of the time gold doesn’t veer materially from its usual summer-drift trading range, where it’s often adrift like a classic tall ship. With range breakouts either way rare, there’s usually little to get excited about.

In this chart I labeled some of the outlying years where gold burst out of its usual summer-drift trend, both to the upside and downside. But these exciting summers are unusual, and can’t be expected very often. Most of the time gold grinds sideways on balance not far from its May close. Traders not armed with this critical knowledge often wax bearish during gold’s summer doldrums and exit in frustration, a grave mistake.

Gold’s summer-doldrums lull marks the best time of the year seasonally to deploy capital, to buy low at a time when few others are willing. Gold enjoys powerful seasonal rallies that start in Augusts and run until the following Mays! These are fueled by outsized investment demand driven by a series of major income-cycle and cultural factors from around the world. Summer is when investors should be bullish, not bearish.

The red average indexed line above encompassing 2001 to 2012 and 2016 to 2017 reveals gold’s true underlying summer trend in bull-market years. Technically gold’s major seasonal low arrives relatively early in summers, mid-June. On average through all these modern bull-market years, gold slumped 1.0% between May’s close and that summer nadir. But that’s probably still too early to deploy capital.

Check out the yellow indexed lines in this chart. They tend to cluster closer to flat-lined in mid-June than through all of July. The only reason gold’s seasonal low appears in mid-June mathematically is a single extreme-outlier year, 2006. Gold’s spring seasonal rally was epic that year, gold rocketed 33.4% higher to a dazzling new bull high of $720 in just 2.0 months between mid-March and mid-May! That was incredible.

Extreme euphoria had catapulted gold an astounding 38.9% above its 200-day moving average, radically overbought by any standard. That was way too far too fast to be sustainable, so after that gold had to pay the piper in a sharp mean-reversion overshoot. So over the next month or so into mid-June, gold’s overheated price plummeted 21.9%! That crazy outlier is the only reason gold’s major summer low isn’t in July.

There were 14 bull-market years from 2001 to 2012 and 2016 to 2017. That’s a big-enough sample to smooth out the trend, but not large enough to prevent extreme deviations from skewing it a bit. Gold’s true major summer seasonal low is really closer to early-to-mid July. After that month’s opening holiday week in the States to celebrate Independence Day, investment capital inflows usually start ramping back up.

On average in these modern bull-market years, gold slipped 0.2% in Junes before rallying 0.9% in Julies. After that first lazy summer week in July, gold tends to gradually start clawing its way higher again. But this is so subtle that Julies often still feel summer-doldrumsy. By the final trading day in Julies, gold is still only 0.7% higher than its May close kicking off summers. That’s too small to restore damaged sentiment.

Since gold exited May 2018 at $1298, an average 0.7% rally by July’s end would put it at $1307. That’s hardly enough to generate excitement after two psychologically-grating months of drifting. But the best times to deploy any investment capital is when no one else wants to so prices are low. Gold’s summer doldrums come to swift ends in Augusts, which saw hefty average gains of 2.2% in these bull-market years!

And that’s just the start of gold’s major autumn seasonal rally, which has averaged strong 6.6% gains between mid-Junes and late Septembers. That’s driven by Asian gold demand coming back online, first post-harvest-surplus buying and later Indian-wedding-season buying. June is the worst of gold’s summer doldrums, and the first half of July is when to buy back in. It’s important to be fully deployed before August.

These gold summer doldrums driven by investors pulling back from the markets to enjoy their vacation season don’t exist in a vacuum. Gold’s fortunes drive the entire precious-metals complex, including both silver and the stocks of the gold and silver miners. These are effectively leveraged plays on gold, so the summer doldrums in them mirror and exaggerate gold’s own. Check out this same chart type applied to silver.

Since silver is much more volatile than gold, naturally its summer-doldrums-drift trading range is wider. The great majority of the time, silver meanders between +/-10% from its final May close. That came in at $16.39 this year, implying a summer-2018 silver trading range between $14.75 and $18.03. While silver suffered that extreme June-2006 selling anomaly too, its major seasonal low arrives a couple weeks after gold’s.

On average in these same modern bull-market years of 2001 to 2012 and 2016 to 2017, silver dropped 4.2% between May’s close and late June. That’s much deeper than gold’s 1.0% seasonal slump, which isn’t surprising given silver’s leverage to gold. Silver’s summer performances are also much lumpier than gold’s. Junes see average silver losses of 3.3%, but those are more than made back in strong rebounds in Julies.

Silver’s big 4.1% average rally in Julies amplifies gold’s gains by an impressive 4.6x. But unfortunately silver hasn’t been able to maintain that seasonal momentum, with Augusts averaging a slight decline of 0.3%. Overall from the end of May to the end of August, silver’s summer-doldrums performance tends to be flat. Silver just averaged a 0.4% full-summer gain, way behind gold’s 2.9% through June, July, and August.

That means silver sentiment this time of year is often worse than gold’s, which is already plenty bearish. The summer doldrums are more challenging for silver than gold. Being in the newsletter business for a couple decades now, I’ve heard from countless discouraged investors over the summers. While I haven’t tracked this, it sure feels like silver investors have been disproportionately represented in this feedback.

Since gold is silver’s primary driver, this white metal is stuck in the same dull drifting boat as gold in the market summers. Silver usually amplifies whatever is happening in gold, both good and bad. But again the brunt of silver’s summer weakness is borne in Junes. Fully expecting this seasonal weakness and rolling with the punches helps prevent being disheartened, which in turn can lead to irrationally selling low.

The gold miners’ stocks are also hostage to gold’s summer doldrums. This last chart applies this same analysis to the flagship HUI gold-stock index, which is closely mirrored by that leading GDX VanEck Vectors Gold Miners ETF. The major gold stocks tend to leverage gold’s gains and losses by 2x to 3x, so it’s not surprising that the HUI’s summer-doldrums-drift trading range is also twice as wide as gold’s own.

The gold miners’ stocks share silver’s center-mass summer drift running +/-10% from May’s close. This year the HUI entered the summer doldrums at 180.1, implying a June, July, and August trading range of 162.1 to 198.1. While gold stocks’ GDX ETF is too new to do long-term seasonal analysis, in GDX terms this summer range translates to $20.11 to $24.57 this year. That’s based off a May 31st close of $22.34.

Like gold, the gold stocks’ major summer seasonal low arrives in mid-June. On average in these modern bull-market years of 2001 to 2012 and 2016 to 2017, by then the HUI had slid 2.3% from its May close. Then gold stocks tended to more than fully rebound by the end of June, making for an average 0.8% gain that month. But there’s no follow-through in July, where the gold stocks averaged a modest 0.2% loss.

Overall between the end of May and the end of July, which encompasses the dark heart of the summer doldrums, the HUI averaged a trivial 0.6% gain. Again two solid months of grinding sideways on balance is hard for traders to stomach, especially if they’re not aware of the summer-doldrums drift. The key to surviving it with minimum psychological angst is to fully expect it. Managing expectations in markets is essential!

But also like gold, the big payoff for weathering the gold-stock summer starts in August. With gold’s major autumn rally getting underway, the gold stocks as measured by the HUI amplify it with strong average gains of 4.2% in Augusts! And that’s only the start of gold stocks’ parallel autumn rally with gold’s, which has averaged 10.5% gains from late Julies to late Septembers. Gold-stock upside resumes in late summers.

Like everything in life, withstanding the precious-metals summer doldrums is much less challenging if you know they’re coming. While outlying years happen, they aren’t common. So the only safe bet to make is expecting gold, silver, and the stocks of their miners to languish in Junes and Julies. Then when these drifts again come to pass, you won’t be surprised and won’t get too bearish. That will protect you from selling low.

This summer actually has a pretty interesting setup for gold that’s more bullish than usual. Gold’s short-term price moves are dominated by speculators’ gold-futures trading. These guys have been selling like crazy since late April in response to a major short-squeeze rally in the US dollar. That’s left their gold-futures long positions exceptionally low entering this summer, which is very unusual and quite bullish.

With total spec longs near the bottom of their past-year trading range, that sizable gold-futures selling that can hit in summers is likely already exhausted. The usual summer-doldrums gold-futures dump was effectively pulled forward, short-circuiting gold’s spring rally. That means gold is much more likely than usual to see mean-reversion futures buying in the coming weeks, especially after next week’s big FOMC meeting.

The Fed is universally expected to hike rates for the 7th time in this cycle on June 13th. That is one of the every-other FOMC meetings also accompanied by the newest dot-plot federal-funds-rate forecast by top Fed officials. And afterwards the Fed’s new chairman Jerome Powell will hold a press conference. If any of this is less hawkish on more rate hikes than traders expect, speculators could aggressively buy gold futures.

Another counter-seasonal bullish factor for gold is today’s radical gold underinvestment coupled with these hyper-complacent bubble-valued stock markets. Whenever the inevitable next major stock selloff arrives, which could be this summer, gold investment demand will surge. Stock selloffs are great for gold since it tends to rally when stocks weaken. That makes gold the ultimate portfolio diversifier during such times.

And with the Fed both relentlessly ratcheting up interest rates and accelerating its young quantitative-tightening campaign to start to unwind QE, the stock markets are facing mounting headwinds. The extreme central-bank liquidity that drove them so high is being reversed, a dangerous omen. Gold investment demand will start returning to favor in a big way whenever they decisively roll over, even if it happens this summer.

Smart contrarians who want to buy low realize gold’s summer doldrums are a gift. They offer the best seasonal buying opportunities of the year in gold, silver, and their miners’ stocks. This is not the time to disengage, but to do your research and get deployed in great gold and silver stocks at bargain-basement prices. They are wildly undervalued and basing today, ready to scream higher when gold sentiment turns.

We’ve been hard at work at Zeal in recent weeks preparing for these great summer buying opportunities. I’ve been researching the latest fundamentals of the world’s best gold and silver miners to make a shopping list for the summer-doldrums lows. These coming trades will easily have the potential to double before next summer as the precious-metals sector mean reverts higher. Buying low is the key to big gains later.

Now is the time to get ready, so we share our research and trades via acclaimed weekly and monthly newsletters. They draw on my vast experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks. As of the end of Q1, all 998 newsletter stock trades recommended since 2001 have averaged stellar annualized realized gains of +19.4%! For just $12 an issue, you too can learn to think, trade, and thrive like contrarians. Subscribe today!

The bottom line is gold, silver, and their miners’ stocks usually drift listlessly during market summers. As investors shift their focus from markets to vacations, capital inflows wane. Junes and Julies in particular are simply devoid of the big recurring gold-investment-demand surges seen during much of the rest of the year, leaving them weak. Investors need to expect lackluster sideways action on balance this time of year.

Gold’s summer doldrums shouldn’t be a psychological burden, as they are a great opportunity to buy low before major autumn rallies. Those tend to be stealthily born in early-to-mid Julies before accelerating in Augusts. So investors must do their research homework in early summers, in order to be ready to deploy capital in mid summers before sizable late-summer rallies. Summer doldrums should be embraced, not dreaded.

The major silver miners’ stocks remain deeply out of favor, languishing near multi-year lows. Of course that reflects investors’ lack of interest in silver itself. It has greatly lagged, not following gold higher like usual over the past year and a half. That’s really torpedoed silver-stock sentiment, making for a challenging environment for silver miners. But they’re weathering it as their recently-released Q1’18 results show.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Companies trading in the States are required to file 10-Qs with the US Securities and Exchange Commission by 45 calendar days after quarter-ends. Canadian companies have similar requirements. In other countries with half-year reporting, many companies still partially report quarterly.

It’s very challenging to find and develop the scarce silver-heavy deposits supporting primary silver mines. And it’s even harder forging them into primary-silver-mining businesses. Since silver isn’t very valuable, most silver miners need multiple mines in order to generate sufficient cash flows. Traditional major silver miners are increasingly diversifying into gold production at silver’s expense, chasing its superior economics.

So there aren’t many major silver miners left out there, and their purity is shrinking. The definitive list of these companies to analyze comes from the most-popular silver-stock investment vehicle, the SIL Global X Silver Miners ETF. In mid-May at the end of Q1’s earnings season, SIL’s net assets were running 6.4x greater than its next-largest competitor’s. So SIL continues to dominate this small niche contrarian sector.

In mid-May as the major silver miners were finishing reporting their Q1’18 results, SIL included 24 “Silver Miners”. Unfortunately the great majority aren’t primary silver miners, most generate well under half their revenues from silver. That’s not necessarily an indictment against SIL’s stock picking, but a reflection of the state of this industry. There aren’t enough significant primary silver miners left to fully flesh out an ETF.

This disappointing reality makes SIL somewhat problematic. The only reason investors would buy SIL is they want silver-stock exposure. But if SIL’s underlying component companies generate well under 40% of their sales from silver mining, they aren’t going to be very responsive to silver price moves. And most of that capital intended to go into primary silver miners is instead diverted into byproduct silver miners.

So the silver-mining ETFs sucking in capital investors thought they were allocating to real primary silver miners effectively starves them. Their stock prices aren’t bid high enough to attract in more investors, so they can’t issue sufficient new shares to finance big silver-mining expansions. This is exacerbating the silver-as-a-byproduct trend. Only sustained much-higher silver prices for years to come could reverse this tragedy.

While most of these top 17 SIL components had reported on Q1’18 by mid-May, not all had. Some of these major silver miners trade in the UK or Mexico, where financial results are only required in half-year increments. If a field is left blank in this table, it means that data wasn’t available by the end of Q1’s earnings season. Some of SIL’s components also report in gold-centric terms, excluding silver-specific data.

The first couple columns of this table show each SIL component’s symbol and weighting within this ETF as of mid-May. While most of these stocks trade on US exchanges, some symbols are listings from companies’ primary foreign stock exchanges. That’s followed by each miner’s Q1’18 silver production in ounces, along with its absolute year-over-year change. Next comes this same quarter’s gold production.

Nearly all the major silver miners in SIL also produce significant-to-large amounts of gold! That’s truly a double-edged sword. While gold really stabilizes and boosts silver miners’ cash flows, it also retards their stocks’ sensitivity to silver itself. So the next column reveals how pure these elite silver miners are, approximating their percentages of Q1’18 revenues actually derived from silver. This is calculated two ways.

The large majority of these top SIL silver miners reported total Q1 sales. Those are divided by quarterly silver production multiplied by silver’s average price in Q1, yielding an accurate relative-purity gauge. In cases where Q1 sales weren’t reported, I estimated them by adding silver sales to gold sales based on their production and average quarterly prices. That’s less optimal, since it ignores any base-metals production.

Percentage changes aren’t relevant or meaningful if data shifted from positive to negative or vice versa, or if derived from two negative numbers. So in those cases I included raw underlying data rather than weird or misleading percentage changes. This whole dataset together offers a fantastic high-level read on how the major silver miners are faring fundamentally as an industry. They kept hanging in there in Q1’18.

Silver has always been driven by gold, effectively acting like a gold sentiment gauge. Generally big silver uplegs only happen after gold has rallied long enough and high enough to convince traders its gains are sustainable. Then the way-smaller silver market tends to start leveraging and amplifying gold’s moves by 2x to 3x. But strangely gold’s strength over the past year didn’t spill into silver, leaving its miners struggling.

