By: John Fisher
Whether you are just now considering entering the gold and silver market, or you have been investing in precious metals for years, there are many options to participate in the precious metals bull market. In this 6-part series, I will provide an overview on each method and the positives and negatives of each. Watch for all 6 parts to appear over the next 3 weeks.
Part 1 – Mining Company Stocks
Why invest in mining stocks? What mining stocks should I buy? You may have heard of conservative blue chip producers like Newmont, Goldcorp or Barrick. You might not have heard of slightly riskier junior producers like Kinross, Agnico Eagle or Yamana. You probably have not heard of risky explorers like Rimfire, Northern Dynasty or Allied Nevada.
In theory, you can reap huge returns by owning shares in gold and silver mining companies. Shares are typically priced at a fraction of the amount of precious metal they have (or believe they have) in the ground. If they are right about the amount, and can extract if from the ground efficiently, you enjoy the potential to profit at a much greater rate than simply holding the physical metal.
That’s the good news.
There are many reasons why mining companies sell for a large discount to the value of the metal (proven reserves and probable resources) they have in the ground. And, the reasons are independent of the current spot prices of the metal. For instance, the government of a country might change to anti-mining, environmentalists in a US state may affect or close a mine, indigenous people groups may stop development progress, operating costs may increase due to petroleum, chemical or steel prices, the cost of environmental reclamation can be substantial, poor organizational management, lack of or cost of credit, infrastructure in desolate, remote locations, share structure dilution, gold and silver “finds” that turn out to be uneconomical. And the list goes on and on. Basically, what can go wrong often does.
Also, just because a mine has gold and silver in the ground doesn’t mean it can bring it all to market at one time. The price the mine realizes for its output will be determined at the time the produce is sold into the market – which is often years into the future. For just this reason, back when gold and silver hit their early 1980 peaks, the values of gold and silver mining stocks only did about half as well as the increase in the price of physical metals.
There may be a place in your portfolio for precious metal miners and explorers. But, please be acutely aware that precious metal stocks are just that – stocks. We personally invest in mining stocks with this clear understanding. I also recommend researching and investing in large established “blue chip” mining stocks – as the “juniors” are significantly riskier. Bottom line, a mining stock may do better or worse than the underlying commodity they are mining.
In Part 2 of our 6 part series “The 6 Best Ways to Own Gold and Silver!” I will examine Commodity futures and options contracts.
Action to take now: Continue to accumulate cautiously, with a weighting to silver over gold. If you currently do not have a tangible precious metals portfolio, or your portfolio is evenly balanced between gold and silver, accumulate silver on a 2 to 1 ratio to gold. The next stops for gold are $1,250 and $1,640. Gold could possibly retrace to the $1,130 to $1,140 range, but this is not assured. The attached graph shows where the gold spot price encountered resistance in Mar 08, Jul 08, Feb 09 and May 09 before finally piercing $1,000 with confidence. Those resistance points now serve as support should gold retrace to test those levels. What to do now? You can try to time a dip below $1200, but market timing is seldom successful. Continue to accumulate now, and add more on the dips.
What to buy now: The best values in silver are US 90% silver coin. In gold, there are very good values in British Sovereign fractional coins, Mexican 50 Peso and Austrian 100 Corona coins. Call for pricing. For a limited time, most coins in quantity are shipped Fed Ex with a 1-week or less turn around.
