With gold prices back above $900 and silver at $12 an ounce, gold producers have reason to be cheerful about the outlook as a flight from all paper currencies to one of fixed supply gathers pace.
However, gold and silver mining is an energy intensive business, with up to 25 per cent of costs going on fuel. Thus falling energy costs will feed straight through to the bottom line for gold and silver producers this year.
It gets better. Gold and silver are priced in dollars but most mining companies have operations in non-dollar countries. Therefore, local costs are falling at a time when precious metal prices are rising.
Could precious metal stocks be one of the few to rise this year? Certainly when you have consumer manufacturers like Samsung or Toyota (NYSE:TM) producing losses, it is notable that precious metal producers are among the only industries to be guaranteed rising profits this year.
This is a win-win environment for gold and silver stocks with falling production costs and rising precious metal prices. Needless to say the latter increases the leverage of owning stocks relative to the precious metals.
Now buyers can point to last year’s huge underperformance by precious metal stocks as a reason for caution. But surely this just makes the upside greater in what looks like a no-lose investment opportunity.
Of course, you should spread your risk and do your due diligence before buying any stock. And yet, again, in a rising market all ships tend to rise and those now perceived as most risky may do best.
That might mean a second coming for the explorer stocks which have been savagely beaten down, and surely the trick here is to buy those which have achieved some degree of public notoriety as investors are more likely to buy something of which they have already heard.
This is perhaps a bit late for those who staked their last cent on exploration stocks two years ago. But precious metal claims are sure to soar in value as gold and silver prices head upwards, and lest we forget the explorers hold those claims and that is the real value of these stocks.
Disclosure: No positions