Chasing Silver Stocks Becomes A Dangerous Game: CDE, EXK, GPL, SLV

Silver prices have gone parabolic over the past few weeks as the price of the metal has risen over 30% in just the past six weeks. Not only has the metal entered a near vertical rise, but its performance when compared to gold has been phenomenal. I took a look at a ratio chart comparing the two back in April 2009 as the markets were starting to regain their footing and mentioned how silver would likely begin to catch up to gold as the markets normalized. Well, “catching up” has ended up being quite an understatement as this ratio has also gone parabolic. In fact, the ratio is now sitting above 20-year highs.
In Pictures: 5 Metals That May Be Brighter Than Gold

Source: StockCharts.com

Many have speculated that the next bubble would be in gold, but could it be in silver instead? Many retail investors have recently begun flocking to silver and it is starting to become a water cooler discussion piece for even novice investors. While it’s possible that this move is still in the early stages of a primary bull market, the recent move is most likely unsustainable in the near term. The silver/gold ratio has not sustained this move for any length of time and silver is very stretched from its mean price right now. (For more, see Trading The Gold-Silver Ratio.)

In looking at a chart for silver, as represented by the iShares Silver Trust (NYSE: SLV) ETF, one can see how far SLV is from its 20- and 50-day moving averages. SLV had been bouncing along its 20-day moving average late in 2010 as it rallied to near $30 per share. It then settled into a consolidation before the recent breakout. Overall, the strength in SLV is not in doubt. The chart looks fantastic and SLV is at new highs. However, nothing goes up in a straight line and silver could easily retrace by more than 15% and still look quite healthy. That said, caution is definitely warranted for shorter term traders.

Source: StockCharts.com

With silver so stretched from its moving averages, it’s no surprise to find many silver mining stocks in a similar situation. Coeur d'Alene Mines Corporation (NYSE:CDE) also recently cleared a consolidation and skyrocketed higher. Much like SLV, CDE is very vulnerable to a pullback of 15% or more in even a normal retracement. A stock will often pull back to test its breakout area and if that were to happen here it would mean a pullback from prices near $35 to near $28. (For more, see 5 Silver Stocks For 2011.)

Source: StockCharts.com

Endeavour Silver Corporation (AMEX:EXK) is another silver miner that has experienced a spectacular breakout. EXK had been basing just under $8 per share from late 2010 through the end of February. It has since surged to more than $10 per share. While the move over the past two weeks has brought the most attention, it really is more amazing when you realize EXK has almost doubled from its February lows.

Source: StockCharts.com

While it’s a lower-priced issue, Great Panther Silver Limited (AMEX:GPL) has more than doubled from its February lows. Volume has expanded on the breakout, which is a healthy sign, but once again, this move may be very difficult to sustain in the near term. The ideal scenario would have GPL slowly drifting sideways in a tight consolidation pattern before a second impulse move higher. While the markets rarely present the ideal setup, traders should realize that GPL is still very extended.

Source: StockCharts.com

The Bottom Line
While silver mining stocks won’t necessarily correct all the way to their prior bases or even pull back in the immediate future; the point I’m trying to make is that chasing silver stocks at this point is a dangerous game. These stocks have already experienced huge gains over the past few weeks, and are vulnerable to steep declines with even just a mild pullback. If this is the beginning of a much stronger long-term trend, then there will be plenty of safer opportunities to jump on board.