The silver market was one of the big winners on the stock market this week after silver prices hit a multiyear high. Not only did silver have a good week, but gold was up as tensions in the Middle East and concerns about inflation heated up.
According to data provided by S&P Global Market Intelligence, First Majestic Silver (AG +3.14%) led the way, rising as much as 24.1% this week; Fortuna Silver Mines (FSM +1.22%) popped 22.7%; Pan American Silver (PAAS +1.01%) was up 11.9%; and Mag Silver (MAG +0.00%) jumped 13.1% at its peak.
NYSE: AG
Key Data Points
Silver prices hit two-year high
The price of silver hit a two-year high this week, following a sharply higher move by gold. The two metals often trade in lockstep, and that was true again this week.
There were several drivers of the increase in silver. The first was rising tension in the Middle East, which can send investors toward "safer" investments like precious metals. This is a big reason gold was up this week, but inflation played a role as well.
Policymakers were on the speaking tour this week, warning that rates may stay higher for longer than expected in 2024. The Federal Reserve wants to keep rates high to combat inflation and continues putting off potential cuts, surprising the market this year.
Metals like gold and silver are often seen as an inflation hedge, so if inflation is higher than expected, it makes sense that both are up this week.
Leverage in the metals business
Miners can often move in the same direction as the commodity they're producing, but in the case of silver miners, the move is magnified because there's a lot of leverage in the business.
You can see in the chart that these companies are not particularly high in free cash flow despite Pan American, Fortuna, and First Majestic all generating significant revenue. That's because there are significant fixed costs in the mining business.
AG Revenue (TTM) data by YCharts
The two levers the company has to increase revenue are the volume of silver and gold produced and the price of the underlying commodity. As silver rose, these stocks followed, and if the trend holds, it will ultimately lead to higher cash flow and earnings.
But the financial improvement may also take time to flow through the income statement, as hedges dampen some of the price change and the delay between commodity movements and operations takes time.
Volatility continues
Expect miners to follow the price of gold and silver, which have suddenly become hot commodities in 2024. But that could reverse course if the Fed feels inflation is under control or investors find better prospects elsewhere.
For miners, the risk is always that a falling commodity price will crush the stock because of the operating leverage inherent in the business. And if these companies aren't highly profitable with silver trading at near decade highs, then they may not be resilient long term. I'll avoid the move this week and look for more durable earnings elsewhere in the market.
