If a picture is worth a thousand words, imagine what five pictures can do…
Last week, I wrote to you about the latest buzz on Wall Street: the possibility of an interest rate cut by the Fed. Even though President Trump dropped his proposed tariffs on Mexican goods since then, the buzz around rate cuts have remained.
The market is still rallying – now five straight days of positive price action – on this belief. The dollar, which generally falls when rates fall, has started to take the hint. You can see the US Dollar Index – which tracks the strength of the dollar against other currencies – has dropped below 97 in recent days.
Chart 1: Dollar Decline
Investing, as you know, is complex. Everything is intertwined and interrelated. When stocks rally, bonds often fall. When the dollar falls, precious metals generally rise. That’s exactly what’s been happening the last few days as you can see in this chart:
Chart 2: Gold Gains
Of course, a week or two rally in gold prices doesn’t tell the whole story. The shiny metal has been out of favor for a long, long time:
Chart 3: A Decade of Consolidation
As you can see, from its early decade peak, the price of gold has fallen into a tight and boring price range the last few years. Each low a bit higher, but each high stopping shy of $1,400 per ounce.
A technical trader might tell you that means it’s due to breakout soon. That could be true. From my fundamental investor’s purview, that makes the most sense. But even if gold does break into a repeat rally like it did from the financial crisis to 2012, there’s a better way to play it.
You see, gold isn’t the only precious metal out there that runs counter to the dollar and interest rates. If rates are cut, or we do face economic challenges later this year and into the next, silver stands to gain the most.
Silver has suffered an even worse few years than gold:
Chart 4: Silver’s Even Uglier Decade
During the last rally, silver shot up from $15 to $50. Today, it sits below $15 again. Gold, however, was able to remain above its pre-rally prices. That means the gold-to-silver ratio (a measure of how many ounces of silver you could buy with one gold ounce) has shot up:
Chart 5: A Broken Ratio
I urge you to look at all of these charts again. Go ahead, I’ll wait.
You can see a trend appear.
We have a real possibility of a falling dollar. In the short term, that’s already starting to happen. (See chart 1). If the Fed does go ahead and cut rates, that will likely continue.
That could kick-start a rally in gold. Again, we’re already seeing early signs of this. (See chart 2).
If this continues, gold should start testing its recent ceiling of $1,400 per ounce. That, if history repeats itself, could turn into a major rally. (See chart 3).
Of course, if gold rallies, so will silver. And again, if history repeats itself, it could do much better than gold. (See chart 4).
Finally, no matter what happens, we could see prices realign between these two precious metals. Right now, we’re looking at the most lopsided gold ratio since the late 1980s. The last time gold was this much more valuable than silver, investors sent silver from $15 to $20 in just a few months (2016’s fake out).
But, if there really is a rally in precious metals, it could result in an even bigger coup for gold’s less popular sister like it did in 2011. (See chart 5).
Why do we bring all of this up? Why paint this picture? Because us small cap investors have a real opportunity if these five charts are pointing the way.
When you think of precious metal mining companies, you probably think about Newmont and Barrick. But silver is only a byproduct for these giants. The real winners if silver does rally and indeed outpace gold will come from much smaller companies.
This week, we’re tracking this industry in our Alpha contest. One of the three contenders is the kind of company I’m talking about: MAG Silver Corp (MAG). It explores for and sets up silver mines. With prices down in the dumps for more than half a decade, few still do this anymore. But companies like MAG will be the first to take advantage of rising silver prices because of that.
I’m not saying MAG is going to skyrocket overnight. It might not even be the best silver play out there. But it is the kind of company worth looking into right now. As Kelly pointed out, companies like this one can take advantage even without a major rally in silver prices. But if there is one, they will take off.
There are others too. Already in our new service, Financial Freedom Formula, I cover two I believe are in an even better position for this rally. On top of those, I have a wildcard gold play that goes for less than $1 per share.
If the Fed goes through with a rate cut… and if investors turn back to precious metals after their long hiatus… those smart enough to front run it – like us – could be sitting on easy money.
To check out the three miners in our premier new service, check this presentation out. If even just one of these blows up into a double or triple, it’ll be worth your time.