Silver’s average price actually fell 4.1% between Q1’17 and Q1’18, despite a sizable 8.9% YoY rally in gold’s average price! Normally silver would’ve powered 18% to 27% higher on such a meaningful gold advance. But it went the other way because gold sentiment remained poor. Investors spent 2017 deeply enamored with the extraordinary levitating general stock markets, ignoring everything else including gold and silver.

With investors not interested, the already-battered silver stocks continued to languish near lows for most of 2017. These miners had insufficient capital and incentives to grow production, which is the lifeblood of mining. So unfortunately these top 17 SIL components collectively suffered sharp declines in both silver and gold production over the past year. That naturally hurt their operating and financial results in Q1’18.

These elite major silver miners’ total silver mined last quarter fell 5.3% YoY to 72.0m ounces! That was certainly not offset by higher gold production, which dropped an even-worse 8.1% YoY to 1243k ounces. And sadly those production declines are actually skewed smaller than sector reality. Note above the only big absolute gains in silver production came from two silver behemoths, Fresnillo and Industrias Peñoles.

Their silver production soared 14.0% and 13.1% YoY in Q1, bucking the weakening trend seen in many of the rest of these major miners. Together Fresnillo and Peñoles added 3.9m ounces of silver mined to the SIL-top-17 total. Without that huge boost, the overall silver production for these elite miners would’ve fallen a huge 10.4% YoY. And I suspect these Mexican giants’ silver production may be double-counted.

Fresnillo and Industrias Peñoles have an incestuous relationship, as the former used to be wholly owned by the latter. Industrias Peñoles spun off Fresnillo back in May 2008 on the London Stock Exchange. While Fresnillo’s financial reporting is decent, Industrias Peñoles’ is murky. Neither my decades studying financial statements as a Certified Public Accountant nor my rudimentary Spanish can penetrate very deep.

So I haven’t been able to track down how much of Fresnillo that Industrias Peñoles still owns, nor whether the silver production reported by these silver-mining monsters is actually fully mutually exclusive. I’m assuming it is for this analysis, but I’m skeptical. Both companies reported their huge YoY growth in silver production was the result of Fresnillo’s new San Julián silver mine ramping up, which is a big one.

San Julián produced 3568k ounces of silver in Q1’18 alone, along with fairly-large gold, zinc, and lead byproducts. It’s anticipated to produce 11.6m and 63.7k ounces of silver and gold annually for 12 years. Without San Julián, which could be double-reported between Fresnillo and Industrias Peñoles, the top SIL silver miners’ production would look very different. These elite silver miners have had a challenging year.

Fully excluding Fresnillo and Peñoles, the rest of these top SIL components saw their collective silver production plunge 16.8% YoY to 39.2m ounces! The mediocre silver-mining economics from these weak silver prices combined with company-specific problems have really hit this industry. Leading the drop in silver production were a couple of long-time American favorites, Tahoe Resources and SSR Mining.

Tahoe was originally spun off by Goldcorp to develop the incredible high-grade Escobal silver mine in Guatemala. Everything went well for its first few years, with this mine providing 1000+ great high-paying jobs to locals and contributing big taxes to the national economy. Then a group of anti-mining activists filed a frivolous and baseless lawsuit with the intent of shutting down Escobal. The whole thing was a farce.

Tahoe wasn’t even the target, Guatemala’s Ministry of Energy and Mines was. This regulator allegedly did not sufficiently consult with the Xinca indigenous people before granting Escobal’s permits! Only in a third-world country plagued with rampant government corruption would that be Tahoe’s problem instead of bureaucrats’. They apparently didn’t hold enough meetings, so Escobal’s mining license was actually suspended.

Tahoe was forced to temporarily mothball its crown-jewel silver mine, and eventually fire many of its local Guatemalan employees. The dishonorable Guatemalan government continues to drag its feet on this case, inexplicably strangling one of its largest taxpayers. It has even allowed violent anti-mine militants to illegally blockade the road to Escobal, often physically attacking trucks and drivers supplying this mine!

Thus Tahoe’s silver production plummeted 100% YoY from 5700k ounces to zero! That’s certainly not an existential threat, as Tahoe still has other sizable gold-mining operations. In early May’s Q1’18 report, Tahoe’s management is still optimistic a court ruling in its favor is soon coming. Then its licenses will be reinstated and it can slowly resume mining at Escobal. Hopefully this whole mess isn’t a stealth expropriation.

SSR Mining’s silver production fell a less-extreme-but-still-huge 38.3% YoY to 938k ounces in Q1’18. This has nothing to do with geopolitics like Tahoe’s nightmare, but is simply the forecast depletion of its old Pirquitas silver mine. SSR Mining, which used to be called Silver Standard Resources, is exploring in the area trying to extend the life of this mine. But most of its financial resources are being poured into its gold mines.

That gold focus among these top silver miners is common across SIL’s components. As the silver-percentage column above shows, most of these elite silver miners are actually primary gold miners by revenue! Only 3 of these 17 earned more than half of their Q1’18 sales from mining silver, and they are highlighted in blue. WPM, HL, PAAS, CDE, and TAHO are also top-34 components in the leading GDX gold miners’ ETF!

While they only comprised 8.7% of GDX’s total weighting in mid-May, this highlights how difficult it is to find primary silver miners. SIL’s managers have an impossible job these days with the major silver miners increasingly shifting to gold. They are really scraping the bottom of the barrel to find more silver miners. In Q3’17 they added Korea Zinc, and it’s now SIL’s 3rd-biggest holding with a hefty 11.9% total weighting.

That was intriguing, as I’d never heard of this company after decades of intensely studying and actively trading silver stocks. So I looked into Korea Zinc and found it was merely a smelter, not even a miner! The latest financial data I could find in English was 2015’s. That year Korea Zinc “produced” 63.3m ounces of silver, which was largely a byproduct from its main business of smelting zinc, lead, copper, and gold.

I ran the numbers for the heck of it, and silver was implied as 32% of Korea Zinc’s 2015 revenues. The fact SIL’s managers included a company like this that doesn’t even mine silver as a top SIL component shows how rare major silver miners have become. The economics of silver mining at today’s prices are inferior to gold mining. Thus the average silver-purity percentage of revenues of these SIL miners is only 36.8%.

That’s right in line with the past year’s trend, with 2017 seeing 38.5%, 37.6%, 40.1%, and 35.8% from Q1 to Q4. This reflects gold mining’s economics being superior to silver mining’s these days. Silver mining is as capital-intensive as gold mining, requiring similar large expenses for planning, permitting, and constructing mines and mills. It needs similar heavy excavators and haul trucks to dig and move the silver-bearing ore.

But silver generates much lower cash flows due to its lower price. Consider hypothetical mid-sized silver and gold miners, which might produce 10m and 300k ounces annually. At last quarter’s average metals prices, these silver and gold mines would yield $167m and $399m of yearly sales. It’s far easier to pay the bills mining gold than silver, which is unfortunate. But until silver surges again, that’s the way things are.

While I understand this, as a long-time silver-stock investor it saddens me primary silver miners have apparently become a dying breed. When silver starts powering higher in one of its gigantic uplegs and way outperforms gold again, this industry’s silver-purity percentage will rise. But unless silver not only shoots far ahead but stays there while gold lags, it’s hard to see major-silver-mining purity significantly reversing.

Unfortunately SIL’s mid-May composition was such that there wasn’t a lot of Q1 cost data reported by its top component miners. A half-dozen of these top SIL companies trade in the UK, South Korea, Mexico, and Peru, where reporting only comes in half-year increments. There are also primary gold miners that don’t report silver costs, and a silver explorer with no production. So silver cost data remains scarce.

Nevertheless it’s always useful to look at what we have. Industrywide silver-mining costs are one of the most-critical fundamental data points for silver-stock investors. As long as the miners can produce silver for well under prevailing silver prices, they remain fundamentally sound. Cost knowledge helps traders weather this sector’s occasional fear-driven plunges without succumbing to selling low like the rest of the herd.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of silver, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q1’18, these top 17 SIL-component silver miners that reported cash costs averaged $5.05 per ounce. That plunged a whopping 25.2% YoY, making it look like silver miners are far more efficient.

But that’s misleading. Because of hefty byproduct credits from gold and base metals, Hecla Mining and Fortuna Silver Mines both reported negative cash costs in Q1. They are an accounting fiction, as mining silver still costs a lot of money. But crediting byproduct sales to silver can slash reported cash costs. In the comparable quarter a year earlier, there were no negative cash costs at any of SIL’s top 17 miners.

Those super-low cash costs offset SSR Mining’s crazy-high $17.07 per ounce. That’s not normal either, the result of that winding down of its lone silver mine. Excluding these extreme outliers, the remaining handful of silver miners had average cash costs of $5.50 per ounce. As long as silver prices stay above those levels, the silver miners can keep the lights on at their mines. Sub-$6 silver is wildly inconceivable.

Way more important than cash costs are the far-superior all-in sustaining costs. They were introduced by the World Gold Council in June 2013 to give investors a much-better understanding of what it really costs to maintain a silver mine as an ongoing concern. AISCs include all direct cash costs, but then add on everything else that is necessary to maintain and replenish operations at current silver-production levels.

In Q1’18 these top 17 SIL miners reporting AISCs averaged just $10.92 per ounce. That’s down 5.1% YoY, and still way below last quarter’s low average silver price of $16.72. Excluding SSRM’s $18.37 which is again a non-representative mine-depletion outlier, that slides to $9.42. Despite all the tough challenges the major silver miners are facing, they are still able to produce silver quite profitably today.

All-in sustaining costs and production are inversely related. Lower silver production, which many of SIL’s top components suffered last quarter, leaves fewer ounces to spread the big fixed costs of mining across. Yet average AISCs still retreated, showing these top silver miners are getting more efficient at producing their metal. That will grant the silver miners more upside profits leverage to rising silver as this metal recovers.

With last quarter’s $16.72 average silver price, $10.92 AISCs show the silver miners still earning pretty-fat profits of $5.81 per ounce. That’s actually only down 2.2% YoY because Q1’17’s higher silver prices were paired with higher AISCs. Since mining costs are largely fixed during planning and construction, these silver-mining profits will explode as silver mean reverts higher. And silver has vast room to run from here.

Today’s silver price remains crazy-low relative to prevailing gold levels, portending huge mean-reversion upside. The long-term average Silver/Gold Ratio runs around 56, which means it takes 56 ounces of silver to equal the value of one ounce of gold. Silver is greatly underperforming gold so far in 2018, with the SGR averaging a stock-panic-like 79.6 YTD as of late May! So silver is overdue to catch up with gold.

At a 56 SGR and $1300 gold, silver is easily heading near $23.25. That’s 39% above its Q1 average. Assuming the major silver miners’ all-in sustaining costs hold, that implies profits per ounce soaring 112% higher! Plug in a higher gold price or the usual mean-reversion overshoot after an SGR extreme, and the silver-mining profits upside is far greater. Silver miners’ inherent profits leverage to rising silver is incredible.

While all-in sustaining costs are the single-most-important fundamental measure that investors need to keep an eye on, other metrics offer peripheral reads on the major silver miners’ fundamental health. The more important ones include cash flows generated from operations, GAAP accounting profits, revenues, and cash on hand. They all deteriorated in Q1’18, as you’d expect with lower silver production and prices.

Before we get into them, these comparisons are a bit misleading. In Q1’18 12 of these SIL-top-17 silver miners reported quarterly financial results, compared to 14 a year earlier. So it’s not quite an apples-to-apples comparison. One reason is Silvercorp Metals, which clawed its way back into SIL’s top 17 over the past year. SVM tends to meander in and out of that 17th spot depending on its market cap relative to its peers.

SVM has a fiscal year ending March 31st, so its full-year results that require more time to prepare and get audited come later than normal quarterly results. I did all the underlying data collection and analysis for this essay, and wrote the draft, before they were reported in late May. Korea Zinc also doesn’t report in English as far as I can tell. Both of these light-blue-highlighted stocks weren’t in SIL’s top 17 a year ago.

Among these top SIL components reporting Q1’18 financial results, operating cash flows plunged 33.6% YoY to $528m. That’s still a strong number for such a small industry, proving that silver mines are still heavily cash-flow positive in general. Since cash on balance sheets actually slid 4.6% YoY to $2973m, the silver miners were apparently spending that cash flow on expansions that have yet to bear production fruit.

Overall sales among these elite silver miners dropped 13.0% YoY to $2699m. That makes sense given their 5.3% lower silver production and 4.1% lower average silver prices in Q1. Of course profits amplify falling sales, so the top 17 SIL silver stocks saw earnings plunge 24.1% YoY to $273m. But these silver miners were still enjoying profitable operations even with silver mired near lows in such miserable bearishness.

As silver powers higher in coming quarters, silver-mining profits will really leverage its advance. And that will fundamentally support far-higher silver-stock prices. The investors who will make out like bandits on this are the early contrarians willing to buy in low, before everyone else realizes what is coming. By the time silver surges higher with gold so silver stocks regain favor again, the big gains will have already been won.

While investors and speculators alike can certainly play the silver miners’ long-stalled mean-reversion bull with this leading SIL ETF, individual silver stocks with superior fundamentals will enjoy the best gains by far. Their upside will trounce the ETFs, which are burdened by companies that don’t generate enough of their sales from silver. A handpicked portfolio of purer elite silver miners will yield much-greater wealth creation.

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The bottom line is the major silver miners fared fine in Q1 despite some real challenges. A combination of silver continuing to seriously lag gold, along with anomalous company-specific problems, weighed on miners’ collective results. Yet they continued to produce silver at all-in sustaining costs way below Q1’s low prevailing silver prices. And their ongoing diversification into gold leaves them financially stronger.

With silver-stock sentiment remaining excessively bearish, this sector is primed to soar as silver itself resumes mean reverting higher to catch up with gold’s young bull market. The silver miners’ profits leverage to rising silver prices remains outstanding. After fleeing silver stocks so relentlessly over the past 21 months, investors will have to do big buying to reestablish silver-mining positions. That will fuel major upside.

Gold failed to breakout in the spring and recently lost weekly support at $1310. Meanwhile, the gold stocks have held up well in recent weeks (considering Gold) but still have much to prove. Silver couldn’t rally much when its net speculative position was at an all time low. The question now is where do things go from here. The price action is not bullish but with a Fed hike looming and negative sentiment, Gold could be poised to snapback after testing lower levels.

The technicals for Gold show a strong confluence of support at $1265 to $1270. It has traded as low as $1281 in recent days. Trendlines and long-term moving averages coalesce at $1265 to $1270. On the weekly chart, $1265 stands out as a key level. A little bit more selling could bring Gold down to key support.

The sentiment indicators (shown at the bottom of the above chart) are encouraging and would be more so with a test of that aforementioned support. The net speculative position as of last Tuesday hit 22.7% of open interest, which is one of the lowest readings of the past two years. The daily sentiment index hit only 10% bulls last week. It’s 21-day average is 32% bulls and if that fell below 30% it would mark a 9-month low.

