The Silver Mines Limited (ASX: SVL) share price is gaining ground this afternoon, currently up 7.3% at 22 cents.
There’s no price-sensitive information out of the precious metals company’s camp today. Therefore, it’s worthwhile considering what forces may or may not be influencing its price action.
Why is the Silver Mines share price charging higher?
In the absence of any market-sensitive information today, we have to examine what’s happening in the underlying commodity markets.
Given the company is basically a silver pure-play, it’s wise to see what’s been happening with gold’s grey cousin lately.
After a strong rally in calendar year 2020, silver pricing has been volatile lately and largely traded sideways until June. After that, it started marching down the steps to hit a new low of US$21.513/t.oz on 29 September.
From then silver pricing has made a sharp recovery and is charging back northwards with authority.
In the two-or-so weeks since the move in silver began, it has climbed 13.5% to now trade at US$24.41/t.oz. It’s showing no signs of slowing down either, with another 0.6% gain so far today.
As long-lasting inflation poses a threat to the global economy, investors tend to flock to asset classes that offer safety and act as a hedge against inflation.
In this “flight to quality” as it is known, investors tend to gain exposure to commodity classes such as precious metals. These have proven to be reasonable and effective protection against currency debasement and asset price inflation over time when included in one’s portfolio.
What else could be at play?
Silver Mines is an ASX resources share that produces a commodity – in this case silver – and therefore, it is considered a price taker on the metal.
That means it must accept the going prices in the markets it sells into, which are often dictated by the unseen hands of supply and demand (among others).
As such, its share price can and does fluctuate with volatility in the broader commodity markets. So, when silver pricing begins to break out or crash, we can expect similar activity in the Silver Lake share price.
The correlation/causation effect is more apparent when examining the price history of both assets. We can see they move largely in unison, with the precious metal leading the Silver Mines share price.
And also given silver has hit new highs each day of this week, including today, it stands to reason this correlation effect has spilled over into Silver Mines’ hemisphere.
Silver Mines share price snapshot
The Silver Mines share price has struggled this year to date, despite strengths in its underlying markets. It has posted a loss of 6.5% since January 1 and is trading flat to its share price 1-year ago.
These results have each lagged the S&P/ASX 200 index (ASXL: XJO)’s return of around 19% in the same time.