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Silver Drop Brings This Opportunity

Chris Lau, Kapitall: The plunge in silver (SLV) continued last week, pushing the metal price to lows not seen in 3 years. This is forcing investors to ask when the decline will end. The decline is clearly being led by the fall in gold prices, even though the correlation should not have a relationship to each other’s physical value. As illustrated in the respective silver and gold ETF (GLD), the drop is showing no signs of letting up:

Bearishness is rising for both metals. Short float was 8.6% for the Gold ETF, and 3.4% for silver. The short sales in the future market are also accelerating the decline in metal prices.

Analysis on Fundamentals

Fundamentally, the move to retain the value of the US dollar is hurting gold and silver prices. This will keep prices for the metals at irrationally lower prices in the near-term. The metal prices are also hurting miners. Barrick Gold (ABX) and Goldcorp (GG), two of some of the largest gold miners in the world, are down 45% and 26%, respectively. Even though they pay dividends, the income is not enough to cushion the decline. Lower metal prices, combined with high production costs, will mean these miners will need to sell assets to improve their balance sheet.

The all-in production costs remain too high for the big firms. Smaller-sized miners face even greater risks. A deteriorating balance sheet will mean that exploration activities will need to be reduced, assets may need to be sold, and shares will need to be issued to boost quarterly cash flow. Allied Nevada (ANV) was a position held by Baupost Group, but in the quarter ending March 31, 2013, the position was closed at a loss. NovaGold (NG) is also another Baupost position. Its shares have yet to recover after selling off sharply at $4. As a point of reference, Golden Minerals (AUMN) now has a market capitalization of $68.4 million. The company once traded at nearly $7 a year ago, before the bearishness in gold was taking place:

Investors might want to take a look at Silver Wheaton (SLW). After Barrick said that Chile’s Superintendent of the Environment fined Barrick, the company confirmed its partnership with Silver Wheaton:

"We remain confident in Barrick's ability to develop Pascua Lama into one of the world's great gold / silver mines. Barrick has continued to show a strong commitment to exceeding regulatory compliance and protecting the environment, and it is worth highlighting that there have been no negative environmental impacts at Pascua Lama to date. We remain confident in Barrick's commitment to this project, and look forward to seeing this issue resolved. Silver Wheaton looks forward to a long term partnership with Barrick on Pascua-Lama."

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