Turning to the miners, we find a sector that continues to be wedged in between support and resistance. GDXJ has trendline and lateral support in the $31s with key resistance in the low $34s. GDX has immediate support at $22 and strong support at $21 while initial resistance is at $23. If Gold is to have another chance to breakout in the months ahead then GDX and GDXJ need to surpass their April highs.

While we are concerned about Gold for the remainder of 2018, it could be setting up for a summer rally and especially if it drops to strong support around $1265. Sentiment would reach even more encouraging levels and that coupled with strong technical support could produce a rebound. In the meantime we continue to focus on and accumulate the juniors that have 300% to 500% return potential over the next 12 to 18 months. To follow our guidance and learn our favorite juniors for the balance of 2018, consider learning more about our premium service.

The Oreninc Index fell in the week ending April 27th, 2018 to 37.75 from an updated 45.59 a week ago as the number of deals fell despite some broker action returning.

A calmer and less volatile week all round with the presidents of North and South Korea meeting for the first time in decades, thawing tensions over the north’s nuclear ambitions, whilst in the US, president Donald Trump eased his position on sanctions against Russian aluminium producer Rusal. Maybe spring is in the air and the world is feeling more positive.

Another range-bound week for gold, this time ending in negative territory as the US dollar strengthened, although there are signs that gold stocks are starting to strengthen.

On to the money: total fund raises announced more than quadrupled to C$96.3 million, a four-week high, which included one brokered financing, a four-week low, and one bought deal financing, also a four-week low. The average offer size also more than quadrupled to C$4.8 million, a four-week high. However, the number of financings decreased to 20, a four-week low.

Gold closed down at US$1,324/oz from US$1,336/oz a week ago. Gold is now up 1.63% this year. Meanwhile, the US dollar index continued to strengthen and closed up at 91.54 from 90.31 a week ago. The van Eck managed GDXJ gave up ground and closed down at US$33.03 from US$33.49 last week. The index is down 3.22% so far in 2018. The US Global Go Gold ETF also fell to close down at US$12.99 from US$13.04 a week ago. It is down 0.12% so far in 2018. The HUI Arca Gold BUGS Index closed down at 182.04 from 184.18 last week. The SPDR GLD ETF saw a growth week as its inventory grew to 871.20 from 865.89 tonnes where it had been for nine-days straight.

In other commodities, silver’s recent growth spurt deflated and closed down at US$16.51/oz from US$17.11/oz a week ago. Copper also gave up a lot of ground as it closed down at US$3.06/lb from US$3.15/lb last week. Oil consolidated despite a slight loss on the week to close down at US$68.10 a barrel from US$68.40 a barrel a week ago.

The Dow Jones Industrial Average lost some ground and closed down at 24,311 from 24,462 last week. Canada’s S&P/TSX Composite Index put in a strong growth week as mining stocks showed growth to close at 15,668 from 15,484 the previous week. The S&P/TSX Venture Composite Index closed down at 783.76 from 804.96 last week.

SilverCrest Metals (TSX-V: SIL) announced a C$15 million bought deal financing

Syndicate of underwriters led by PI Financial and Cormark Securities for 7.1 million shares @ C$2.10.

Prospero Silver (TSX-V: PSL) provide an update on planned exploration work on its Mexican projects for 2018.

Having recently announced a fund raise, the work plan shows that Prospero will continue to drill test the targets it has identified via its geological hypothesis for discovering large, blind silver deposits. Whilst the news release did not explicitly state that its strategic partner Fortuna Silver (TSX:FVI) would co-fund this exploration program, that seems likely given the technical success of the 2017 exploration program and that Fortuna has yet to select a project to joint-venture under its strategic agreement with Prospero.

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It was an interesting week in the precious metals complex. There appeared to be the start of a short squeeze in Silver (hedge funds were heavily short) but it ceased at an important resistance. Meanwhile, Gold closed the week on a weak note, losing $1340-$1350. The gold stocks, like silver closed the week below technical resistance. The price action in the complex continues to suggest that a breakout in Gold is the key to unleashing strong outperformance from Silver and the gold stocks.

While Silver has very supportive sentiment, it has not broken out from its downtrend yet. The net speculative position was at 1.1% a few weeks ago, an all time low. That won’t spring Silver by itself unless Silver can surpass critical resistance in the mid $18s. And that may not happen until Gold breaks $1360-$1370. Silver has strong support in the low to mid $16s.

Silver & Silver Net Speculative Position

Moving to Gold, the daily chart below shows Gold losing $1340-$1350 after rejection again at $1360. Immediate support for Gold lies at $1325 which if broken would lead to a test of $1300-$1310 and the 200-day moving average.

We have a few observations to share with respect to the gold stocks. First, GDXJ has pulled back from trendline resistance around $34. Second, breadth indicators for GDX such as the advance decline line (A/D) and the bullish percentage index (BPI) are showing a positive divergence. The BPI has reached a 52-week high while the A/D line is not far from its January peak when GDX nearly hit $25. So while GDX has been relatively weak, its internals are showing more strength.

Silver and the gold stocks have yet to break important resistance as Gold once again was turned back at major resistance. If the US Dollar, which closed at 90.07, rallies up to its 200-day moving average at 92, Gold would likely test $1300-$1310. Should Silver and the gold stocks hold up well in that scenario (which could be suggested by current breadth) then it would imply a good rebound from the sector back to resistance points. Lower prices in the juniors would be a welcome sign and another opportunity to accumulate ahead of a major breakout in the not too distant future. In anticipation of that breakout, we have been accumulating the juniors with 300% to 500% upside potential over the next 18-24 months. To follow our guidance and learn our favorite juniors, consider learning more about our premium service.

By: Paul Farrugia

Gold and silver mining stocks face increased risks and uncertainty in 2018, not seen by investors and mining management teams for quite some time. Many of the top risks to gold stocks are related to geopolitical and financial, which will only compound the already high operational risks. Many of these top risks to gold stocks can be applied to silver stocks and any commodity stocks as well. What was most interesting, many of these risks are not seen as a concern to the management teams of Newmont Mining or Barrick Gold when going through their 10-Ks, versus the elevated risks the investment community sees in the macro landscape. Is the investment community concerned with many risks or is management thinking many of the risks won’t happen to them? These risks can heighten mining risk because of the elevated geopolitical and financial risks, potentially disrupting supply, and driving up gold prices even further without gold demand increasing. Are these the catalysts that will push up higher gold prices?

HISTORY REPEATS

Over a long-term enough time horizon, the sixteen biggest risk events repeat, but with a slight twist. The risks are the same, but the characters in the play are different. Capital controls, nationalization of assets, labor disputes, increased regulation on assets, and royalty changes. They all have occurred during different time periods, at some point or another. Most are tied to miners generating an incredible amount of profits, and individual countries wanting to get a bigger share of those revenues. It’s hard to move a mine, putting the mine at increased operational and political risk to earn more on those assets.

GEOPOLITICAL RISKS

Geopolitical Escalations Disrupting the Supply-chain
Government Election Uncertainty
Tariffs (on Mine Supplies)
Export Restrictions of Commodities

Supply disruptions from geopolitical are at heightened levels of risk not seen since the 1930’s and 1940’s, because of increased geopolitical risks. All of this political uncertainty increased demand for all private assets (not just gold).There is a shift from public assets to private assets.

Geopolitical risks are always the hardest for management and investors to get a firm grip on. It requires so many “ifs or if that”, to really pinpoint which will do harm to the mine operations. The geopolitical risks can impact other items that impact funding of the operations like capital controls or the mine operations supplies. A simple solution for investors to mitigate geopolitical risk is to see if the miner has its operations across more than one country, to limit any country-specific risk. There are also several general elections in 2018 and 2019 in commodity-specific countries. Mexico is a significant gold and silver mining producer, and it is having elections in 2018. Brazil also has its general election in 2018, its second largest export commodity in dollar value is gold. Brazil also produces more than 90% of the worlds Niobium, third largest producer of iron ore, and sixth largest producer of aluminum [1]. Heightened political matters will only increase throughout 2018 and continue into 2019, adding to already heightened geopolitical issues.

FINANCIAL RISKS

Economic Slowdown
ETF margin requirements reducing liquidity in mining ETF impacting financing
Financial Taxation Changes by Governments
Bail-in Risk to cash balance
Rising Interest Rates
Cash held Government Bonds – Debt Jubilee

The world continues to work through the debt issues, that have not been resolved since 2008 financial crisis. The risks at banks continue to remain elevated, particularly the European banks. We expect there will be a debt jubilee in some form, with shorter duration government bonds being converted into longer-dated bonds. Companies that are holding shorter-term term government paper as “safe” allocation for their cash, will be caught off guard if their government paper is re-adjusted to a longer duration. Corporate bonds are a better alternative. For Canadian and Australian miners they also face the added bail-in risk of deposits. Federal governments have explicitly stated that they will consider bail-in options, issuing depositors a clear warning. However, “This will never happen to us” management teams always say. Well, they have before, and they will again. If governments are already warning you what they will do in the next crash, and you fail to heed their warning. The list of repeat offenders is quite long.

Even Goldman Sachs CEO, Lloyd Blankfein is warning about the sovereign crisis coming next.

“What is kind of a little bit off. A lot of the bank issues in the United States and around the world have been solved. But migrating the problem to the sovereign balance sheets. So the banks look pretty good, but the Fed has $4 trillion of debton its balance sheet. And it’s even more, we are not in a European audience. In Europe they would really know what they meant because all the European banking system is fixed but Europeans are all also buying up all the debt. The budget deficits haven’t contracted, they’ve widened. The banks buy the debt, then walk over to the European Central bank, finance it. Get new money, so they can buy the next round of debt.

So, you have countries with way bigger deficits, as a percentage of GDP than the U.S., that are borrowing money for ten years, at 3.0% or 2.5%. Really? And the banks look ok.

It is the sovereigns that look risky, like Greece. You wonder is the next crisis going to be a sovereign crisis? And if it is, it will just be a continuation. People will look back and say.. what we really did, we didn’t fix the outcome of the financial crisis. We left that open and as a result, its really been a thirty-year workout.”Lloyd Blankfein [Source: CNBC]

THIS COULD NEVER HAPPEN?

LATE IN THE CYCLE COMMODITY ISSUES

Labor price issues
Government Expropriation Risks
Royalty Regime increases on mining assets

Investors, who say that any of the above risks can never happen, fail to learn the lessons of history to see that, yes, these events have happened and they impacted miners at one point or another. They have impacted many miners over the past 30 years. My experience has taught me, that most investors only really look back far enough to the last crash as to what could happen. Every one of these late in the cycles issues (labor price pressures, government expropriation, royalty regime increases) have always all occurred during the last mining boom. We don’t see these late in the cycle commodity risks evident in gold and silver stocks at this time. Look at cobalt and the skyrocketing price increases. This resulted in governments stepping in and raising cobalt taxes. Investors and management should not be surprised that this occurred, but human beings rarely learn from the past lessons.

For the longer cycle-related events, the time period is much longer than the typical business cycle. By taking into account the business cycle and debt cycles in conjunction with the commodity cycle, you can see where the events will take place. One of my leading long-term bearish indicators in any industry is the regulation card because it has historically highlighted the top in the industry. The mining sector is not there yet.

RISK ALWAYS ON OPERATIONS

OPERATIONAL RISKS

Mine start-up
Cyber Espionage on Mines
Regulatory changes on permitting

The risk to miners will always have the operational risks, particularly when the mine is starting up. Even the best construction engineers and site managers do their best to mitigate the mine risks. The financial and geopolitical poses an added layer of risk that could disrupt the supply chain.

MANAGEMENT TEAMS WILL RESPOND ONLY AFTER

History has shown that management teams from all industries will respond only to a situation or negative event after it has happened. “It couldn’t happen to me” or “That happened 30 years ago”. For the investor, it is better to assume that management will respond only after the event has happened. I am always concerned when the majority of new MBA’s choose a hot and trending industry to build a career in because the top is almost always nearby. We don’t see MBA’s flocking to the gold sector at issue at this time, which continues to make an unloved and unwanted, but excellent for the long-term investor.

FAILURE TO LEARN FROM PAST CYCLES

As this new commodity cycle takes fold, new management teams have entered the mining sector. Old management teams have either sold out, been fired or decided to call it quits after a number of mining cycles. Gone are the lessons from past cycles putting out fires, dealing with governments, capital raising, and operating expertise. This is why it is important to seek those management teams that have succeeded in the past and are still around. It will only increase the odds of success. For the new management teams, they have to earn investor’s trust. If investing in them, watch about putting all your money in from the start, because they will slip. That is certain.

OPPORTUNITIES FOR INVESTORS

Risk events can present opportunities for investors on assets because when investors indiscriminately sell stocks, they sell out the good ones. By thinking through risk events now, it allows investors and management CEO’s to better capitalize on opportunities that can present themselves because your weaker and ill-prepared peers won’t. The risks can also reduce overall gold supply and even with the heightened demand due to geopolitical and financial risks. The gold and silver sectors remain under-owned in relation to other sectors. Technology remains over owned particularly given it is at the beginning of incoming regulation.

“By failing to prepare, you are preparing to fail.” ― Benjamin Franklin

TAKE AWAY FOR THE PORTFOLIO MANAGER & GOLD STOCK ANALYST

Warren Buffett said it best, in managing risk in the investments one makes:

“The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.”

Better to focus on risk control

Country Diversification- Reduce risks in the portfolio by diversifying across multiple countries.
Financial Strength – Balance sheet counts at the end of the day. How management diversifies its cash will be critical reducing bank deposit risk and debt jubilee exposure.
Margin of Safety – The greater the difference between commodity price and the mine’s All-In-Sustaining-Cost (AISC) reduces the chances of going bust should commodity prices fall.
Investors can seek out less financially leveraged companies, and while ensuring the company is growth focused.
Seeking companies with high management ownership with a significant portion of their wealth in the company.

We have outlined the key geopolitical, financial, and operational risks that investors should be aware of and at least think through in their own portfolios and CEO’s in operating their businesses. 2018 is a period of elevated geopolitical and financial markets related risks to gold stocks. This elevated risk may be the catalysts that wake up the investment community and shift from public assets to private assets, benefiting commodities like gold and silver. While risk is always present when investing, there are risks that one can control, and there are risks that one cannot control.

“If you are not worried, you should be. If you are worried, probably less to be worried about” – Paul Farrugia

Paul Farrugia, BCom. Paul is the President & CEO of First Macro Capital. He helps his readers identify mining stocks to hold for the long-term. He provides a checklist to find winning gold and silver mining producer stocks, including battery metals.

The mega-cap stocks that dominate the US markets have enjoyed an amazing bull run. But February’s first correction in years proved things are changing. With that unnatural low-volatility melt-up behind us, it’s more important than ever to keep leading stocks’ underlying fundamentals in focus. They help investors understand which major American companies are the best buys and when to deploy capital in them.

For some years now, I’ve been doing deep dives into the quarterly financial and operational results in the small contrarian sector of gold and silver miners. While hard and tedious work, this exercise has proven incredibly valuable. With each passing quarter my knowledge of individual companies grows, helping to ferret out miners with superior fundamentals and the greatest upside potential. Traders love the resulting essays.

