The Silver Lining in Precious Metals

With all the recent financial upheaval and drastic action by the Federal Reserve, precious metals have seen a renewed interest from investors as a safe haven during tumultuous and uncertain times. They also can be used as hedges against inflationary pressure as all this liquidity finds its way back into the market. A weaker U.S. dollar and interest rates falling to record low yields are making gold an attractive alternative to many other asset classes at this time.

However, silver is also an interesting option; the reaction has just been a bit more delayed as silver is also an industrial metal. Weaker demand from slowing worldwide economies is having a negative effect on price while demand from precious metal buyers is positive. One company whose stock price is highly correlated to the price of silver is Pan American Silver Corp. (PAAS - commentary - Cramer's Take), which owns and operates seven silver mines in Peru, Mexico and Bolivia.

Pan American is expanding its operations in the San Vicente mine in the silver-rich Bolivian province of Potosi. According to the company's mission statement, its goal is to be the largest and lowest-cost primary silver mining company by constantly increasing silver production and reserves. Growth strategy is based on the continued increase of low-cost silver production through the efficient operation and expansion of its existing mines, an aggressive exploration program and the acquisition and development of new silver-rich deposits.

Technically, the stock is showing signs of recovery after a steep and deep decline, similar to most companies dependent on commodity prices. While the stock remains in a long-term downtrend, the intermediate-term price action is becoming more positive and constructive.

For the last three months, the stock has been weaving together a small base and recently cleared the first level of resistance in the $15 area. The move above that level occurred on increasing volume, a sign of increased demand. During the bottoming process, the stock did not make a new low along with the rest of the market in November, the first sign of relative performance.

Over the past week we have seen a consolidation above support providing an opportunity to establish longs at a favorable level. Look for a move back to the $20 initially and possibly up to the mid-$20s. Use the $13 level as a stop.

Pan American Silver

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Know What You Own: Silver producers include Silver Wheaton (SLW - commentary - Cramer's Take), Coeur de Alene Mines (CDE - commentary - Cramer's Take), Hecla Mining (HL - commentary - Cramer's Take), Compania Min Buen (BVN - commentary - Cramer's Take), Apex Silver Mines (SIL - commentary - Cramer's Take), Mines Management Inc. (MGN - commentary - Cramer's Take) and Mag Silver (MVG - commentary - Cramer's Take).

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At the time of publication, John Hughes and Scott Maragioglio were long had no positions in the stocks mentioned. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.