Silver, Silver Stocks will Shine in the Fall

Our short-term objective for Durban Deep of $1.40 was realized within 24 hours of the posting of our last week's article on GOLD-EAGLE, not bad considering the volatile market for mining stocks and stocks in general. The focus of this latest article is a follow-through on our prediction that silver and silver stocks will likely outperform gold this autumn, much to the surprise of conventional wisdom.

In last week's article we wrote, "silver's 120-week cycle is due to bottom this fall. We are only a few short weeks away from this important bottom, and when it happens it will represent a fine interim swing play. The gold-silver ratio definitely favors silver right now. After a relentless bear market in the white metal over the past few years, it is now finally time for silver to shine." This is still the favored outlook in the silver sector, and indeed a few select silver stocks are already beginning to shine and outperform the leading gold stocks in terms of percentage gain and overall performance.

On a comparative basis the charts for the leading silver stocks look better and reflect more overall accumulation than do the charts for the blue-chip golds. As an example, we have compared the charts for Pan American Silver (PAAS), a leading silver stock and one that is representative of the overall silver stock sector, and Placer Dome Gold (PDG), a leading gold stock which mainly reflects the overall gold stock sector. When the two charts are overlaid, the chart for Pan American Silver shows clearly a more rounded, bowl-shaped look in its priceline over the past year than does Placer Dome. This suggests that accumulation has been more pronounced in the silvers than in the golds.

One reason for this is the fact that gold's dominant short-term and intermediate-term cycles-most of which have bottomed between March and September of this year-have already seen their most dynamic upward phase and now the shorter-term gold cycles are turning down. Silver's dominant cycles, however, most notably the 120-week cycle, are just starting to turn up which gives silver greater upside potential this fall. This fact is reflected in the price-line for Pan American Silver, among other silver stocks, in that an important series of bottoming cycles just starting to turn up usually manifest in the form of bowl-shaped curves, whereas the price-line in Placer Dome bespeaks just the opposite-cycles turning down. Hence, the more jagged appearance of Placer's price-line.

Another constructive feature among the leading silver stocks is the large amount of "key volume" that has appeared in the leading silver stocks, most notably in Pan American Silver. This volume-which is best interpreted by going directly to the tape rather than the daily or weekly charts-is clearly insider upside volume. This portends wonderful things for the silvers. By contrast, much of the volume in some of the leading gold stocks is more along the lines of (short-term) selling volume. Yet another reason to favor the silver mines over the golds this autumn.

In response to our last commentary on GOLD-EAGLE a reader asked, "The question is if silver is about to explode how would you play it, and if you had to buy one silver stock what would it be: Stillwater, Pan American Silver, Apex Silver or other pure silver plays?" Of these three, Pan American Silver remains the favored choice due to its relative strength to the other leading silver stocks, including the ones just mentioned.

We have already examined Pan American Silver in depth, but one more observation must be made. Pan American's 12-week cycle won't bottom until around the first week of October-only days away-and this also marks an important seasonal cycle bottom in this equity. Thus, there remains some downside potential in PAAS until then and perhaps in subsequent weeks as the stock continues to consolidate from its recent extreme upward trajectory. Nevertheless, the months ahead should be prosperous ones for PAAS investors.

The XAU index is technically bullish. A near-term target of 65-67 remains in place for September. A series of rising cycle channels, coupled with bullish seasonal factors, is pointing the way to higher prices on the XAU.