Investors are chasing ASX silver stocks as the price takes off

Silver is finally getting a bit of the price action that its much popular counterpart, gold, has been witnessing for some time now.

While investors have been glued to gold since the start of 2020, silver stocks have started to become more popular with thousands of ordinary Australian investors getting in on the price action.

The price of gold’s poorer cousin jumped to $US23.68 an ounce ($32.83/oz) on Friday, and it has rallied strongly from its mid-March low of $12.27/oz, according to metals website BullionVault.

Manuka Resources (ASX:MKR) has seen many small investors join its share register since listing on the ASX on July 14.

“The number of individual investors we have on our books has grown by 800 which has been astonishing,” executive chairman Dennis Karp told Stockhead.

“I put this down to the fact we are in production [for gold] and we will be the largest producer of primary silver in Australia,” he said.

“A lot of people are looking for exposure to silver,” Karp said.

A July 10 ASX filing showed Manuka had 651 shareholders, — none held under 5,000 shares — and 95 per cent of its shares were in the hands of 148 shareholders.

Wonawinta silver project

Manuka owns the Wonawinta silver project, which hosts a 52 million-ounce JORC-compliant resource grading 42 grams per tonne silver.

The mine is expected to be in production within the next nine to 12 months, Karp said.

Manuka also owns the Mt Boppy gold mine in the Cobar Basin in NSW’s Lachlan Fold Belt that started production in April and is targeting 32,000oz/year of gold production.

Primary silver gets converted into silver bars and ingots, whereas silver in-concentrate tends to contain other metal such as zinc or lead and has to be refined.

Another factor behind the surge in investor interest in silver stocks is the small number of companies that are close to producing.

“I think there is a limiting factor in the number of silver opportunities in Australia,” Karp said.

Manuka recently improved the capacity of its Wonawinta gold-silver production facility to 1 million tonnes per year from 850,000t/year following a refurbishment, Karp said.

Ore from the company’s Mount Boppy gold mine is trucked to the facility at a rate of 300,000 to 400,000t/year.

Currently all of Manukua’s gold is sent to a refinery in Sydney for further processing, and its silver will go there too, Karp said.

Silver batteries

Karp pointed to Korean phone maker Samsung’s use of more silver in its electronics products as positive for the precious metal.

“Samsung came out and said there is a future for silver and carbon silver-based battery technology. That has given silver a kick too,” he said.

The physical silver market is currently around 1 billion ounces a year, and seven times larger than the gold market, but the price of gold is 80 times that of silver, Karp said.

Investor demand for silver in the form of exchange traded funds is also rising.

Another bullish factor for silver arises from the impact of the COVID-19 pandemic, which is affecting production at mines in Central and South America.

“Silver production has declined for the 5th year in a row and is set to be 5 per cent lower this year,” Karp said.

ASX small cap silver plays

Other silver stocks include Silver Mines (ASX:SVL), which is sitting on one of the world’s largest silver deposits at its Bowdens project with production expected to be around 3.4 million ounces per year, and Mithril Resources (ASX: MTH).

Mithril last week started drilling at its Copalquin gold and silver project in the west of Mexico after raising $3.5m from investors, and results from this exploration are expected by the end of August, the company said.

Copalquin is home to more than 32 historic gold and silver mine workings and is within the Sierra Madre gold-silver trend that hosts Coeur Mining’s Palmarejo and Agnico Eagle’s Altos mines.

Volatility in silver prices

Precious metals experts say that silver has a tendency to wilder price swings than gold.

“The nature of silver is that it tends to be particularly volatile, so the price movements are quite exaggerated compared to the gold price,” Gavin Wendt, director and senior resource analyst at MineLife, said.

Silver has traditionally lagged gold in terms of price movement, either up or down, and so when gold takes off in price, it takes time for silver to catch up, he said.

“What we have seen in the past 12 months is the silver price took a long time to start moving, and it was around March or April that it started to move in line with gold,” Wendt said.

At that time, the gold-silver ratio — a measure of the relative value of each metal — blew out to a record of 125:1, meaning it took 125 ounces of silver to buy one ounce of gold.

Experts say the long-term mean for the ratio is about 60:1, silver to gold.

“We had the gold-silver ratio trading at double the long-term average, and something had to give,” Wendt said.

Silver price drivers

Wendt put the current rise in the silver price down to a couple of factors.

“When investors see the silver-gold ratio blow out, people switch from gold to silver, taking some profits on gold,” he said.

The post-global financial crisis period saw both silver and gold perform strongly.

The price of silver hit a record of $US46.50/oz in March 2011.

Wendt said he believed there was a lot more upside for silver prices than for gold, despite gold’s charge toward $US2,000/oz.

The current monetary environment of near zero and negative central bank interest rates was positive for precious metals prices, including silver, Wendt said.

“It’s impossible to see [interest rates] rising in the next five years, and they could go negative, and that drives the performance of precious metals,” he said.

Added to this is the large amount of central bank economic stimulus that is being fed into the global economy and has a net impact on gold and silver prices.

“There certainly are the ingredients for a sharp spike in gold and silver prices,” Wendt said.

Investors including hedge funds are realising that silver could play a role in their portfolios.

“There is capacity for new buyers to come into the market, and there is the possibility for existing investors to increase their holdings, and for hedge funds to significantly increase their bets on silver and gold,” Wendt added.