The Stock: Pan American Silver Corp. (PAA-T)
Recent price: $28.64
Trend: The market has a nose for profits. It is the mother's milk of equity performance. But the market also has a nose for inflation. The unfolding debt crisis hobbling Europe stands as fair warning that the bond market has its boundaries and that profligate government spending must be reined in. More importantly for global investors, the Greek bailout - even if a temporary salve underscoring a commitment to European monetary union - raises concern about the potential for central banks to monetize tremendous amounts of public debt. Worse than moving money from one pocket to another - in this case, from Germany to Greece - is the creation of new money out of thin air. Not surprisingly, investors are piling on precious metals as a store of value.
Gold bullion trusts and producer stocks have been top performers amid the euro crisis, as they were during the global financial crisis of 2008. The S&P/TSX Global Gold Index is up 19 per cent in the past three months, while the SPDR Gold Trust exchange-traded fund has outperformed the broad U.S. stock market by six percentage points over the period. Although the U.S. dollar is also benefiting from the loss of confidence in the euro, the relative performance of gold tells us that investors are demanding increasing stakes in this inflation-hedging asset.
Investors who want to trade precious metals price momentum should also look at the relative performance of silver during this gold rally. While the price of gold bullion punches ahead to new highs above $1,200 (U.S.) per ounce, silver has handily outpaced gold. The iShares Silver Trust ETF , the most actively traded physically backed silver ETF has advanced 24 per cent since early February - a notable premium over the 13-per-cent gain in gold-backed ETFs over the period. Some primary silver producer stocks are doing even better, with shares of Silver Wheaton Corp. and Silvercorp Metals Inc. scaling to new highs last week. There are opportunities for investors to trade other silver stocks developing bullish trends.
The Trade: Pan American Silver Corp. has been on the Stock Trends watch list for much of the past month. A changing price trend and relatively strong trading activity guides this trend-following interest, but so does the stock's current move to the upper end of a long-term trading channel. The stock's relative performance to the market has improved in recent weeks, but still runs shy of its peers. Investors looking for silver exposure can go long Pan American Silver as it clears resistance at the current level and parlays sector strength to stretch its valuation multiples.
The Upside: This stock chart presents some helpful sign posts. The price pattern suggests a bullish breakout if the stock moves decisively above $29. The next significant resistance area allows for a 20-per-cent advance from the current share price. The positive conditions for continued upward moves in the price of silver - global economic recovery and endemic inflation hedging - give this and other silver plays considerable uptrend potential.
The Downside: The stock's current support level is around $25. It is possible the share price could retreat to the trend line at that level. However, investors should welcome that drop as more cause to buy on weakness than to sell.