Precious Metal Monday
I continue to keep a watchful eye on a number of exchange traded funds (ETFs) to help me slice and dice the market's latest moves. There is one trend that investors simply can't ignore.
That trend is increasing gold and silver prices. But I won't play this trend through ETFs, there is a better way. And I'll show you why in just a minute...
There are a lot of gold and silver bugs out there constantly pounding the table. They say gold is the ultimate inflation hedge, that it is a safe haven asset, and that it is extremely undervalued right now by historical measures. The story is much the same for proponents of silver. In fact, the amount of silver being held for investment purposes has surged in recent years.
If you've been a reader of Small Cap Investor Daily for a little while now, you know that Kevin McElroy, editor of Resource Prospector (another Wyatt Investment Research free daily letter) is one of these precious metal tub thumpers. He and I frequently discuss gold and silver prices, and we both agree that investors should be buying both, on the dips, as part of a long-term asset accumulation strategy.
Back in June I wrote that Kevin is the kind of guy that I think (although he won't admit it) stuffs his mattress with the precious metals. I wrote:
"Everyone has heard the stories of how some widow sold an armoire that had bars of gold hidden in a secret drawer, or about some elderly lady that gave a suitcase to the Salvation Army, only to learn that her husband had sewn $100K into the liner.
That's Kevin, and I'm quite certain his wife probably doesn't know where all his money goes. She would however, if she stopped to think about how their mattress seems to be getting more and more firm with each passing month."
I'm hoping that Kevin and his wife will want to get together for dinner soon so I can stir the soup, and see if she's getting suspicious yet...
***Gold has recently pulled back to $1,200 an ounce, but its trend higher is unmistakable. Take a look at this five year chart of the continuous contract for gold. It has recently pulled back to its 50 day moving average. This is a dip, albeit a small one, but still a dip nonetheless. Could it go lower? Of course, but that's why we average in by buying the dips instead of buying all at once.
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The five year chart for silver looks a bit different, most notably you should immediately realize that silver is trading in the same $16 - $19 range that it traded in back in 2008. Except this time I think it will break out to the upside as more investors realize that it is trading at a big discount to gold.
To see what I mean look at this third chart of the gold:silver ratio, which plots the price of gold divided by the price of silver. The historical average for this ratio is around 55, but right now it is nearly at 67. Mean reversion, which will ultimately occur, means silver prices need to rise relative to those of gold. I don't believe gold prices are going to substantially fall, so the only way mean reversion can occur is if silver prices rise. If you agree with me, then you want to own silver right now, in addition to gold.
***So how do we profit from this trend as small cap investors? It's time to buy...
Mid-Tier Gold And Silver Miners
These guys are the best way to play the strength in precious metals because they are already pulling the stuff out of the ground, not just looking for it. And as the price of gold and silver increases, their profit margins increase. It's pretty simple - so long as fixed costs remain constant.
That last caveat is what small cap investors need to be careful about. It's been said that CEO's of mining companies are just liars with holes in the ground. Since 'proven and probable' reserves can be open to interpretation, we only want to invest in those companies that are actually pulling gold and silver out of the ground, as well as those that keep a tight lid on expenses.
Now, you can go out and buy Van Eck's Junior Gold Miners ETF (NYSE: GDXJ) to get exposure to junior gold/silver miners, but you're unlikely to make the same huge percent gains that are possible with individual mid-tier miners.
To do that, you need to buy small cap mining stocks.
***I own a mid-tier gold miner in the Small Cap Investor PRO portfolio. The company expects to pull 70,000 ounces of gold from the hills of Mexico in 2010, and looking at gold prices, that translates into a bundle of cash!
In the last quarter, this company received an average price of $1,119 per ounce, and total cost per ounce was only $425. That's a $694 profit per ounce! That's why I love low cost gold producers, as the price of gold goes up, their margins expand. And the more gold they pull from the ground - well you get the picture.
This stock was recently featured in the Dick Davis Digest, and it may not have much longer before Wall Street really begins to take notice. It's not too late to pick up shares however. You can get my full research report on this company here.
I also own a mid-tier silver minor in the Small Cap Investor PRO portfolio. This company recently reported a new quarterly record for silver and gold production, by 41 percent and 61 percent, respectively!
Last week this stock surged by 12.6 percent. How did the GDXJ do? It was up by 2.3 percent - not bad but more than 10 percent less than my silver mining company.
***There are a lot of small cap gold and silver mining companies out there, but many CEOs are just liars with holes in the ground.
You need to be investing in small cap companies that are actually producing and profitable. The two companies I've found boast both aspects.
See if you can find better gold/silver mining companies than I have. Send me your tickers; I can't tell you what company I've found - you'll have to sign up for a trial subscription to Small Cap Investor PRO for that.
But I will review your company, and let you know if I think it's a good investment. My address is: editorial@smallcapinvestor.com.
