Rampaging silver prices commanded plenty of headlines recently as some retail investors expanded their battlefront against Wall Street short sellers. The dual-role metal struck eight-year highs above $30 per ounce as the Reddit Revolution rolled on. They’ve since retraced to around $26.30, but I don’t think silver’s race is run just yet.
Naturally the prices of London-quoted silver producers move up and down in line with movements in metal price. I’m looking at this as a splendid investment opportunity for my ISA. In terms of individual shares, I would invest in Hochschild Mining (LSE: HOC) to play this theme.
Of course, future events can blow City estimates wildly off course, so they’re not to be relied on. But today, brokers reckon that Hochschild’s annual earnings will rocket more than 200% in 2021. This leaves the UK share trading on a rock-bottom forward price-to-earnings growth (PEG) ratio of 0.1. This is a sub-1 reading, which conventional thinking suggests the gold and silver digger is being wildly undervalued by the market.
Silver prices tipped to rise
I think there’s plenty of scope for safe-haven silver to rise strongly in 2021. It’s not just ongoing fears over the economic recovery as the Covid-19 emergency continues, trade wars come back into sharp focus, and Brexit trade turbulence emerges. The possibility of interest rates remaining lower for longer, and stimulus measures continuing to come down the line, will favour hard currencies like precious metals over paper currencies as inflationary concerns linger.
The latest annual survey from the London Bullion Market Association (or LBMA) illustrates the sunny outlook for precious metals in 2021. The 38 analysts it interviewed reckon the average prices of gold, silver, platinum, and palladium will rise by double-digit percentages this year. But the survey suggests silver will be “the star of the show” in 2021, the LBMA says.
LBMA forecasts suggest the metal will average $28.50 an ounce this year. This represents a 38.7% increase from the 2020 average of $20.55. It also suggests that silver prices will rise three times as fast as gold. Again, forecasts can change.
A UK share offering compelling value
The outlook for silver in 2021, and by extension for UK silver-producing shares like Hochschild, looks pretty robust then. But there are still reasons plenty of reasons why a new precious metals rally could fail to materialise. A strong and sustained economic recovery as Covid-19 vaccines roll out could hit demand for flight-to-safety assets. A better-than-expected performance from the US dollar could also hit silver prices. That’s because weakness in the greenback makes it more cost effective for overseas buyers to purchase dollar-denominated commodities like this.
It’s possible, too, that expectations of strong production at Hochschild in 2021 could disappoint. The UK mining share has plans to produce 360,000 to 372,000 ounces of gold this year and between 31m and 32m ounces of silver. But unexpected production issues can easily push output forecasts well off course and drive costs through the roof too.
Keeping the possible risks and rewards in mind, I reckon Hochschild’s mega-cheap valuation makes this UK share worthy of my serious attention today.