This successful fundamental-research methodology can be applied to other sectors, and even the stock markets as a whole. And no “sector” is more important to the overall stock markets than the biggest and best American companies. So I’m starting this new essay series to analyze their quarterly results on an ongoing basis. Today’s initial foray starts with their latest results from Q4’17, a critical baseline quarter.

With the new Q1’18 earnings season getting underway, Q4’17’s data is getting stale. Optimally this research would’ve been done 6 weeks or so ago. But it wasn’t until long-lost stock-market volatility finally roared back in February and March that it became abundantly clear big changes are afoot. After that it took time to build our necessary underlying spreadsheets and dive into the big US stocks’ Q4 results.

Going forward it will be easier to analyze and publish new quarters’ results much sooner after those quarters end. But getting Q4’17 baseline data was absolutely essential. That may very well prove the final quarter in one of the most-extraordinary bull markets on record. The flagship S&P 500 stock index had powered 324.6% higher over 8.9 years, making for the third-largest and second-longest US bull on record!

That was also just a hair under the second-largest ranking. 2017 was truly the best of times for the stock markets too. Record-low volatility along with extreme euphoria in anticipation of Republicans’ coming massive corporate tax cuts drove the S&P 500 (SPX) 19.4% higher with nary even a trivial 4%+ pullback. Nearly everyone was convinced this idyllic rally could continue indefinitely, traders were utterly enchanted.

A key real-world side effect of last year’s epic stock-market exuberance was sharply-higher spending by households and corporations alike. Late in major bull markets when everyone is complacent and greedy the wealth effect is very strong. People extrapolate their fat stock gains out into infinity, and ramp their spending accordingly. That drives strong growth in corporate sales and profits, greatly reinforcing the elation.

As a contrarian student of the markets and trader, I wasn’t drinking that Kool-Aid. On 2017’s final trading day I published an essay on the hyper-risky stock markets, explaining why a new bear was long overdue. The valuations of the elite SPX stocks were deep into formal bubble territory, running at average trailing-twelve-month price-to-earnings ratios of 30.7x at the time. That would further balloon to 31.8x by late January!

More importantly, the world’s major central banks were pulling away the punch bowls that had directly fueled that vast orgy of stock-market excess. The Fed was starting to ramp its first-ever quantitative-tightening campaign to begin unwinding long years and trillions of dollars of quantitative-easing money printing. And the European Central Bank was drastically tapering its own QE bond-buying campaign.

This unprecedented tightening following radically-unprecedented QE would literally strangle the stock markets, as I explained in late October. The extreme euphoria drowned out those warnings then, but traders are more receptive now after the SPX’s first 10%+ correction in 2.0 years in early February. All this suggests high odds that Q4’17 will prove the final pre-peaking quarter of that central-bank-goosed bull.

Thus I couldn’t wait for Q1’18 data to start this new essay series, I had to get Q4’17’s baseline data no matter what. The world’s most-important stock index by far is the US S&P 500, which weights America’s biggest and best companies by market capitalization. So not surprisingly the world’s largest and most-important ETF is the SPY SPDR S&P 500 ETF which tracks the SPX. This week it had net assets of $252.4b!

That’s a staggering sum, reflecting the universal popularity of index investing late in major bull markets. Two of the next three largest ETFs also track the S&P 500, the IVV iShares Core S&P 500 ETF at $140.4b and the VOO Vanguard S&P 500 ETF at $87.1b. These dwarf the entire rest of the ETF sector. For comparison, the dominant and popular GLD SPDR Gold Shares gold ETF has net assets of just $37.3b.

Unfortunately my small financial-research company lacks the manpower to analyze all 500 SPX stocks in SPY each quarter. Support our business with enough newsletter subscriptions, and I would gladly hire the people necessary to do it! But for now we’re starting with the top-34 SPY components ranked by market capitalization. That’s an arbitrary number that fits neatly into the tables below, but a commanding sample.

As of the end of Q4’17 on December 29th, these 34 companies accounted for a staggering 41.8% of the total weighting in SPY and the SPX itself! They are the biggest and best American companies that are largely-if-not-totally driving US stock-market fortunes. Whether the SPX rolls over into a new bear market or not will depend on how these elite stocks fare. They are the widely-held mega-cap stocks everyone loves.

Every quarter I’m going to wade through a ton of core fundamental data on each top-34 SPX company and dump it into a spreadsheet for analysis. The highlights make it into these tables. They start with each company’s symbol, weighting in the SPX and SPY, and market cap as of the final trading day of Q4’17. That’s followed by the year-over-year change in each company’s market capitalization, a critical metric.

Major US corporations have been engaged in a wildly-unprecedented stock-buyback binge ever since the Fed forced interest rates to deep artificial lows during 2008’s stock panic. Thus their share-price appreciation also reflects shrinking shares outstanding. Looking at market-cap changes instead of just underlying share-price changes effectively normalizes stock buybacks. It’s a purer view of company value.

The next data set is quarterly sales along with their YoY changes. Revenues are one of the best indicators of businesses’ health. While profits can be manipulated quarter-to-quarter by playing with accounting estimates, sales are mostly set in stone. Ultimately sales growth is necessary for companies to expand, as earnings boosts driven by cost-cutting are inherently limited. Sales declines are bear-market harbingers.

Operating cash flows are also very important, showing how much capital companies’ businesses are actually generating. Unfortunately most of these elite big US stocks didn’t break out Q4’17 OCF, instead lumping it in with full-year financial statements. While that can still be calculated by subtracting the Q1 to Q3 OCFs from the annual one, that’s tedious and time-consuming. Not reporting full Q4 results disrespects investors.

Next are the real quarterly earnings that must be reported to the Securities and Exchange Commission under Generally Accepted Accounting Principles. Late in bull markets, companies tend to use fake pro-forma earnings to downplay GAAP results. These are derided as EBS earnings, Everything but the Bad Stuff! Companies arbitrarily ignore certain expenses to artificially inflate their profits, which is very misleading.

While we’re also collecting earnings-per-share data, it’s more important to consider total profits. Stock buybacks are executed to drive EPS higher, because the shares-outstanding denominator shrinks as shares are repurchased. Raw profits are a cleaner measure, normalizing out stock buybacks’ impacts. When the inevitable bear market arrives, companies will attempt to mask falling earnings by emphasizing EPS.

Finally the trailing-twelve-month price-to-earnings ratio is noted. TTM P/Es look at the last four reported quarters of actual GAAP results compared to prevailing stock prices. They are the gold-standard metric for valuations. Wall Street often intentionally obscures these hard P/Es by using forward P/Es instead, which are literally mere guesses about future profits! They have usually proven far too optimistic in the past.

As expected given last year’s spending-driving stock-market euphoria, the top SPY/SPX components’ Q4’17 results were generally quite impressive. Their sales grew strongly, but were still far-outpaced by their stock-price gains driving valuations sharply higher. Earnings were heavily distorted due to the impact of Republicans’ big corporate tax cuts passing that quarter, which was fascinating to analyze.

Not surprisingly the S&P 500’s top-constituent list was little changed in 2017. Most of these elite American companies only grew larger. Three stocks did claw their way into the top 34 since Q4’16, their symbols are highlighted in blue above. Boeing is a high-priced Dow 30 stock, which has skyrocketed on better business prospects driving the Dow higher. Its market cap soared an astounding 85% higher last year!

Any company with YoY market-cap gains over 19% beat the overall SPX last year, while any company below that lagged it. These top-34 US stocks saw average market-cap gains of 29%, well ahead of that average. One of the telltale characteristics of bull-market tops is gains concentrate in fewer and fewer stocks. The well-known shrinking-business problems of GE and IBM forced them just out of the top 34 last year.

With 500 stocks in the S&P 500, it’s still amazing and damning that 41.8% of this entire index’s market cap is concentrated in just 34 big US stocks! At the end of Q4’17, investors had $10.2t of wealth tied up in these elite companies. That extreme concentration is a double-edged sword, because bear markets often inflict downside damage on individual stocks in proportion to their upsides seen in the preceding bulls.

Ominously the universally-adored and -owned mega-cap tech stocks were dominating the SPX at the end of 2017. Apple, Alphabet, Microsoft, Amazon, and Facebook all had staggering market caps in excess of a half-trillion dollars each. These 1% of SPX stocks weighed in at a colossal 13.8% of index weight! Their average TTM P/E was 61.7x, more than double the 28x classical bubble threshold. That’s super risky!

One reason investors have been willing to pay such high premiums for the tech market darlings is their astounding sales growth. While the top-34 SPX companies together averaged still-impressive 11% sales growth from Q4’16 to Q4’17, the top 5 tech stocks trounced that at 28%! The rest of these top-34 SPY components reporting Q4 sales averaged about a quarter of that at 7.7%. So these tech stocks look invincible.

But such fast sales growth is unsustainable given their massive sizes, and likely to reverse with the stock markets. Everyone loves Apple’s products, but they are expensive. iPhones and iPads last years with no need to upgrade, and major upgrades are few and far between anyway with those technologies maturing. So the upgrade cycles Apple desperately needs to drive its massive sales are lengthening considerably.

As the stock markets’ wealth effect reverses to negative in the next bear market, odds are Americans will keep their iPhones longer before buying new ones. These are sizable expenses relative to median US household incomes. Amazon might be able to better weather a stock-market storm, depending on how much of the stuff Americans order from it is necessary versus discretionary. Its bear sales trends will be interesting.

Alphabet, Microsoft, and Facebook rely heavily on business spending. The coming huge tax cuts made 2017 a banner year for business confidence, leading to giant leaps in spending on online advertising as well as back-office data services. When the next recession comes accompanying the stock bear, much of that euphoric business spending will wither and reverse. So mega-cap-tech sales growth ahead isn’t so rosy.

I was very dismayed to find only 13 of these biggest-and-best American companies bothered reporting their Q4 operating cash flows to their investors. These companies have effectively infinite accounting resources, yet their Q4 breakouts from full-year results were terrible. Even the gold miners with their wildly-varying accounting and home countries did way better. So there’s not enough Q4 OCFs to bother analyzing.

Thankfully that won’t be the case in Q1s to Q3s, where every one of these elite stocks will dutifully report their quarterly operating cash flows. In the gold-mining space, sometimes companies choosing to obscure their OCFs want to hide poor performance. I don’t think that’s the case in these top SPX/SPY companies given their strong sales growth. But I’m shocked they don’t consider shareholders worthy of this key data.

The biggest surprises for me in this first foray into big US stocks’ quarterly results came on the earnings front. As expected given all the spending-inducing stock euphoria last year, overall profits of these top-34 SPY components grew to $112.2b in Q4. That made for average YoY gains of 137%, certainly sounding phenomenal. But that was just one quarter, not the entire year. So valuations didn’t decline on that.

The dominant reason the stock markets soared in 2017 was the coming massive corporate tax cuts. All year long there was great anticipation of them becoming law. The actual Tax Cuts and Jobs Act of 2017 bill was introduced in early November, passed the House in mid-November, passed the Senate in early December, and then was passed again in its reconciled version in both Congress chambers in mid-December.

Trump signed it into law and made it official on December 22nd, 2017. This whole process surrounding the actual bill began and ended in Q4. Its flagship provision was slashing the US corporate tax rate from 35% to 21%. This was a huge cut despite many offsetting business deductions and credits also being eliminated. It was probably the biggest change in US corporate taxation in history, a huge shift to adjust to.

For large publicly-traded companies, the SEC requires formal 10-K annual reports after fiscal year-ends to be filed by 60 days after quarter-ends. So American companies only had about 9 weeks to analyze the impact of the TCJA on their businesses before reporting Q4’17. Fully 33 of these top 34 companies in the SPX reported TCJA adjustments to their Q4’17 profits. Apple was the only company not breaking it out.

These adjustments’ profits impacts had an enormous range, from a colossal $29.1b boost to Berkshire Hathaway’s Q4 profits to a gargantuan $22.0b hit on Citigroup’s! So nearly all these Q4 GAAP profits are somewhat-to-heavily distorted by one-time impacts of those corporate tax cuts. Most of the really-big profits and really-big losses above are the result of these TCJA adjustments and not business operations.

In reading through all these 10-Ks and 10-Qs, there were generally two major tax-cut drivers impacting profits. The first was deferred tax assets and liabilities. These are very complicated, but basically US companies either overpaid or underpaid their taxes in individual years due to various accounting rules. The differences become DTAs or DTLs, which reduce or increase future years’ tax burdens for these companies.

But when the corporate tax rate was drastically slashed from 35% to 21%, all of a sudden both DTAs and DTLs were worth much less going forward. DTAs shielded less future profits at lower tax rates, while DTLs would have lower future tax payments. Different industries and businesses had wildly-different deferred taxes on their books. The second provision driving the adjustments was a one-time repatriation tax.

Because the US corporate tax rate had been so obnoxiously high relative to the rest of the world for so long, major companies played accounting games recognizing earnings in other countries. This stacked up to trillions of dollars held overseas. The TCJA imposed a one-time repatriation tax assuming that this cash was being sent back to the US whether that was true or not, which was a big cost for some companies.

So these Q4’17 profits numbers are very distorted by these one-time TCJA adjustments flushed through income statements. I gathered all these with the rest of the data, and expected a big overall impact on their collective profits. The absolute value of all of them together for these top-34 US stocks was a truly-staggering $209.2b in Q4’17! That dwarfed the actual reported GAAP profits running $112.2b that quarter.

Thus I watched the running total with great interest as I waded through the quarterlies. I expected to see corporate profits greatly overstated by the TCJA adjustments. But much to my surprise, the net of all of these positive and negative profits impacts was merely +$2.7b. That’s just 2.4% of the total earnings of these top-34 big US stocks, essentially a wash. Will the corporate tax cuts be less valuable than expected?

While the old statutory corporate rate was 35%, many companies are using schemes and loopholes to pay far less. Many of those were closed to get to 21%. If the positive impact of lower corporate taxes is smaller going forward than Wall Street joyously expects, it will have a big adverse psychological impact. If profits don’t balloon dramatically as forecast, valuations are going to get even more dangerously extreme.

While individual top SPX companies’ profits won’t be comparable with those big TCJA adjustments, they will be collectively with the overall flat impact. If the $112.2b of Q4’17 GAAP profits earned by these top 34 US companies is annualized, it implies $448.9b of earnings on a $10.2t collective market cap. That equates to a 22.7x overall P/E for these big US stocks at the end of one of the best corporate-profits years ever.

That’s not in bubble territory, but still very expensive after such a big and long bull. But not aggregated these top stocks look way more overvalued. Their average TTM P/Es, which didn’t yet include Q4’17 earnings at the end of December, ran way up at 30.6x. That’s still above that 28x bubble threshold. But Amazon is an insane outlier at 190.2x earnings. Ex-Amazon, that top-SPY-stocks average drops to 25.8x.

That’s still frighteningly high. The whole purpose of bear markets following long bull markets is to drag stock prices down and sideways long enough for earnings to catch up with lofty stock prices. Bears don’t end until overall stock-market P/E ratios collapse back down to 7x to 10x earnings! That implies the US stock markets face getting at least cut in half, which is typical in major bear markets. That’s serious downside.

