via the Dantes Outlook Facebook Page
As Western economies attempt to avoid a double dip, the slowdown has formed an attractive buy price for Silver (SLV) at $27. However, easing tactics will increase fears of inflation, and China’s international development strategy is sure to fuel a Silver (SLV) rally to $45.
The global economy is on a tightrope. Growth is on the agenda, but structural issues continue to deter a comeback. Asset buying programs are in full effect, and currency depletion in the developed world will surely cause inflation. However, the downward spiral creates opportunityfor investors. Consider the events of the past two weeks as proper causality to the coming silver rally.
Past headlines were flooded by what seemed to be a coordinated easing tactic by central banks. The ECB decreased interest rates to 0.75% and cut the overnight deposit rate deeper into the zero territory, joining the US and Japan. The Bank of England announced QE measures, a bond buying program meant to increase lending to jumpstart the economy. News out of China demands greater attention for our purpose of being bullish on Silver. China’s slowdown is meant to decrease demand for building projects, thus causing a decrease in the price of Silver and other basic materials. Silver’s four month decline was driven by the fear of decreased demand.
Despite China’s slowdown, we must remember that even 7% growth is good. Citing a prolonged Chinese slowdown is completely short-sighted. The country’s domestic economy is need ofimprovement, but international investment is booming, and will surely add to the demand forbasic materials. China’s easing measures such as decreasing the benchmark borrowing cost will fuel growth at home, while promoting an aggressive international investment strategy. Partnerships with Argentina and Tunisia for building projects in return for access to agriculture and crude oil must not be forgotten. Furthermore, the ability to supply materials highlights a more specific investment opportunity.
iShares Silver Trust, ETF (SLV) is a less risky bet. Pricing at $26.48 at the time of this report, provides a good discount for a buy opportunity. Keep in mind that SLV is stil lpositive for the year despite the four month decline, reversing from a February peak when China reduced its growth target. In terms of meeting Silver supply, consider First Majestic Silver Corp(AG), a silver producing mining company based in Mexico. AG has an aggressive developmentand acquisition plan to produce 8-9 million ounces of pure silver production this year.
First Majestic is rapidly growing, and its strategic location and timing of extraction is key to meeting demand while benefiting from the coming Silver price rally. AG operates 3 productive mines, and has 3 under development. On May 22nd, AG issued a technology report and pre feasibility study of its Del Toro Silver mine. By 2014, the estimated production at Del Toro is expected to reach 9.7 million ounces of pure silver. The development requires $124 million of capital, and is forecasted to produce a 43% IRR over a 6 year production life and a 2.5year payback. Accounting for the upcoming speculation once Silver pops, knowledge of AG’sdevelopment plans and positive studies will be factored into the stock’s rally, heavily correlated with SLV’s uptick.
AG is in a strong financial position, with little debt and positive cash flows to help aid expansion. The only negative on its balance sheet is exchange rate risk.
To recap this buy recommendation, I am confident that SLV and AG will rally due to the continued economic decline of the Western economies. Demand and speculation will drive the rally. China’s international development investments to capture resource wealth will require material usage, and the easing programs of the West will devalue currency and lead to inflation.
A potential negative is if China continues a decline and does not demand materials. The globa lslowdown could continue to bear down on the price of Silver. However, the charts strongl ysupport a buy opportunity.
Here’s the gameplan:
AG is right around the $15 support level, and has the potential of rallying to $20.
SLV is also around a critical support area at $27 and has the potential of rallying to $35-40,holding on near the $45 resistance level. See charts below.*Time horizon for buy is 4-6 months, reaching the $40-45 price level in SLV.
-Damanick Dantes
US Dollar decline technical forecast: http://www.gold-eagle.com/editorials_12/images/hubbartt062912a.png
Silver uptick: http://www.gold-eagle.com/editorials_12/images/hubbartt062912g.png
Crude Oil decline fuels Gold uptick: http://www.gold-eagle.com/editorials_12/images/hubbartt062912e.png
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