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Silver Prices at 2-Year High: Will the Rally Continue?

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Silver is on a roll this year, with prices trending above $18 an ounce — levels last seen in 2017. The metal has gained 11.26% over the past month, outshining gold’s 5.08%. The rally can be attributed to a dovish fed, safe haven demand triggered by latest tit-for-tat tariffs by the United States and China, and concerns over the global economic outlook.

On Aug 23, China hiked tariff on U.S. goods worth $75 billion and announced it will raise import duties on U.S.-made autos and auto parts. In retaliation, President Trump raised the tariffs to 30% from 25% on Chinese goods worth $250 billion and 15% from 10% on other products worth $300 billion.

Stock markets took a dive on apprehensions that elevated tariffs will add to global economic weakness. The 10-year Treasury note yield declined below 2%.

Sales of new U.S homes witnessed a drop of 12.8% to 635,000 new homes in July from June’s revised rate of 728,000 and projected figure of 647,000 units.  So far this year, new home sales have risen just 4.1%, reflecting ongoing weakness in the housing market despite the reduction in mortgage rates.

Another factor that has been working in favor of silver lately is subdued demand for gold in India owing to gold prices at 6-year high. Most consumers sold their physical gold holdings to capitalize on the higher gold prices and opted for silver. All these developments led to silver gaining 17.8% so far this year.

What Next For Silver?

Silver’s unrivaled characteristics make it indispensable for many industrial products. In fact, industrial applications account for roughly 60% of the global silver consumption. Growing industrial activity will sustain silver demand. India is expected to be one of the largest silver consumers in 2019. Notably, silver imports rose 35% year over year to around 225 million ounces in 2018 in the country. Demand in jewelry fabrication, which accounts for approximately one-fifth of total silver demand, is also expected to witness solid growth in 2019.
However, silver mine production fell 2% in 2018 — the third consecutive year-on-year drop and is anticipated to decline 2% in 2019.  This can be attributed to the absence of development of new projects, declining ore grades and depleting reserves. Consequently, a potential silver deficit is imminent, which in turn sets the stage for higher silver prices in the long haul.

Silver Industry Performance

The Mining - Silver industry has rallied 18.0% so far this year compared with the S&P 500’s growth of 15.3%. Going by the forward 12 months EV/EBITDA multiple (a preferred valuation metric for mining companies that have high capital expenditures), the silver mining industry has a multiple of 8.7, lower than the S&P 500’s multiple of 11.6.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. The Zacks Mining- Silver Industry, which is a 14-stock group within the broader Zacks Basic Materials Sector, currently carries a Zacks Industry Rank #76, which places it at the top 30% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

We are presenting two silver mining stocks with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

MAG Silver Corporation (MAG - Free Report) : The Zacks Consensus Estimate for fiscal 2020 for this Vancouver-based company indicates an improvement of  810.71% from the year-ago quarter.

Pan American Silver Corp. (PAAS - Free Report) : The Zacks Consensus Estimate for this Vancouver, Canada-based company for fiscal 2020 suggests growth of 110.26% from the year-ago reported figure. The company has a long term estimated earnings growth rate of 4%.

Investors may also consider First Majestic Silver Corp. (AG - Free Report) and Avino Silver & Gold Mines Ltd. (ASM - Free Report) , which carry Zacks Rank #3 (Hold), at present. Both the stocks have strong earnings growth expectations for fiscal 2020. Their estimates have also undergone positive revisions lately.

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