Recently AJ, who occasionally comments on this blog, asked if it was normal that a rise in a commodity price such as silver price should correspond in an equal movement in a silver related company such as Pan American Silver Corporation. I replied that there is a strong correlation, but not always day to day.
I would like to comment further. Let us consider the following stock symbols:
- GLD: StreetTracks Gold Trust
- ABX: Barrick Gold Corporation
- EGO: Eldorado Gold Corporation
- KGC: Kinross Gold Corporation
- NEM: Newmont Mining Corporation
GLD is an excellent proxy for the price of gold. Because GLD is trust that holds gold, we can treat it as though it were gold. The remaining symbols represent gold mining companies. As an exercise, go to your favorite online stock graphing website and graph all the gold symbols listed above. Start the graph on 2 January 2005 and end at today's date. I use MSN MoneyCentral for graphing stocks.
Looking at the graph with all the stocks plotted, we note that there is a correlation between gold prices (GLD) and the gold stocks. But the correlation is not 100 percent. Sometimes the stocks underperformed relative to gold prices and other times outperformed.
Generally speaking, as the price of the commodity rises, a company should do well because its margin usually increases. But sometimes, a company has hedged its commodities or its costs rise faster than the commodity's price does. Furthermore, a company might have an increasing or decreasing production rate, depending upon its reserves and production capacity as well as other factors. Thus a company's stock price will not be perfectly correlated with a commodity's price rise.
In addition to the fundamental factors discussed above, there are also the normal noise factors in the market. Speculative forces will drive prices higher or lower. P/E multiples will expand and contract. Markets can be dismal or frothy. There can be takeovers, consolidations, and other developments that might affect the valuation.
There is a strong correlation between commodity prices and commodity stock prices. But the correlation is not a 100 percent because of both fundamentals and normal market noise. However, over the longer term, a strong commodity company will see its stock price rise along with the commodity price rise.
As a matter of disclosure, I remain long Pan American Silver stock.
Hi Kevin,
What are your views on the Silver ETF that will start trading tomorrow, will it affect silver/silver stock prices?
Has the recent run up in silver prices, and now a pullback, been a case of 'buy the rumor, sell the news'?
Thanks.
Hi AJ,
I don't know if the silver ETF will drive up silver tomorrow. For example, China's decision to raise rates appears to have to have knocked the stuffing out of commodities today.
During the last couple of weeks, oil, gold and silver have gone up in a parabolic fashion. So it is no surprise that there is some profit taking. I do not believe it will be a case of buy the rumor and sell the news because all commodities have been affected, not just silver. There might be some selling of silver because it became an ETF. But I would think it will be a non-event because it has been so widely anticipated for so long. As I write this message, I note silver is up $0.10 in Asia.
I am still bullish on silver and Pan American in particular. I will not be one of the sellers tomorrow.
Kevin
PAAS closed well today :) Hope the trend continues.
CEF for some reason traded down today. Perhaps people were pulling their money from CEF and putting it in SLV. I added to my CEF holding today on the dip. Goes straight into my long term 'kitty'. Hope it works out.
AJ
Hi AJ,
With regard to CEF, I wonder if it traded at a premium to its assets? I do not know the answer. But if it did trade at a premium, some investors might have decided that they can invest in gold and silver on their own without being in a fund that is "overpriced." This is purely speculation on my part. I have no knowledge whatsoever.
I continue to be bullish on gold and silver, though I am somewhat concerned about the recent parabolic moves.
I hope it all works out as well.
Kevin
Kevin,
Was reading some messages on the CEF message board and came across this website posted there.. http://www.silveranalysis.com/
I thought it was good. He's also written a premium calculator on CEF http://www.silveranalysis.com/cef-premium/
Currently, CEF is trading at a premium of 3.9%.
AJ
Hi AJ,
If CEF is currently trading at a premium of 3.9% and it fell on Friday, then I can only assume it was at a higher premium entering into Friday's session. Given that CEF holdings are primarily gold and silver, investors are now able to create their own fund cheaply. Moreover, an investor can sell at any time, including the middle of the day. I am not sure what value CEF brings to the table any longer. Thus, I think CEF will trade near NAV and its total size will be smaller in the future.
Kevin
Hi Kevin,
From what I've heard, the main reasons why anyone might want to buy CEF over GLD and SLV is the long term tax consequence. For CEF it's around 15% but for GLD and SLV its around 28%.
Correct me if I'm wrong though.
AJ
Hi AJ,
I have absolutely no knowledge of how a Canadian mutual fund would be taxed in the U.S.
This is a question you would have to ask someone more knowledgeable than I am on U.S. taxes.
But if true, then yes, that would provide an incentive to continue holding the mutual fund over GLD and SLV.
If you do get a definite answer, please let me know. I am curious.
Kevin