Ominously most of this past year’s incredible stock-price appreciation in these elite companies wasn’t driven by earnings growth. The average jump in their market capitalizations from the end of Q4’16 to the end of Q4’17 was 29%. In this same span their TTM P/E ratios climbed an average of 25%. Thus these top SPY companies’ earnings barely grew during all of last year despite all the record-high-stocks euphoria!

The hard data proves that’s true. In Q4’16, these same 34 big US stocks collectively earned $110.4b. That only rose 1.7% YoY to $112.2b in Q4’17. Yet their total market caps still blasted 26.9% higher! This proves one of the greatest stock-market years on record didn’t drive any meaningful earnings growth in Q4, which tends to be the best quarter of the year on holiday spending. Fundamentals didn’t improve.

Last year’s extreme stock-market melt-up to dazzling new all-time highs was purely a sentiment thing, not at all fueled by GAAP earnings growth. 2017’s big gains were built on sand. Psychology is a fleeting capricious thing that will absolutely mean revert back to neutral and overshoot to bearish. And when that happens, the profits won’t be there to keep these elite market-darling stocks from getting mauled by the bear.

Despite the recent mild correction, these stock markets remain exceedingly overvalued and dangerous. The big US stocks’ Q4’17 fundamentals prove corporate earnings remain far too low to justify such high stock prices. That’s terrifying in 2018 where the Fed and ECB will collectively remove $950b of liquidity compared to last year! Regardless of valuations, this alone would plunge these stock markets into a new bear.

Investors really need to lighten up on their stock-heavy portfolios, or put stop losses in place, to protect themselves from the coming central-bank-tightening-triggered valuation mean reversion in the form of a major new stock bear. Cash is king in bear markets, as its buying power grows. Investors who hold cash during a 50% bear market can double their stock holdings at the bottom by buying back their stocks at half-price!

SPY put options can also be used to hedge downside risks. They are still relatively cheap now with complacency rampant, but their prices will surge quickly when stocks start selling off materially again. Even better than cash and SPY puts is gold, the anti-stock trade. Gold is a rare asset that tends to move counter to stock markets, leading to soaring investment demand for portfolio diversification when stocks fall.

Gold surged nearly 30% higher in the first half of 2016 in a new bull run that was initially sparked by the last major correction in stock markets early that year. If the stock markets indeed roll over into a new bear in 2018, gold’s coming gains should be much greater. And they will be dwarfed by those of the best gold miners’ stocks, whose profits leverage gold’s gains. Gold stocks skyrocketed 182% higher in 2016’s first half!

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The bottom line is the big US stocks’ latest quarterly results are concerning. Despite a perfect year for the stock markets, and boundless optimism fueled by hopes for big tax cuts soon, corporate profits were largely flat in Q4. If the biggest and best American companies can’t grow earnings substantially even in that ideal environment, how will they fare when these stock markets inevitably roll over into a long-overdue bear?

And the initial massive-corporate-tax-cut impact on corporate profits was effectively a wash. What if the slashed corporate tax rate doesn’t yield the expected earnings windfall in 2018? This risk coupled with slowing sales as stock markets weaken is incredibly bearish. Especially with the biggest and best US stocks everyone loves and owns still trading near or above bubble valuations as central banks greatly tighten.

Silver has been dead money over the past year or so, relentlessly grinding sideways to lower. That weak price action has naturally left this classic alternative investment deeply out of favor. Silver is extremely undervalued relative to gold, while speculators’ silver-futures positions are extraordinarily bearish. All this has created the perfect breeding ground to birth a major new silver bull market, which could erupt anytime.

Silver’s price behavior is unusual, making it a challenging investment psychologically. Most of the time silver is maddeningly boring, drifting listlessly for months or sometimes years on end. So the vast majority of investors abandon it and move on, which is exactly what’s happened since late 2016. There’s so little interest in silver these days that even traditional primary silver miners are actively diversifying into gold!

But just when silver is universally left for dead, one of its massive uplegs or bull markets suddenly ignites. Some catalyst, typically a major gold rally, convinces investors to return to silver. Their big capital inflows easily overwhelm the tiny global silver market, catapulting this metal sharply higher. Silver skyrockets to amazing wealth-multiplying gains, dwarfing nearly everything else. This reinvigorates silver’s cult-like following.

Silver’s dominant primary driver has long been gold, which controls all precious-metals sentiment. When gold isn’t doing anything exciting, silver languishes neglected. But once gold rallies high enough for long enough to convince investors a major upleg is underway, capital starts returning to silver. Thus silver is effectively a leveraged play on gold, amplifying its price action. Silver never soars unless gold is strong.

This psychological relationship is so ironclad it may as well be fundamental. The global silver and gold supply-and-demand profiles are technically independent, with little direct linkage physically. But when investment demand flares to drive gold higher, parallel silver investment demand soon materializes. So silver and gold often move in lockstep, especially when gold’s price action is interesting enough to catch attention.

All this makes the Silver/Gold Ratio the most-important fundamental measure for silver prices. The lower silver prices happen to be compared to prevailing gold ones, the greater the odds a major silver mean-reversion rally is imminent. And today silver is almost as low relative to gold as it’s ever been in the past century! This first chart looks at the SGR, or more precisely the inverted GSR, over the past 13 years or so.

The SGR calculation results in tiny hard-to-parse decimals, like this week’s 0.012x. So I prefer to use the gold/silver ratio instead, which yielded a cleaner 81.9x as of this Wednesday. Charting this GSR with its axis scaled upside down produces the same SGR line, but with far-more-brain-friendly numbers. This shows that silver is extremely undervalued relative to gold today, which is super-bullish for this neglected asset.

Again this week the SGR was running at just 81.9x, meaning it took almost 82 ounces of silver to equal the value of a single ounce of gold. So far in 2018, the SGR has averaged 79.6x. As you can see in this chart, that’s extremely low. There have only been two other times in modern history where silver looked worse relative to gold, late 2008’s first-in-a-century stock panic and early 2016’s secular-bear-market lows.

Because of silver’s tiny market size, it’s an incredibly-speculative asset. When investment capital flows really shift, silver can soar or plunge with shocking violence. Silver’s speculative nature makes it far more susceptible to general market psychology than gold. Silver acts like a small fishing boat battered around in the choppy waves of sentiment, while gold is more like a supertanker punching through them.

That 2008 stock panic was the first since 1907, one of the most-extreme fear events of our lifetimes. Technically a stock panic is a 20%+ plummet in the major stock-market indexes in less than two weeks. The flagship S&P 500 stock index indeed collapsed 25.9% in exactly two weeks in early October 2008, which terrified everyone. If felt like the world was ending, so investors and speculators sold everything to flee to cash.

Gold weathered that storm well, only sliding 3.3% in that wild stock-panic span. But the overpowering fear scared traders into hammering silver 23.7% lower. On exceptional stock-market down days, silver tends to split the difference between the S&P 500 and gold. We’ve seen that recently as well, during this new stock-market correction since early February. Silver is particularly sensitive to prevailing herd sentiment.

Between September and December 2008 straddling that stock panic, the SGR averaged just 75.8x. Silver was radically undervalued relative to gold, an anomalous state that has never been sustainable for long. The resulting mean reversion and overshoot higher was enormous, yielding stupendous gains for silver investors. Silver ultimately bottomed at $8.92 per ounce in late-November 2008, at a super-low 83.5x SGR.

Over the next 12.4 months silver rocketed 115.4% higher out of those extreme stock-panic lows, which restored the SGR to 63.2x. But that was still low. In the years leading into that stock panic, the SGR averaged 54.9x. For decades a mid-50s SGR has been normal, with silver generally oscillating around those levels compared to gold. Miners had long used 55x as a proxy for calculating silver-equivalent ounces.

Once silver falls to extreme lows relative to its primary driver gold, the inevitable resulting mean reversion rarely stops near the average. Instead it tends to overshoot proportionally to the upside, fueling massive gains. Silver started returning to favor in late 2010 and early 2011 as gold powered to major new highs. That ultimately climaxed with silver enjoying popular-mania-like popularity in late April 2011, at $48.43 per ounce.

That made for a total bull market out of those extreme stock-panic lows of 442.9% over 2.4 years! At its peak, the SGR had soared to 31.7x. Silver can’t sustain anomalously-high prices relative to gold either, so that bull soon rolled over as I warned the month before that peak. The key takeaway today is silver’s extreme stock-panic lows birthed a major new bull market. Silver can’t stay crazy-low relative to gold for long.

Unbelievably silver in 2018 is even more extremely undervalued than during those 4 months surrounding that stock panic! Again the SGR is averaging just 79.6x year-to-date. That’s considerably worse than during the stock panic which saw 75.8x over a similar time span. Such incredibly-low silver prices are no more sustainable now than they were then. That’s why a major new silver bull is likely coming very soon.

Interestingly the SGR popped right back up to its traditional mid-50s average after 2008’s stock panic as well. Between 2009 and 2012, the SGR averaged 56.9x. Those were the last quasi-normal years for the markets before the Fed’s unprecedented open-ended third quantitative-easing campaign started to wildly distort everything in 2013. Everything since then is literally a central-bank-conjured illusion that will shatter.

If silver merely mean reverts out of today’s worse-than-stock-panic extreme lows, regaining a 55x SGR would catapult it near $24.25 at this week’s $1333 gold levels. That’s almost 50% higher than today’s deep lows! From this week’s wild 81.9x SGR low, a proportional overshoot back up to a 28.1x SGR would blast silver back near $47.50. That’s 191% higher from here, nearly a triple, making for big gains.

All it will take to get silver mean reverting is a convincing gold upleg. Investors will return to silver once gold rallies high enough for long enough for them to believe its climb is sustainable. Then silver will take off and amplify gold’s gains. Gold powered 106.2% higher during that post-stock-panic silver bull where it soared 442.9%, making for 4.2x leverage. Gold also fueled silver’s last reversion rally out of extreme lows.

From 2013 to 2015, the stock markets surged relentlessly as the Fed’s vast QE money creation directly levitated them. Gold is an alternative investment thriving when stock markets weaken, so it was largely abandoned in those weird years. Gold ultimately slumped to a 6.1-year secular low in December 2015 leading into the Fed’s first rate hike of this cycle. That pummeled silver to its own parallel 6.4-year secular low.

In late 2015 silver felt a lot like it does today. No one wanted anything to do with it, everyone believed it was dead. Investors and speculators alike wouldn’t touch silver with a ten-foot pole near those lows, convinced it was doomed to spiral lower indefinitely. Yet out of that very despair a new silver bull was born. Over the next 7.6 months into August 2016, silver powered 50.2% higher on gold’s new 28.2% upleg.

Unfortunately that new mean-reversion silver bull ended prematurely as gold’s own young bull suffered a temporary truncation. The extreme stock-market rally erupting after Trump’s surprise election victory on euphoric hopes for big tax cuts soon sapped the wind from gold’s sails. So it dragged silver lower during much of the time since. But the new stock-market correction proves that stocks-strong-gold-weak trend is ending.

That’s super-bullish for silver, especially with it trading at stock-panic-like extreme lows compared to where gold is today. As these wildly-overvalued stock markets continue sliding lower on balance, gold will return to favor. The resulting capital inflows driving it higher will get investors and speculators alike interested in silver again. And just like after past extreme lows, their buying will catapult silver sharply higher.

Today’s extreme undervaluation in silver relative to gold is reason enough to expect a major new silver bull to ignite soon and start powering higher. But silver’s bullish outlook gets even better. The silver-futures situation today is nearly as extreme, with speculators making exceedingly-bearish bets on silver. These will have to be reversed as gold rallies, unleashing massive silver buying that will quickly drive it higher.

Short-term silver-price action is dominated by speculators’ silver-futures trading. The extreme leverage inherent in silver futures lets these guys punch way above their weight in terms of silver-price impact. Each silver-futures contract controls 5000 troy ounces of silver, worth $81,400 even at this week’s very-depressed prices. Yet the maintenance margin required to hold a contract was only $3,600 this week!

That means silver-futures speculators can run extreme leverage up to 22.6x, which is outrageous. Most investors run no leverage at all of course, and the legal limit in the stock markets has been pegged at 2x for decades now. Compared to an investor owning silver outright, each dollar silver-futures speculators are trading can have over 20x the price impact on silver! This gives futures traders wildly-outsized influence.

Every week their collective silver-futures positions are detailed in the CFTC’s famous Commitments of Traders reports. The recent reads are every bit as bullish for silver over the coming months as the SGR is over the coming years! All it will take to get silver surging higher again is for these universally-bearish traders to start buying again. And with the extreme leverage they run, the markets will force them to buy.

This chart shows speculators’ collective long and short positions in silver futures in green and red. They are now barely long silver while heavily short, making for exceedingly-bearish collective bets. Those will have to be unwound relatively rapidly once gold’s stock-market-selloff-fueled rally inevitably starts pulling silver higher again. This is the most-bullish silver-futures situation seen since just before silver’s last bull was born!

Let’s start on the short side, since that’s where speculators’ big silver-futures buying will begin. In the latest CoT week before this essay was published, current to Tuesday March 27th, speculators had total silver-futures shorts of 87.6k contracts. That’s truly extreme. Out of the 1004 CoT weeks since back in early 1999, that’s the 5th-highest spec shorting levels ever seen! Past extremes were never sustainable.

Note above that every single time the red spec-shorts line surged to highs, silver was bottoming ahead of a major rally ignited by short covering. That was true in late 2015 when silver’s latest bull was born, in mid-2017 during gold’s and silver’s summer-doldrums lows, and in late 2017 which saw extreme silver-futures short selling leading into another Fed rate hike. Silver rallied sharply after each shorting spike.

Silver-futures speculators are always wrong at extremes, because their very collective trading is what spawns those extremes in the first place. Once these guys have expended all their capital firepower to throw heavily short silver, there’s no one left to short sell it. Soon some get nervous and start to buy to cover their existing shorts. The only way to exit futures shorts is to buy offsetting long contracts to close positions.

And once short-covering buying starts on the periphery, the whole herd of speculators soon has to join in or risk truly-catastrophic losses. At today’s 22.6x max leverage available in silver futures, a mere 4.4% silver rally would wipe out 100% of the capital risked shorting it! So as soon as silver starts rallying when speculators are extremely short, they are forced to rush to buy to cover which catapults its price sharply higher.

No matter where the SGR happened to be, the 5th-highest spec shorts in silver-futures history would be wildly bullish for the near-term. But that’s not the whole silver-futures picture. It’s not just the speculators on the short side of the trade that are too bearish on silver, so are the long-side guys. In this latest CoT week, total spec silver-futures longs were only running 95.0k contracts. That’s just over a 26.2-month low!

Speculators’ collective bullish bets on silver via futures are slightly above their lowest levels since early 2016 when silver’s last bull market erupted! Unlike short-side traders who are legally obligated to buy to cover once silver starts rallying, new long-side buying is discretionary. But that very short covering drives silver higher fast enough to make the bearish long-side traders want to buy back in too, amplifying silver’s rally.

