-- Posted 23 June, 2006 | |

The Wallace Street Journal

By David Bond, Editor

The Silver Valley Mining Journal

Wallace, Idaho – Will somebody please explain something to us? Oh, forget it: it involves human nature and cannot be explained.

We were diddling about on Kitco this morning, looking at Silver’s price behaviour over the past five years of this secular bull market. Ditto with the some 60 stocks, mainly silver but yes, a few good gold miners, that we track (but don’t tell anyone that we like two gold stocks, OK?).

The price of silver crossed the $6-an-ounce mark in late 2003 and early 2004, on its way to $8. Fast-forward to June 2006 solstice, where it seems to be building a pretty solid base level of support at $10 after settling back from $14.

Now pick a silver miner, any silver miner, and overlay their stock price performance over silver’s price across the past five years, and you will find something remarkable. With a few exceptions in Toronto that we could find, silver mining stocks were doing hugely better when silver was at $8 and even $6 than now, when it is $10, or even a few months ago when it was at $14!

Here are some f’rinstances. Hecla (HL) went above $8 when silver hit $6 in January 2004. Now they’re at $4.70 or so. Coeur, same story; CDE flirted with $8 at the same time silver hit $8. Now at $10 silver, Coeur’s at $4.42. Sterling Mining (SRLM) went on a real Nantucket sleigh-ride, hitting $12 and higher when silver was at $6. Now, at $10 silver Sterling’s at $4.10. Mines Management (MGN) kissed $10 in the 2004 run-up; now they’re $7.15. Silver Buckle (SBUM) got up to six bits in 2004; now they’re trading at 28 cents. And the list goes on.

There are only two possible logical conclusions to make of all this. Either silver is over-priced relative to mining stocks at the moment, or mining stocks are under-priced relative to silver. Given that silver’s price in terms of 1980 dollars is still only $5, it’s pretty hard to make a case that the poor man’s gold is overpriced. So if we strike that option, there’s only one conclusion left to draw: mining stocks are hugely underpriced right now.

Why all this is, is beyond the intellectual grasp of your lowly Wallace denizen, because as we said at the beginning of this rant, to understand markets one would need to understand human nature – the most impossible thing to understand in the world. But it does make all this talk of the precious metals’ drastic “correction” a little silly.

Or as an IR friend we were chatting up a week ago in Finland put it so well, “If I’d told you in June 2005 (when silver was flopping around at $7) that one year from then, it would be at $10, would you have settled for that?”