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Silver Is Hated. Time to Buy. Here's the Best Way...By
Thursday, June 23, 2011
It's official... Silver is hated...
A couple months ago, silver was loved... more than any time in recent years.
Back in April of this year, "Silver Fever" was in full swing. I've never seen such optimism about silver. And the price of silver peaked right along with investor optimism.
Silver is notoriously volatile...
The last peak in investor optimism about silver was back in early 2008. At that time, silver had just poked its head above $20 an ounce. In late 2008, investor sentiment in silver bottomed, and the price of silver bottomed below $10 – a fall of over 50%.
Silver then soared to near $50 in early 2011. By May, it had dropped below $34 – a fall of about 30%. Today, it sits around $36 an ounce.
Once again, investors have given up on silver. Astoundingly, investors are as pessimistic as they were back at the end of 2008. After that pessimistic bottom, silver soared fivefold in less than three years.
Could it happen again? Yes.
While silver is notoriously volatile, shares of silver stocks are even more volatile than the price of silver...
Shares of Silver Wheaton fell from $20 a share in early 2008 to around $2.50 a share in late 2008 – nearly 90%. Then the shares soared from $2.50 to peak around $47 in April 2011. Said another way, $2,500 invested in Silver Wheaton at its bottom in 2008 would have turned into $47,000 at its 2011 peak.
That's when I told subscribers that I expected a severe fall in the price silver... and that shares of Silver Wheaton would get hurt... but that we would continue holding.
The correction in both silver and Silver Wheaton was more than I expected. But now, shares of Silver Wheaton are incredibly cheap relative to the price of silver.
Take a look at this chart... It's my valuation indicator for Silver Wheaton. When the blue line is below the green one, Silver Wheaton is cheap. And when the blue line is above the red one, Silver Wheaton is expensive.
.gif) Right now, Silver Wheaton is extremely undervalued. It's my favorite way to own silver.
This next chart shows my "fair value" indicator (in gray) versus the stock market value of Silver Wheaton. This indicator is simple... It's 20 times Silver Wheaton's net cash flow from silver production.
Silver Wheaton forecasts it will produce 43 million ounces of silver in 2015. Multiply that times the net silver price per ounce of $32 ($36 per ounce market price – $4 per ounce cost to Silver Wheaton = $32) and you get net cash flow of $1.376 billion. Multiply that by 20, and you get a fair value in 2015 of $27.5 billion for Silver Wheaton.
So if silver stays at $36 an ounce, Silver Wheaton's fair value in 2015 will be $27.5 billion Meanwhile, Silver Wheaton is currently valued at $12 billion.
From current prices, Silver Wheaton is a double in waiting...
.gif) Of course, if the price of silver goes up... which it very well could... you could make more than 100% on your money between now and 2015 in shares of Silver Wheaton.
In my True Wealth newsletter, we own shares of Silver Wheaton with a wide 50% trailing stop. If you buy Silver Wheaton, I strongly suggest you use the same wide stop.
One thing is certain with silver and silver stocks: The ride higher will be volatile.
But at these prices, you must check out Silver Wheaton.
Good investing,
Steve
Further Reading:
Steve thinks Silver Wheaton has one of the best business models he's ever seen. But even back in January, he warned readers to watch for a silver correction... "If silver tanks," he wrote, "Silver Wheaton will tank even harder." Check it out here: Silver Wheaton: A Double in Waiting?
This week, legendary metals investor Chris Weber told DailyWealth readers what he's doing with his silver now. "My views are always based on having me experience no bad surprise and no stress whatever happens," he says. "With this perspective, either way I win... or at least I don't lose."
Market NotesHOMES ARE MORE AFFORDABLE THAN EVER In yesterday's opener to Market Notes "Housing Week," we pointed out how, if you have a down payment and decent credit, borrowing money for a home purchase has never been cheaper.
In today's edition, we point out that it's not just money that's cheap... What you're buying with that money is cheap as well.
Below is a chart that displays the past 40 years of the Housing Affordability Index. When measuring the general trend in home affordability, this index takes three factors into account: home prices, income, and mortgage rates. Simply put, the index measures whether folks earning the median U.S. income can afford the median monthly payment on a U.S. home.
Because home prices have fallen so much from their 2006 highs and because mortgage rates are so low, the Housing Affordability Index is at an all-time high. Looking at all this, we have to say, in the U.S., it's a buyer's market.
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