Tuesday, October 9, 2012

Silver Wheaton (SLW) Still a Buy

Some financial writers are attempting to cast doubt on silver and gold specifically, and also precious metals streaming company Silver Wheaton in particular, on the dubious and weak unemployment numbers, which allegedly dropped below 8 percent, producing the best results for the Obama administration about a month before the presidential election.

Former General Electric (GE) CEO Jack Welch asserts the numbers have been manipulated in order to cast Obama in a much brighter light than he should be. But even if they're close to the actual unemployed, all that means is a bunch of retailers hired temporary, part-time help, which they'll shed soon after the inventory is counted at the end of the year. Consequently, as usual, the unemployment numbers will jump up after the holiday season.

A major impediment from those making it look like the so-called improving economic situation in America being believable is that most are looking at the weak supply and demand circumstances, along with the assumption QE3 will end sooner than later as a result of the "improving" unemployment numbers.

That's a fallacy, and the open-ended monthly acquisition of mortgage-backed securities by the Federal Reserve is far from ending, and hints have been made that it won't stop until unemployment drops below 6 percent, and possibly as low as 5.5 percent. That isn't going to happen any time soon.
With Europe and China slowing down considerably, what could possibly be the catalyst to really end the ongoing recession? There aren't any, and that means QE3 will go on for a long time into the future; probably for many years.

About the only real positive in the American economy is the probability the housing market has reached, or is close to reaching a bottom. But even there it'll take years before a rebound will happen which will bring prices back to pre-2008 levels.
Even so, new construction could begin on homes in America, which would be a positive for silver and other commodities on the demand side, but which won't do much to change the jobs picture in the next couple of years.
As it all relates to Silver Wheaton, the price is driven more by QE3 at this time than any other factor, and the ongoing stimulus has formed support for silver prices, which means it has also put support under Silver Wheaton as well.
That, and the recent deal between Hudbay and Silver Wheaton shows the management is still seeking to boost its silver resources, as well as gold, which locks in revenue streams for years.

Silver Wheaton will only pay $5.90 an ounce for silver from Hudbay, which brings to overall total the company pays for silver production from all its deals to about $4.04. The operating margin enjoyed by Silver Wheaton are now about 75 percent. What's not to like about that?

As for real unemployment, the U-6 rate remains the same, which stands at 14.6 percent of Americans. That includes the underemployed or those that quit looking for work. Those are the numbers that really count, and that means there is no chance the Federal Reserve and Ben Bernanke are even close to thinking about easing up on the easing. Those that think they are don't understand the motivations and reasoning behind QE3.
This doesn't even take into account inflation and the necessity for the Fed to unwind its position.

Taken together, Silver Wheaton remains a great buy, and those who don't own the company will regret they didn't get in before the price of silver and Silver Wheaton take off to even more dizzying heights.

Silver Wheaton closed Tuesday at $38.70, falling $0.99, or 2.49 percent.

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