There’s nothing more bullish for silver over coming months than the rare combination of extremely-high shorts and very-low longs! This hasn’t been seen since late 2015 around silver’s 6.4-year secular low. Once silver started climbing on a parallel gold rally driven by short covering in its own futures, silver was off to the races on big futures buying. Speculators rushed to cover their excessive shorts and rebuild meager longs.

The resulting 30.0k contracts of silver-futures short-covering buying and another 55.6k of long buying catapulted silver 50.2% higher over the next 7.6 months. That adds up to 85.6k contracts of spec silver-futures buying. Today’s situation is even more bullish. If total spec shorts and longs return to their past year’s low and high, we’re looking at 54.5k contacts of short covering and another 59.5k of long buying!

That adds up to colossal silver-futures buying potential of 114.0k contracts over the next half-year or so. That’s the equivalent of a staggering 570m ounces of silver, or nearly 2/3rds of the latest read on annual world silver mine production! The potential silver upside that would be fueled by silver-futures buying of this magnitude is enormous. I suspect the resulting silver bull will dwarf the last +50.2% one in 2016’s first half.

Once silver starts rallying decisively on silver-futures buying, investors with their vastly-larger pools of capital will also start returning. Bullish analyses will explode, highlighting silver’s deep undervaluation relative to gold per the Silver/Gold Ratio. That will fuel bullish sentiment driving even more buying. Bull markets’ virtuous circle is buying begetting more buying. The more silver rallies, the more people want to buy it.

I’d be very bullish on silver with only a stock-panic-level SGR, only extreme spec silver-futures shorts, or only very-low spec silver-futures longs. But seeing all three at once, at a time when gold is rallying as the stock markets finally roll over out of their fake central-bank-spawned levitation, is truly extraordinary! This is literally the most-bullish setup for silver seen in years, so smart contrarian traders should be really long.

History proves that once silver starts moving, it will likely rally fast. As always the biggest gains will be won by the fearless contrarians who bought in early before everyone else figures this out. Investors and speculators alike can play silver’s big coming upside in physical bullion itself, the leading SLV iShares Silver Trust silver ETF, and the silver miners’ stocks. But only the latter will greatly leverage silver’s gains.

Just last week I wrote a comprehensive essay exploring the recent Q4’17 results of the world’s major silver miners included in the leading SIL Global X Silver miners ETF. They are mining silver at average all-in sustaining costs of just $10.16 per ounce, far below even today’s low silver prices. So all of silver’s new-bull-market gains will be pure profit, leading to exploding earnings driving silver miners’ stocks far higher.

During 6.9 months roughly coinciding with early 2016’s silver bull, SIL rocketed 247.8% higher! That’s about 4.9x upside leverage to silver’s own gains. And given how absurdly low silver-stock prices are today, silver miners have similar-if-not-greater potential to amplify silver’s even-larger gains in its next bull. The elite major silver miners with superior fundamentals could be the best-performing stocks in all the markets.

The bottom line is a new silver bull is coming. Silver’s long and vexing sideways-to-lower grind has left it as undervalued relative to gold as during 2008’s stock panic. That anomaly was resolved by silver more than quintupling over the subsequent years in a mighty mean-reversion-overshoot bull. On top of that, silver-futures speculators’ short positions are at extreme highs while their opposing longs are at bull-birthing lows.

These wildly-bearish traders will be forced and motivated to aggressively buy silver futures once silver starts rallying decisively. That will be driven by gold strength like usual. Stock-market weakness ignites gold investment demand, driving both precious metals higher. Today’s silver setup is the most bullish in years. Everything is perfectly aligned for a massive new silver bull market to get underway any day now.

The silver miners’ stocks have really languished since mid-2016, relentlessly grinding sideways to lower. With gold out of favor, silver and its miners have largely been left for dead and forgotten. This sector is deeply mired in universal apathy and bearishness. But since silver stocks can skyrocket when silver decisively rallies again, it’s important to keep an eye on silver miners’ fundamentals like their recent Q4’17 results.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Required by securities regulators, these quarterly results are exceedingly important for investors and speculators. They dispel all the sentimental distortions surrounding prevailing stock-price levels, revealing the underlying hard fundamental realities. They serve to re-anchor perceptions.

Normally quarterlies are due 45 calendar days after quarter-ends, in the form of 10-Qs required by the SEC for American companies. But after the final quarter of fiscal years, which are calendar years for most silver miners, that deadline extends out up to 90 days depending on company size. The 10-K annual reports required once a year are bigger, more complex, and need fully-audited numbers unlike 10-Qs.

So it takes companies more time to prepare full-year financials and then get them audited by CPAs right in the heart of their busy season. The additional delay in releasing Q4 results is certainly frustrating, as that data is getting stale approaching the end of Q1. While most silver miners report their Q4 and/or full-year results by 7 to 9 weeks after year-ends, some disrespect their investors by pushing that 13-week limit.

And some silver miners only publish full-year results without breaking out Q4, masking what happened in the latest quarter. All this unfortunately makes Q4 results the hardest to analyze out of all quarterlies. But delving into them is still well worth the challenge. Quarterly results offer a very valuable true snapshot of what’s really going on, shattering all the misconceptions bred by the ever-shifting winds of sentiment.

Silver mining is a tough business both geologically and economically. Primary silver deposits, those with enough silver to generate over half their revenues when mined, are quite rare. Most of the world’s silver ore formed alongside base metals or gold, and their value usually well outweighs silver’s. So typically in any given year, less than a third of the global mined silver supply actually comes from primary silver mines!

The world authority on silver supply-and-demand fundamentals is the Silver Institute. Back in mid-May it released its latest annual World Silver Survey, which covered 2016. That year only 30% of silver mined came from primary silver mines, a slight increase. The remaining 70% of silver produced was simply a byproduct. 35% of the total mined supply came from lead/zinc mines, 23% from copper, and 12% from gold.

As scarce as silver-heavy deposits supporting primary silver mines are, primary silver miners are even rarer. Since silver is so much less valuable than gold, most silver miners need multiple mines in order to generate sufficient cash flows. These often include non-primary-silver ones, usually gold. More and more traditional elite silver miners are aggressively bolstering their gold production, often at silver’s expense.

So the universe of major silver miners is pretty small, and their purity is shrinking. The definitive list of these companies to analyze comes from the most-popular silver-stock investment vehicle, the SIL Global X Silver Miners ETF. This week its net assets are running 6.8x greater than its next-largest competitor’s, so SIL really dominates this space. As investors buy SIL, it in turn buys shares in the companies it holds.

Back in mid-March as the major silver miners were finishing reporting their Q4’17 results, SIL included 25 “silver miners”. This term is used loosely, as SIL holds plenty of companies which can’t be described as primary silver miners. Most generate well under half their revenues from silver, which really limits their stock prices’ leverage to silver rallies. Nevertheless, SIL is today’s leading silver-stock ETF and benchmark.

The higher the percentage of sales any miner derives from silver, naturally the greater its exposure to silver-price moves. If a company only earns 20%, 30%, or even 40% of its revenues from silver, it’s not a primary silver miner and its stock price won’t be very responsive to silver itself. But as silver miners are increasingly actively diversifying into gold, there aren’t enough big primary silver miners left to build an ETF alone.

While most of these top-17 SIL components had reported on Q4’17 by late March, not all had. Some of these major silver miners trade in the UK or Mexico, where financial results are only required in half-year increments. If a field is left blank in this table, it means that data wasn’t available by the end of Q4’s earnings season. Some of SIL’s components also report in gold-centric terms, excluding silver-specific data.

In this table the first couple columns show each SIL component’s symbol and weighting within this ETF as of mid-March. While most of these silver stocks trade in the States, not all of them do. So if you can’t find one of these symbols, it’s a listing from a company’s primary foreign stock exchange. That’s followed by each company’s Q4’17 silver production in ounces, along with its absolute year-over-year change.

After that comes this same quarter’s gold production. Pretty much every major silver miner in SIL also produces significant-if-not-large amounts of gold! While gold stabilizes and augments the silver miners’ cash flows, it also retards their stocks’ sensitivity to silver itself. Naturally investors and speculators buy silver stocks and their ETFs because they want leveraged upside exposure to silver’s price, not gold’s.

So the next column reveals how pure the elite SIL silver miners are. This is mostly calculated by taking a company’s Q4 silver production, multiplying it by Q4’s average silver price, and then dividing that by the company’s total quarterly sales. If miners didn’t report Q4 revenues, I approximated them by adding the silver sales to gold sales based on their quarterly production and these metals’ average fourth-quarter prices.

Then comes the most-important fundamental data for silver miners, cash costs and all-in sustaining costs per ounce mined. The latter determines their profitability and hence ultimately stock prices. Those are also followed by YoY changes. Finally comes the YoY changes in cash flows generated from operations and GAAP profits. But there are a couple exceptions where YoY changes just wouldn’t yield useful results.

Percentage changes aren’t relevant or meaningful if data shifted from positive to negative or vice versa, or if derived from two negative numbers. So in those cases I included raw underlying results instead of weird or misleading percentage changes. This whole dataset offers a great high-level read on how the major silver miners are faring today as an industry. They’re doing pretty well in this weak-silver-price environment.

That’s reassuring given silver’s serious underperformance relative to gold. As a far-smaller market, silver usually amplifies gold’s advances by 2x to 3x. Yet in 2017, silver only rallied 6.4% despite a much-bigger 13.2% gold rally. That vexing trend has continued in 2018, with silver down 3.8% year-to-date while gold is 1.8% higher. With silver itself really sucking wind, investors sure aren’t motivated to buy silver stocks.

Production is the lifeblood of miners, and thus the best place to start fundamental analysis. In Q4’17, these top-17 SIL components collectively produced an impressive 78.6m ounces of silver. If 2016’s world-silver-mining run rate is applied to last year’s fourth quarter, that implies 221.5m ounces of silver mined. Thus these top SIL silver miners would account for nearly 36% of that total, they truly are major silver players.

Their collective silver production looks solid, climbing 3.0% YoY. But unfortunately that’s misleading, as huge growth in a couple mining conglomerates is masking sharp-to-catastrophic declines for some of the rest of these SIL-component miners struggling with low silver prices. Fresnillo and Industrias Peñoles enjoyed major 20% and 19% YoY gains in silver production off their already-gigantic world-leading bases!

So I haven’t been able to track down how much of Fresnillo that Industrias Peñoles still owns, nor whether the silver production reported by these silver-mining behemoths is actually mutually exclusive. I’m assuming it is for this analysis, but I’m skeptical. Both companies reported their huge YoY growth in silver production was the result of Fresnillo’s new San Julián silver mine coming online, which is a big one.

San Julián produced 4057k ounces of silver in Q4’17 alone, along with fairly-large gold, zinc, and lead byproducts. It’s anticipated to produce 11.6m and 63.7k ounces of silver and gold annually for 12 years. Without San Julián, which could be double-reported between Fresnillo and Industrias Peñoles, the top SIL silver miners’ production would look very different. These elite silver miners have had a challenging year.

Excluding Fresnillo and Peñoles, the rest of these top SIL components saw their collective silver production fall a sizable 6.8% YoY to 44.5m ounces! It’s been quite ugly out there in silver-land, for both industry-wide and company-specific reasons. Between Q4’16 and Q4’17, the average silver price retreated 2.5% to just $16.69. That was far worse than average gold’s 4.8% YoY gain, testing silver’s economics.

With silver prices so weak, sentiment so bearish, and silver-stock prices so darned low, silver miners are both starved of capital for expansions and reluctant to invest heavily in the silver side of their businesses. Mining gold is far more profitable at today’s precious metals’ prices, so they continue to allocate scarce resources to growing their gold production. That certainly isn’t helping the purity of the major silver miners.

A couple long-time favorites of American investors saw silver production plummet over this past year. Tahoe Resources was originally spun off by Goldcorp to develop the incredible high-grade Escobal silver mine in Guatemala. Over the past year that country’s corrupt government shut this mine down after a frivolous and baseless lawsuit by anti-mining activists. They sued the government regulator, not Tahoe itself!

That lawsuit claimed Guatemala’s Ministry of Energy and Mines did not properly consult with the Xinca indigenous people before granting Escobal’s permits! That shouldn’t even be Tahoe’s problem if the government bureaucrats didn’t hold enough meetings, yet Escobal’s mining license was still suspended. The dishonorable Guatemalan government has been dragging its feet ever since, so Escobal is frozen in stasis.

The government’s lack of respect for the rule of law shows why third-world countries stay that way. For many months it allowed violent anti-mine militants to illegally blockade the road to Escobal and physically attack trucks and their drivers! Tahoe eventually had to fire about half of the 1000+ local employees who had high-paying jobs at that mine. Tahoe’s silver production cratered 100% YoY from 4827k ounces to zero.

SSR Mining saw a similar sharp 60% YoY plummet in silver production to just 877k ounces in Q4’17. It had nothing to do with geopolitics like Tahoe’s mess, but is simply due to the forecast depletion of its old Pirquitas silver mine. SSR Mining, which used to be called Silver Standard Resources, is exploring in the area trying to extend the life of this mine. But most of its financial resources are being poured into its gold mines.

That gold focus among these top silver miners is common across SIL’s components. As the silver-percentage column above shows, most of these elite silver miners are actually primary gold miners by revenue! Only 3 of these 17 earned more than half of their Q4’17 sales from mining silver, and they are highlighted in blue. WPM, CDE, PAAS, TAHO, and HL are also top-34 components in the leading GDX gold miners’ ETF.

While they only comprised 8.3% of GDX’s total weighting in late March, this highlights how difficult it is to find primary silver miners. SIL’s managers have an impossible job these days with the major silver miners increasingly shifting to gold. They are really scraping the bottom of the barrel to find more silver miners. In Q3’17 they added Korea Zinc, and it’s now SIL’s 2nd-largest holding with a large 12.7% total weighting.

That’s right in line with the downtrend over this past year, with Q4’16, Q1’17, Q2’17, and Q3’17 seeing SIL’s top-component silver purity averaging 40.6%, 38.5%, 37.6%, and 40.1%. Silver mining is as capital-intensive as gold mining, requiring similar large expenses for planning, permitting, and constructing mines and mills. It needs similar heavy excavators and haul trucks to dig and move the silver-bearing ore.

But silver generates much lower cash flows due to its lower price. Consider hypothetical mid-sized silver and gold miners, which might produce 10m and 300k ounces annually. At last quarter’s average metals prices, these silver and gold mines would yield $167m and $383m of yearly sales. It’s far easier to pay the bills mining gold than silver, which is unfortunate. But until silver surges again, that’s the way things are.

Unfortunately SIL’s mid-March composition was such that there wasn’t a lot of Q4 cost data reported by its top component miners. A half-dozen of these top SIL companies trade in South Korea, the UK, Mexico, and Peru, where reporting only comes in half-year increments. There are also primary gold miners that don’t report silver costs, and a silver explorer with no production. So silver cost data remains scarce.

Nevertheless it’s always useful to look at what we have. Industry wide silver-mining costs are one of the most-critical fundamental data points for silver-stock investors. As long as the miners can produce silver for well under prevailing silver prices, they remain fundamentally sound. Cost knowledge helps traders weather this sector’s fear-driven plunges without succumbing to selling low like the rest of the herd.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of silver, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q4’17, these top-17 SIL-component silver miners that reported cash costs averaged $4.66 per ounce. That plunged a whopping 11.6% YoY, making it look like silver miners are far more efficient.

