Silver's Breakout and Sierra Madre's Perfect Timing

Time to take profits or double down on this expanding producer?

Two mid-week posts this week, you lucky things.

How about that for value?

In case you missed it, here is yesterday’s:

But today, with silver seemingly unstoppable - we touched $53 yesterday - I want to look at top silver pick, Sierra Madre Gold and Silver (TSX-V:SM).

This has been a big win for us, with braver readers picking it up below 30c 18 months ago, when junior mining really was in the doldrums.

Today we are flying high at $1.50.

What, then, to do? Take profits? Buy more? Hold?

I met with CEO Alex Langer last week, and I’ll let you know what I think.

But first …

A word on silver

Silver fever is in their air once again.

The internet is abuzz. Emails are flying about - “the end of cheap silver is over.” The Royal Mint has run out of supply. Physical silver is trading north of $100/oz in China. You can’t get silver at $50. The paper markets are going to fall apart.

Supply will catch up. It always does. But for now, with the recent price surge, investment demand has shot up, and it has created a shortage in London - where supply was already tight. Lease rates - the cost of borrowing metal - have jumped above 30% in recent days. Bid-offer spreads have risen from a typical 3c to 20c. The spread between the London spot price and the Comex future price typically sits at -30c/oz. Suddenly it’s $3/oz and silver has gone into backwardation: the spot price is now higher than the futures price. (That happened in 1980 as well, as silver was rocketing).

This backwardation has led traders to fly 1,000 oz bars from Comex vaults in New York to London. The price gap justifies the transport costs and remember: silver is bulky compared to gold. It is not cheap to fly.

If you live in a Third World country, such as the UK, I urge you to own gold or silver. The bullion dealer I recommend is The Pure Gold Company. Pricing is competitive, quality of service is high. They deliver to the UK, the US, Canada and Europe or you can store your gold with them. More here.

Silver can carry on rising. It’s a bull market. The cup-and-handle pattern that I keep banging on about has come into play.

$100/oz silver is a real possibility. It’s true this long-overdue bull market in metals has barely got started. There is more than a decade of mining and metals underinvestment to work through.

But remember this is silver. If it can find a way of letting you down, it will.

Everyone is screaming, “new paradigm” while thinking to themselves, “how long do I wait before I pull the trigger and sell?”

What to do? And when to do it?

$50 is/was a huge line in the sand. There is a lot of price memory there. I thought we would bounce down off it. We haven’t. We’ve gone through. Maybe this is a genuine break out, maybe it’s one of those suck-people-in-before-we-crash-the-price jobs.

But we are now at $53. There is no resistance overhead. Typical action would be for us to rally a bit more, pull back to the breakout level, re-test, then off to new highs. That’s when we start heading towards those cup-and-handle highs.

$50 silver in 1980 translates to over $200 today … but it’s silver. Never forget that.

Sierra Madre Gold and Silver (TSX-V.SM)

My favourite silver play, my largest silver position and one I have covered on these pages before is Sierra Madre Gold and Silver (TSX-V.SM).

It’s been a big win.

What to do?

Well, it can higher. The company is on a really good trajectory: expanding at just the right time.

Here are my thoughts.