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March 2, 2006

Silver Boom

After creeping upwards during the passed three weeks, the price of silver exploded over 4% today to new highs. The move is certainly an exciting one for precious metals bulls and may help validate postulations that we are in Phase II of the bull market in metals. Typically, second phases of bull markets are characterized by long runs interspersed with brief pull-backs... an ideal environment for buy-the-dippers.

A theory posed for today's move is speculation that the long-awaited silver ETF from Barclay's will be presently approved by the SEC. It is possible that such speculation played a roll given silver's recently strong out-performance of gold. Clearly, though, demand for gold and silver is continuing to rise. Both metals bounced off support lines in early February, and I would be surprised if gold did not make its own move to new highs in the next few days.

The metals' strength finally brought some bids in to support Newmont Mining's slide. NEM shares were up 2.3% and showing strong volume in the early afternoon when most of today's rise took place. However, the big winner today was Pan-American silver, which saw it shares explode for 7.5% to close just shy of an all-time high. February's pull-back is looking more and more like the nearly-obligatory pull-back that occurs when an issue breaks out of an extended trading range. I expect PAAS to continue a strong rally from here.

Another earnings release from a home builder, Hovnanian, did little to rattle that sector. The homeys finished the day essentially flat. HOV had nothing new to add to what we already know: that demand for new housing is slowing. There have now been three home builders reporting a slowing market while simultaneously reiterating previous earnings forecasts. If these companies were prescient enough to discount a slowdown when the forecasts were initially published last year, they certainly didn't say so at that time. It is possible that the homeys are relying on back orders to meet earnings projections, but with order cancellations on the rise, traders would be folly to believe it.

Even though home builder shares continue to slide, I have not found a comfortable, low-risk entry point to short, so I continue to play this theme under the premise that suppliers to the industry will be the first to feel real pain. Building Materials Holding Corp. is the largest supplier to this group, and I am still short their shares.

Disclosure: Long PAAS; Long NEM, PAAS Calls; Short BMHC


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