But that’s misleading. This past quarter SIL’s 17th-largest component was Silvercorp Metals, which enjoys big lead and zinc byproducts at its China silver mines. These base metals are sold and used to offset the costs of silver mining. That forced SVM’s cash costs down to negative $5.92 per ounce, which dragged down SIL’s overall average. Hecla Mining also enjoyed negative cash costs due to byproduct credits.

Those super-low cash costs help offset SSR Mining’s super-high $16.36 per ounce. That’s not normal either, the result of that winding down of its lone silver mine. Excluding these extreme outliers, the remaining handful of silver miners had average cash costs of $5.69 per ounce. As long as silver prices stay above those levels, the silver miners can keep the lights on at their mines. Sub-$6 silver is inconceivable.

Way more important than cash costs are the far-superior all-in sustaining costs. They were introduced by the World Gold Council in June 2013 to give investors a much-better understanding of what it really costs to maintain a silver mine as an ongoing concern. AISC include all direct cash costs, but then add on everything else that is necessary to maintain and replenish operations at current silver-production levels.

In Q4’17 these top-17 SIL components reporting AISCs averaged just $10.16 per ounce. That was down 3.8% YoY, and far below last quarter’s average silver price of $16.69. Again SVM’s incredible byproduct production dragged down the average though. Ex-Silvercorp, these top SIL silver miners’ AISCs ran at an average of $11.33 in Q4. That’s still way below prevailing silver prices, generating nice operating profits.

At $10.16 AISCs, the major silver miners still earned big profits in the fourth quarter. Once again silver averaged $16.69, implying fat profit margins of $6.53 per ounce or 39%! Most industries would kill for such margins, yet silver-stock investors are always worried silver prices are too low for miners to thrive. That’s why it’s so important to study fundamentals, because technical price action fuels misleading sentiment.

Today’s silver price remains crazy-low relative to prevailing gold levels, portending huge mean-reversion upside. The long-term average Silver/Gold Ratio runs around 56, which means it takes 56 ounces of silver to equal the value of one ounce of gold. Silver is really underperforming gold so far in 2018, with the SGR averaging a stock-panic-like 79.5 YTD as of late March. So silver is overdue to catch up with gold.

At a 56 SGR and $1325 gold, silver is easily heading near $23.66. That’s 42% above its Q4 average. Assuming the major silver miners’ all-in sustaining costs hold, that implies profits per ounce soaring 107% higher! Plug in a higher gold price or the usual mean-reversion overshoot after an SGR extreme, and the silver-mining profits upside is far greater. Silver miners’ inherent profits leverage to rising silver is incredible.

While all-in sustaining costs are the single-most-important fundamental measure that investors need to keep an eye on, other metrics offer peripheral reads on the major silver miners’ fundamental health. The more important ones include cash flows generated from operations, actual accounting profits, revenues, and cash on hand. They generally corroborated AISCs in Q4’17, proving silver miners are weathering low prices fine.

The collective operating cash flows generated by these top-17 SIL silver miners grew 2.2% YoY to $590m. That’s not bad considering the 2.5% YoY drop in quarterly average silver prices and the 6.8% YoY lower silver production not including Fresnillo and Peñoles. These strong positive OCFs prove the major silver mines are generating much more cash than they cost to run even at these depressed silver prices.

But the elite silver miners’ GAAP accounting profits looked horrendous, weighing in at a huge $703m loss in Q4’17 compared to $157m earned a year earlier! The vast majority of that is due to a single colossal $547m loss from a company that newly climbed into SIL’s top 17 components over the past year. In the table above these new companies that weren’t among SIL’s leading stocks a year ago are highlighted in light blue.

Volcan Compañia Minera mines base metals, silver, and gold in the central highlands of Peru. In Q4 it reported a gargantuan net loss of $547m, driven entirely by a negative $570m “Exceptional adjustments”. This was described in the management discussion and analysis of quarterly results as necessary “to meet the corporate policies and accounting standards of Glencore”, which bought 55% of Volcan’s stock in November.

Pulling out that one-time Volcan loss to consolidate its financial results with its new parent’s, the top-17 SIL silver miners lost $156m in Q4’17. That’s still a major YoY drop, but is reasonable given the weak silver prices and their resulting ongoing non-cash writedowns of silver mines and deposits that look less economical. With lower silver prices and lower production, it wouldn’t have surprised me to see far-bigger losses.

The revenue front was interesting, with these top-17 SIL silver miners reporting overall sales of $3331m in Q4’17. That soared 26.6% YoY despite generally-lower production and prices. Peñoles was definitely a factor, but Fresnillo doesn’t break out Q4 sales so they weren’t included in Q4’17 or Q4’16. The primary driver was the UK’s Polymetal reporting $586m in sales in Q4’17 after breaking out none a year earlier.

These top SIL components’ collective cash on hand at the end of Q4 was largely flat at $3715m. That means the strong cash flows generated from operations were plowed back into exploring for more silver and gold to mine, expanding existing mines, and developing new ones. That’s still a big pile of cash for this small industry, giving silver miners flexibility to grow their production and ride out any unforeseen challenges.

Silver miners’ earnings power and thus stock-price upside potential will only grow as silver mean reverts higher. In mining, costs are largely fixed during the mine-planning stages. That’s when engineers decide which ore bodies to mine, how to dig to them, and how to process that ore. Quarter after quarter, the same numbers of employees, haul trucks, excavators, and mills are generally used regardless of silver prices.

So as silver powers higher in coming quarters, silver-mining profits will really leverage its advance. And that will fundamentally support far-higher silver-stock prices. The investors who will make out like bandits on this are the early contrarians willing to buy in low, before everyone else realizes what is coming. By the time silver surges higher with gold so silver stocks regain favor again, the big gains will have already been won.

The bottom line is the major silver miners fared fine in Q4 despite some real challenges. A combination of silver continuing to seriously lag gold, along with anomalous company-specific problems, weighed on miners’ collective results. Yet they continued to produce silver at all-in sustaining costs way below Q4’s low prevailing silver prices. And their ongoing diversification into gold leaves them financially stronger.

With silver-stock sentiment remaining excessively bearish, this sector is primed to soar as silver itself resumes mean reverting higher to catch up with gold’s young bull market. The silver miners’ profits leverage to rising silver prices remains outstanding. After fleeing silver stocks so relentlessly over the past 19 months, investors will have to do big buying to reestablish silver-mining positions. That will fuel major upside.

The precious metals sector continues to correct and consolidate. Gold remains in a bullish consolidation. It recently reached resistance again and even though it has failed to breakout, it remains above long-term moving averages which are sloping upward. However, the gold stocks and Silver remain in correction mode. They are trading below the long-term moving averages and at the lower end of their ranges over the past 12 months. That certainly provides an opportunity but these markets may not truly perform until Gold is ready to breakout.

Bullish Silver commentaries (because of its CoT) have been making the rounds and I don’t disagree. In the chart below we plot the net speculative position as a percentage of open interest. It is at 7.4%, which is the lowest reading in nearly three years. Interestingly, the daily sentiment index for Silver is not at an extreme. Its at 40% bulls. Technically, Silver is wedged in between support and resistance. A break does not appear imminent.

Like Silver, the gold stocks are oversold but we do not see an indication of an extreme oversold condition. In the chart below we plot GDX along with the difference between new highs and new lows. We also plot GDXJ along with the percentage of stocks (from a group of 50 we follow) that are trading above the 50-dma and 200-dma. GDX recently held above $21 again (even with over 20% of the index making new 52-week lows) while GDXJ is starting to show a bit more strength relative to GDX. At the low last Wednesday, 19% of those 50 juniors were trading above the 50-dma while 27% were trading above the 200-dma.

Gold, unlike Silver and the gold stocks, has not corrected much and remains much closer to resistance than support. Also, sentiment in Gold is much more optimistic than in Silver. The net speculative position in Gold is 37%, which dwarfs the 7.4% reading in Silver. Gold’s daily sentiment index is 56% bulls which is comfortably above Silver’s. During bull markets, corrections in Gold tend to push the net speculative position below 30%. Gold continues to maintain support at $1300 but we wonder if it needs to break that level and flush out some speculators before breaking out of its larger consolidation.

The precious metals sector is at an interesting juncture and it remains to be seen how the current disparity will resolve. One scenario is Gold breaks $1300 and this causes a mini-washout in the gold stocks and Silver. The other scenario is Gold continues to consolidate above $1300 and the gold stocks and Silver firm in anticipation of a major breakout in Gold. This is something that could take weeks to answer. In any event, we continue to remain patient and continue to accumulate the juniors we think have 5-fold potential over the next 18 months. To follow our guidance and learn our favorite juniors for the next 12-18 months, consider learning more about our service.

1. While many gold market technicians have been neutral to slightly negative about gold in the short term, I’ve been extremely positive.

2. As of today, I’ve become outrageously more positive. To understand why that is, please click here now. Double click to enlarge this spectacular daily gold chart.

4. As a result of that behaviour, Santa has put a beautiful bull wedge breakout into everybody’s Christmas stocking!

5. The near-immediate price target is $1310, but $1360 should also be hit during what looks to be a very positive Chinese New Year season.

8. GDX is sporting a great looking inverse head and shoulders bottom, and the rally from the head of the pattern has a bull pennant formation breakout in it.

9. This is quite exciting. For gold stock investors around the world, it is really ushering in the new year in a great way.

10. I’ve suggested that the $25 – $26 target zone is likely to turn out to be little more than a pitstop on the road to the $35 area.

11. I’ve argued that the biggest bubble of all time is the bubble of government fiat money, and that bubble has started to burst. The initial bursting of the bubble has seen all global fiat collapse against blockchain currencies like bitcoin.

12. That’s a lot like how the stock market crashes when it becomes a bubble. The initial collapse happens in the most speculative stocks. From there, the collapse spreads to the big Dow Jones Industrial Average component stocks.

13. In the case of the fiat bubble, I’ve predicted that the collapse of fiat against bitcoin is only the very beginning of a horrific collapse that will ultimately see fiat fall hard against gold, silver, and mining stocks.

14. Please click here now. Double-click to enlarge this exciting bitcoin chart. Technically, the double bottom pattern is arguably the most difficult one for investors to handle emotionally.

15. A great double bottom appears to be in play now on this short term bitcoin chart. Note the immense panic volume on the first low, and the much lighter volume on the second one.

16. That’s classic technical action. There’s also a potential flag-like pattern in play, which is quite positive. A breakout above $15,000 is likely, and it would serve as a lead indicator for an imminent and powerful rally in the precious metal markets.

17. The bottom line: gold investors don’t need to be invested in bitcoin, but it’s important to follow the price action as a lead indicator for the spread of the global fiat wildfire.

18. Please click here now. Some heavyweight institutional analysts are concerned that a fall in bitcoin against fiat could trigger a stock market crash.

19. Governments and central banks are becoming pushed into a corner. They need to quickly regulate bitcoin markets so that a rogue bank or other nefarious entity doesn’t try to cause a global markets crash by crashing bitcoin.

20. Please click here now. Tom Lee was head of equities for JP Morgan. He turned bullish on the US stock market at almost the exact low in 2009, and stayed bullish until 2016 when be saw the market as fully valued.

21. He’s started his own firm now. He’s moved his focus to bitcoin and was an eager buyer on Friday, as I was. With heavyweights like Tom in the blockchain house, the global fiat fire is likely to intensify.

22. On that exciting note, please click here now. Double click to enlarge this key money velocity chart. I think most mainstream analysts are underestimating the commitment of Trump and new Fed chair Powell to small bank deregulation.

23. That deregulation can end the twenty-year money velocity bear market, and usher in an era of inflation.

24. Please click here now. Double click to enlarge. Hi ho silver! When inflation becomes widely accepted by institutional investors, they will flock to silver more than gold. This is particularly true if global growth continues. Watch for a trendline breakout fuelled by bank deregulation to send silver soaring to my initial $26 target, and on to higher prices after a brief rest there!

The silver miners’ stocks have really languished this year, grinding sideways to lower for months on end. This vexing consolidation has fueled near-universal bearishness, leaving silver stocks deeply out of favor. But once a quarter when earnings season arrives, hard fundamentals pierce the obscuring veil of popular sentiment. The silver miners’ recently-reported Q3’17 results reveal today’s silver prices remain profitable.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. These are generally due by 45 days after quarter-ends in the US and Canada. They offer true and clear snapshots of what’s really going on operationally, shattering the misconceptions bred by the ever-shifting winds of sentiment. There’s no silver-miner data that is more highly anticipated than quarterlies.

The world authority on silver supply-and-demand fundamentals is the Silver Institute. Back in mid-May it released its latest annual World Silver Survey, which covered 2016. Last year only 30% of silver mined came from primary silver mines, a slight increase. The remaining 70% of silver produced was simply a byproduct. 35% of the total mined supply came from lead/zinc mines, 23% from copper, and 12% from gold.

So the universe of major silver miners is pretty small, and their purity is shrinking. The definitive list of these companies to analyze comes from the most-popular silver-stock investment vehicle, the SIL Global X Silver Miners ETF. This week its net assets are running 6.6x greater than its next-largest competitor’s, so SIL really dominates this space. With ETF investing now the norm, SIL is a boon for its component miners.

While there aren’t many silver miners to pick from, major-ETF inclusion shows silver stocks have been vetted by elite analysts. Due to fund flows into top sector ETFs, being included in SIL is one of the important considerations for picking great silver stocks. When the vast pools of fund capital seek silver-stock exposure, their SIL inflows force it to buy shares in its underlying companies bidding their prices higher.

Back in mid-November as the major silver miners finished reporting their Q3’17 results, SIL included 29 “silver miners”. This term is used loosely, as SIL holds plenty of companies which can’t be described as primary silver miners. Most generate well under half their revenues from silver, which greatly limits their stock prices’ leverage to silver rallies. Nevertheless, SIL is today’s leading silver-stock ETF and benchmark.

While most of these top 17 SIL components had reported on Q3’17 by mid-November, not all had. Some of these major silver miners trade in the UK or Mexico, where financial results are only required in half-year increments. If a field is left blank in this table, it means that data wasn’t available by the end of Q3’s earnings season. Some of SIL’s components also report in gold-centric terms, excluding silver-specific data.

In this table the first couple columns show each SIL component’s symbol and weighting within this ETF as of mid-November. While most of these silver stocks trade in the States, not all of them do. So if you can’t find one of these symbols, it’s a listing from a company’s primary foreign stock exchange. That’s followed by each company’s Q3’17 silver production in ounces, along with its absolute year-over-year change.

So the next column reveals how pure the elite SIL silver miners are. This is mostly calculated by taking a company’s Q3 silver production, multiplying it by Q3’s average silver price, and then dividing that by the company’s total quarterly sales. If miners didn’t report Q3 revenues, I approximated them by adding the silver sales to gold sales based on their quarterly production and these metals’ average third-quarter prices.

