Recently, precious metals stocks, Silver Wheaton (NYSE:SLW) included, have gone down a good bit. Just in the past several days, SLW has gone down roughly 14% and compared to what it was at in September, shares have gone down a massive 20%.
So what gives? Why is Silver Wheaton going down? There’s many different opinions on this matter, but I believe that Silver Wheaton is going through a natural cycle and that it will continue to climb higher into 2017 and potentially 2018.
Recently, the Federal Reserve announced that they “may” be raising interest rates in December. If we’ve learned anything from the Fed over the past year, it’s that they’ve promised to increase the interest rates numerous times, but have quite consistently failed to do so.
Despite this, however, there has been some hysteria in regards to the precious metals’ market. Whenever the dollar grows stronger, the precious metals market goes down, which is why the Fed claiming that they’ll raise interest rates has caused a temporary dip in SLW’s shares.
Global Uncertainty Drives Precious Metals Market
With Brexit creating a chain reaction all throughout Europe, the migrant crisis affecting countries such as Germany and Sweden, and election day coming up soon, there is no doubt a large amount of global uncertainty.
According to multiple polls, Donald Trump’s presidency is no longer an impossibility; having him in office would no doubt spark political controversy and strain relationships between countries and the US, driving the price of precious metals even higher.
Combine this with Irish growth forecasts looking glum, the IMF predicting a slow rate of economic world growth due to joblessness, and global IPOs having dropped by roughly 33% over the past year, it’s pretty safe to assume that the precious metals market has a bright future ahead.
An SLW Rebound Is Near
Over the past several weeks, the precious metals market has dipped, but this has been due to mere emotional fluctuations in the market. No substantial changes have occurred over the last year to indicate that there will be more global certainty.
The only thing that’s happened recently that would potentially hinder Silver Wheaton from climbing further has been the Fed’s announcement, but as we’ve seen, in just 2016 alone, they’ve said multiple times that they would hike the interest rate, but that hasn’t happened yet.
In my opinion, the Fed knows that it cannot hike the interest rate due to sluggish economic growth; the last 8 or so years of quantitative easing has caught up with us. It masked the signs of a lagging economy, but did nothing to fix the root problems: outsourcing, technology replacing jobs, and low minimum wages.
As we move into more of a digital world, one thing is for certain: industries that were once bustling will collapse due to innovations. Just in the past decade, several multibillion-dollar industries have collapsed: the cable industry, the taxi industry, and the movie renting industry.
Uncertainty Is The New Norm
I’m trying my best to remain unbiased, but it’s difficult to claim that uncertainty will go away with a straight face. The simple fact is that the US’s economy and political realm is slowly sinking, European governments are under an enormous amount of heat for either leaving the EU or letting in millions of refugees, and more and more companies are outsourcing their work to places like China and India.
And speaking of China, the once bustling country has also seen a currency crash over the past year. The once mighty dollar and the Euro have also been seeing an enormous amount of fluctuations over the past year.
It seems like the things we once thought were unshakable, are indeed quite fragile.
Why SLW? Why Not Other Precious Metals Stocks?
Silver Wheaton has the unique advantage of being a precious metals streaming business. What this means, is rather than establishing their own mines, they provide others with capital to do so themselves – in return for a hefty discount, of course.
In other words, Silver Wheaton has the ability to purchase precious metals at a ridiculously low cost; their average cost per ounce of silver is roughly $5, which is nearly half of the average.
This gives Silver Wheaton massive margins, but the advantages don’t stop there. They’re known for their silver trading, but they also get involved in other precious metals such as gold. This protects them from any market fluctuations in individual metals.
What About Their Dividend?
Silver Wheaton’s dividend has gone down since 2013, but this is because they don’t pay a fixed dividend. Instead, they pay a percentage of average operating cash flows in the last four quarters.
Even if you are a dividend investor, however, this may be the time to purchase stock in Silver Wheaton. As you know, they’ve had a phenomenal last year (they’ve almost tripled since December), which means that their dividend will also grow by a great amount.
Lastly, Silver Wheaton profits greatly from increased precious metals prices, more so than other mining companies. If you recall, Silver Wheaton invests in mines in return for a steep discount – this discount, which is often just a flat rate, remains true during times of huge precious metals costs.
In other words, even if the cost of silver per ounce goes up to a cool $30, Silver Wheaton will still only be charged an average of $5 per ounce, which equates to massive margins and an increased dividend for quarters to come.
The Bottom Line: SLW Will Continue To Grow
The fact of the matter is that global uncertainty, poor job prospects, and slow economic growth are all what drive precious metals industries to thrive.
There is no reason to indicate that our global economy will improve over the next year, or that the level of global uncertainty will decrease.
Of course, there could be some sort of random event which creates a massive amount of certainty and spurs job growth, but this is very unlikely – in fact, random, unpredictable events typically do the opposite.
All in all, I expect SLW to grow significantly over the next year, potentially doubling or tripling, breaking through its previous highs. There will certainly be dips, but don’t expect them to be permanent.