Conversation With a Silver Miner

On Wednesday, a contact (who shall remain nameless) at one of my favorite small-cap silver miners sent me the latest update full of good news on his company. I sent back a brief note that said:

“Nice, but it doesn't answer the question that is running around my mind: "How much dynamite am I going to have to put under your stock’s butt to get it to soar with the price of silver?!

“Seriously, silver is up huge - just huge. Do you have any insight as to why small miners aren't enjoying the rally? It's like gold and silver are out at the big dance and the small-cap miners are stuck back in the convent.”

I really wasn’t expecting a reply – it was more of a gripe session. But to his credit, my contact DID write back. Here’s what he wrote …

“Hi Sean - Dynamite.......not a bad idea, I hadn't thought of that. Nothing else is working so maybe I should give that a try. If I got $5.00 for every time I got your very legitimate question, I'd be wealthy.

“Even the larger silver stocks aren't tracking silver's surge. I have seen this before (as recently as late summer 2007) and there are two apparent responses:

“1. The ‘market’ doesn't believe in this latest leg in the precious metals rally. The prevailing sentiment is we'll see a correction in Ag & Au and investors on the sidelines will be able to buy these stocks at a cheaper price. Between us, I have to confess I have a boatload of cash and I too am looking for a pullback. However, I am convinced we will see much, much higher prices in these metals.

“2. Secondly, the gold and silver shares aren't acting like gold and silver stocks, they're acting like stocks...period. Up until yesterday, and as you are aware better than most, the broad markets have been trending sharply lower and all the equities are under pressure, including the majority of gold and silver stocks.

“Keep the faith. Your support will be rewarded by the market.”

I thought that was a fair and honest response. Yes, the metals are up. Investors are expecting a pullback, and they’re hoarding cash to buy gold and silver stocks when they see that pullback.

If so, that means the next pullback could have enough rebound to send select stocks to the moon.

And MANY small-cap Canadian stocks (or small-cap miners around the globe, for that matter) haven’t recovered from last July’s sell-off. That means they’re at the same levels … or lower … than they were when the price of silver was 40% less than it is now.

I don’t think that disconnect can last much longer. Either silver is going to take a tumble – which I find unlikely – or those stocks are going to take off.

So, as the man said, “keep the faith.”

Check out my new gold and energy blog at MoneyAndMarkets.com