Then comes the most-important fundamental data for silver miners, cash costs and all-in sustaining costs per ounce mined. The latter determines their profitability and hence ultimately stock prices. Those are also followed by YoY changes. Finally comes the YoY changes in cash flows generated from operations and GAAP profits. But an exception is necessary for companies with numbers that crossed zero since Q3’16.

Percentage changes aren’t relevant or meaningful if data shifted from negative to positive or vice versa. Plenty of major silver miners suffered net losses in Q3’17 after earning profits in Q3’16. So in cases where data crossed that zero line, I included the raw numbers instead. This whole dataset offers a fantastic high-level fundamental read on how the major silver miners are faring today, and it’s reasonably well.

That’s reassuring given silver’s serious underperformance relative to gold this year. As a far-smaller market, silver usually amplifies gold’s advances by at least 2x. But as of the end of Q3, silver was only up 4.6% YTD compared to 11.3% for gold. That’s horrendous 0.4x leverage! And by mid-November as Q3’s earnings season wrapped up, silver’s YTD gain of 6.6% was still way behind gold’s 11.1% for 0.6x leverage.

Production is the lifeblood of miners, and thus the best place to start fundamental analysis. In Q3’17, these top 17 SIL components collectively produced an impressive 79.0m ounces of silver. If 2016’s world-silver-mining run rate is applied to this year’s third quarter, that implies 221.5m ounces of silver mined. Thus these top SIL silver miners would account for nearly 36% of that total, they truly are major silver players.

Their collective silver production looks robust, surging 3.7% YoY and climbing 0.6% sequentially quarter-on-quarter. Unfortunately that is misleading, with huge growth in a couple mining conglomerates masking sharp-to-catastrophic YoY declines for most of the rest of these elite silver miners. Fresnillo and Industrias Peñoles enjoyed gigantic 24% and 34% YoY gains in silver production off already-massive bases!

San Julián produced 3499k ounces of silver in Q3’17 alone, along with fairly-large gold, zinc, and lead byproducts. It’s anticipated to produce 11.6m and 63.7k ounces of silver and gold annually for 12 years. Without San Julián, which could be double-reported between Fresnillo and Industrias Peñoles, the top SIL silver miners’ production would look very different. These elite silver miners have had a challenging year.

Excluding Fresnillo and Industrias Peñoles, the rest of these top SIL components saw their collective silver production fall a sharp 9.3% YoY to 45.9m ounces! It’s been quite ugly out there in silver-land, for both industry-wide and company-specific reasons. Between Q3’16 and Q3’17, the average silver price dropped 13.9% YoY to just $16.84. That was far worse than gold’s 4.2% YoY decline, testing silver’s economics.

That lawsuit claimed Guatemala’s Ministry of Energy and Mines did not properly consult with the Xinca indigenous people before granting Escobal’s permits! That shouldn’t even be Tahoe’s problem if the government bureaucrats didn’t hold enough meetings, yet Escobal’s mining license was still temporarily suspended. It has since been reinstated, but the government is not breaking up an illegal roadblock to the mine.

This whole situation is ludicrous, highlighting why third-world countries stay that way. The government of Guatemala isn’t respecting the rule of law, which will greatly hurt future investment. It’s allowing violent anti-mine militants to physically attack trucks and their drivers heading to Escobal. They should be arrested and the blockade cleared. Thus Tahoe’s silver production collapsed 100% YoY from 5000k ozs in Q3’16!

SSR Mining saw a similar sharp 62% YoY plummet in silver production to just 1156k ounces in Q3’17. It had nothing to do with geopolitics like Tahoe’s mess, but is simply due to the forecast depletion of its old Pirquitas silver mine. SSR Mining, which used to be called Silver Standard Resources, is exploring in the area trying to extend the life of this mine. But most of its financial resources are being poured into its gold mines.

That gold focus among these top silver miners is common across SIL’s component companies. As the silver-percentage column above shows, most of these elite silver miners are actually primary gold miners by revenue! Only 6 of these 17 earned more than half of their Q3’17 sales from mining silver, and they are highlighted in blue. 8 of SIL’s top 17 component stocks are also included in the leading GDX gold miners’ ETF.

While they only comprised 10.0% of GDX’s total weighting in mid-November, this highlights how difficult it is to find primary silver miners. SIL’s managers have an impossible job these days with the major silver miners increasingly shifting to gold. They are really scraping the bottom of the barrel to find more silver miners. In Q3’17 they added Korea Zinc, making it SIL’s 4th-largest holding at 9.0% of this ETF’s total weighting.

That was intriguing, as I’d never heard of this company after decades of intensely studying and actively trading silver stocks. So I looked into Korea Zinc and found it was merely a smelter, not even a miner. The latest financial data I could find in English was 2015’s. That year Korea Zinc “produced” an incredible 63.3m ounces of silver! But it also smelted large amounts of zinc, lead, copper, and gold that same year.

That’s right in line with the trend over this past year, with Q3’16, Q4’16, Q1’17, and Q2’17 seeing SIL’s top-component silver purity averaging 42.8%, 40.6%, 38.5%, and 37.6%. Silver mining is as capital-intensive as gold mining, requiring similar large expenses for planning, permitting, and constructing mines and mills. It needs similar heavy excavators and haul trucks to dig and move the silver-bearing ore.

But silver generates much lower cash flows due to its lower price. Consider hypothetical mid-sized silver and gold miners, which might produce 10m and 300k ounces annually. At last quarter’s average metals prices, these silver and gold mines would yield $168m and $384m of yearly sales. It’s far easier to pay the bills mining gold than silver, which is unfortunate. But until silver surges again, that’s the way things are.

Unfortunately SIL’s mid-November composition was such that there wasn’t a lot of Q3 cost data reported by its top component miners. 4 of its top 5 companies trade in the UK, South Korea, and Mexico, where reporting only comes in half-year increments. Lower down the list there are more half-year reporters, an explorer with no production, and primary gold miners that don’t report silver costs. So silver cost data was scarce.

Nevertheless, it’s always useful to look at the data we have. Industrywide silver-mining costs are one of the most-critical fundamental data points for silver-stock investors. As long as the miners can produce silver for well under prevailing silver prices, they remain fundamentally sound. Cost knowledge helps traders weather this sector’s fear-driven plunges without succumbing to selling low like the rest of the herd.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of silver, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q3’17, these top 17 SIL-component silver miners that reported cash costs averaged $4.86 per ounce. That plunged a whopping 13.6% YoY, making it look like silver miners are far more efficient.

But that too is misleading. This past quarter SIL’s 17th-largest component was Silvercorp Metals, which enjoys big lead and zinc byproducts at its China silver mines. These base metals are sold and used to offset the costs of silver mining. That forced SVM’s cash costs down to negative $5.16 per ounce, which dragged down SIL’s overall average. A year ago in Q3’16, SVM ranked 18th in SIL and missed the top-17 cutoff.

Still even ex-SVM, these top SIL silver miners reporting cash costs last quarter averaged just $6.54 per ounce. As long as silver prices stay above those extreme levels, the silver miners can keep the lights on. And there’s no way silver is going to plummet down under $7 in any conceivable scenario. So even at 2017’s vexingly-low gold-lagging silver prices, the major silver miners face no existential threats today.

Way more important than cash costs are the far-superior all-in sustaining costs. They were introduced by the World Gold Council in June 2013 to give investors a much-better understanding of what it really costs to maintain a silver mine as an ongoing concern. AISC include all direct cash costs, but then add on everything else that is necessary to maintain and replenish operations at current silver-production levels.

In Q3’17, these top 17 SIL components reporting AISC averaged just $9.73 per ounce. That was down 3.9% YoY, and far below last quarter’s average silver price of $16.84. Again SVM’s incredible byproduct production dragged down the average though. Ex-Silvercorp, these top SIL silver miners’ AISC ran at an average of $10.98 in Q3. That’s still well below prevailing silver prices, generating nice operating profits.

All-in sustaining costs and production are inversely related. Lower silver production, which many of SIL’s top components suffered last quarter, leaves fewer ounces to spread the big fixed costs of mining across. Thus AISC surged at Pan American Silver, First Majestic Silver, and SSR Mining. PAAS discontinued mining at an older mine, while other mines processed lower-grade ore that was on the way to better rock later.

AG’s lower production was due to land-access issues and mine inspections necessary following Mexico’s big earthquakes in mid-September. And of course SSRM is winding down its lone primary silver mine. Yet even with lower production driving higher per-ounce costs, the major silver miners still enjoyed solid operating profits. That’s certainly not apparent based on silver miners’ super-low stock prices mired in bearishness.

At $9.73 AISC, the major silver miners still earned big profits in the third quarter. Once again silver averaged $16.84, implying fat profit margins of $7.11 per ounce or 42%! Most industries would kill for such margins, yet silver-stock investors are always worried silver prices are too low for miners to thrive. That’s why it’s so important to study fundamentals, because technical price action fuels misleading sentiment!

Today’s silver price remains really low relative to prevailing gold levels, which portends huge upside as it mean reverts higher. The long-term average Silver/Gold Ratio runs around 56, which means it takes 56 ounces of silver to equal the value of one ounce of gold. Silver is really underperforming gold so far in 2017, with the SGR averaging just 73.5 YTD as of mid-November. So silver is overdue to catch up with gold.

At a 56 SGR and $1300 gold, silver is easily heading near $23.25. That’s 38% above its Q3 average. Assuming the major silver miners’ all-in sustaining costs hold, that implies profits per ounce soaring 90% higher! Plug in a higher gold price or the usual mean-reversion overshoot after an SGR extreme, and the silver-mining profits upside is far greater. Silver miners’ inherent profits leverage to rising silver is incredible.

While all-in sustaining costs are the single-most-important fundamental measure that investors need to keep an eye on, other metrics offer peripheral reads on the major silver miners’ fundamental health. The more important ones include cash flows generated from operations, actual accounting profits, revenues, and cash on hand. They generally corroborated AISC in Q3’17, proving silver miners are weathering low prices.

The collective operating cash flows of these top 17 SIL silver miners slumped 14.4% YoY to $1350m. That’s really impressive considering the 13.9% YoY drop in average silver prices, so these miners are holding their own despite silver really lagging gold this year. GAAP accounting profits looked far worse though, plunging 77% to just $88m. Many of these top SIL silver miners suffered net losses in Q3’17.

That was generally just the result of lower silver prices. There were two outliers, Tahoe Resources and Coeur Mining. With its silver mine temporarily shuttered by Guatemala, TAHO’s profits swung massively from +$63m in Q3’16 to -$8m in Q3’17. That $71m drop alone was responsible for 24% of the YoY drop in these top SIL silver miners’ GAAP profits. CDE simply had higher costs as it worked on expanding mines.

So its profits plunged from +$68m in Q3’16 to -$17m in Q3’17, for an $85m total drop. That accounted for another 29% of the total slide in collective top SIL miners’ profits. Other than that, the YoY declines were reasonable based on the lower silver prices. Interestingly these top 17 SIL miners’ collective sales surged 15.2% YoY to $3003m, driven by their aggregate silver and gold production rising 3.7% and 2.4% YoY.

And despite the weak silver prices, serious operational challenges, and ongoing expansions especially on the gold side of their businesses, these elite SIL miners’ total cash balances only edged 0.1% lower YOY to $2682m. So overall the silver miners’ operating results were pretty good in Q3’17 considering all the big trials they faced. Based on the individual miners’ travails, I was steeling myself for much worse.

While investors and speculators alike can certainly play the silver miners’ ongoing mean-reversion bull with this leading SIL ETF, individual silver stocks with superior fundamentals will enjoy the best gains by far. Their upside will trounce the ETFs, which are burdened by companies that don’t generate enough of their sales from silver. A handpicked portfolio of purer elite silver miners will yield much-greater wealth creation.

At Zeal we’ve literally spent tens of thousands of hours researching individual silver stocks and markets, so we can better decide what to trade and when. As of the end of Q3, this has resulted in 967 stock trades recommended in real-time to our newsletter subscribers since 2001. Fighting the crowd to buy low and sell high is very profitable, as all these trades averaged stellar annualized realized gains of +19.9%!

The key to this success is staying informed and being contrarian. That means buying low when others are scared, like late in this year’s vexing consolidation. An easy way to keep abreast is through our acclaimed weekly and monthly newsletters. They draw on my vast experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks. Easy to read and affordable, they’ll help you learn to think, trade, and thrive like contrarians. Subscribe today and get 20% off in our Black Friday Sale!

The bottom line is the major silver miners fared fine in Q3 despite some real challenges. A combination of silver continuing to seriously lag gold, along with anomalous company-specific problems, weighed on miners’ collective results. Yet they continued to produce silver at all-in sustaining costs way below Q3’s low prevailing silver prices. And their accelerating gold-production growth leaves them financially stronger.

With silver-stock sentiment remaining excessively bearish, this sector is primed to soar as silver itself resumes mean reverting higher to catch up with gold’s current upleg. The silver miners’ profits leverage to rising silver prices remains outstanding. After fleeing silver stocks so aggressively this year, investors and speculators alike will have to do big buying to reestablish silver-mining positions. That will fuel major upside.

Northern Vertex Project Feasibility, Moss Mine
Project Silver Ounces (M&I)	4,610,000
Silver Recovery Rate	65.00%
Recoverable Ounces, Initial	2,996,500
Gold Ounces (M&I)	377,000

Maverix Agreement
Tranche 1 Stream Ounces	3,500,000
Difference to be found through expanded exploration	503,500
Maverix spot-based payments ($14.81 silver spot as of 12-24-2018)	$8,875,633.00
Initial Payment to Northern Vertex	$20,000,000.00
Total Payments to Northern Vertex	$28,875,633.00
Maverix Total Cost of Silver per ounce	$9.64

Maverix Optionality Analysis
Silver @ $17.50/ounce, total project silver value	$52,438,750.00
Maverix 20% spot payment	$10,487,750.00
Maverix Total Cost of Silver per ounce	$10.17
Northern Vertex – per gold ounce byproduct credit from silver stream	$80.87

Silver Rises to $20/ounce (2016 high)	$59,930,000.00
Maverix 20% spot payment	$11,986,000.00
Maverix Total Cost of Silver	$10.67
Northern Vertex – per gold ounce byproduct credit from silver stream	$84.84

Silver Rises to $25/ounce	$74,912,500.00
Maverix 20% spot payment	$14,982,500.00
Maverix Total Cost of Silver	$11.67
Northern Vertex – per gold ounce byproduct credit from silver stream	$92.79


Highbank Resources Ltd.	HBK.V	+50.00%
Arctic Star Exploration Corp.	ADD.V	+50.00%
Romios Gold Resources Inc.	RG.V	+50.00%
Energy Resources of Australia Ltd	ERA.AX	+50.00%
Bell Copper Corp.	BCU.V	+40.00%
Playfair Mining Ltd.	PLY.V	+33.33%
Empire Resources Limited	ERL.AX	+33.33%
Playfair Mining Ltd.	PLY.V	+33.33%
Helix Resources Ltd.	HLX.AX	+33.33%
MRG Metals Limited	MRQ.AX	+33.33%

Optionality Analysis for Maverix and Northern Vertex

What the Deal Says About Confidence in the Project

What are the Risks?

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