I have never liked gold, silver, nor any of the precious metals as an investment. I still don't, however, given the world economic situation, the potential for war(s), inflation, deflation or whatever, I am re-examining my attitude.
For many folks, owning physical gold or silver is the way to go. I have friends who have been accumulating 1 ounce gold coins and 1 ounce silver Canadian Maple Leafs for some time. When I ask what they plan to do with them, I am always told they intend to use them to buy food and other staples when everything around us collapses. I wonder how a supermarket will be making change for a gold coin worth $4000 or $5000 or a silver one worth perhaps $100? Have you ever tried to go to a grocery store when there is the threat of an ice storm?
Looking at another scenario, that of anarchy, my guess is that the first person pulling a gold or silver coin from their pocket would probably be shot dead on the spot, and their pockets cleaned out. This all being said, my choice for precious metals investing would be mining stocks, or companies that stream these assets. Even with these, I have considerable reservations.
IAG is a Canadian company that explores for, develops and operates gold, silver, niobium and copper bearing properties. Their operations are primarily in Canada, South America and Africa. The stock's shares are quite volatile, and have dropped from a high of about $16 in late 2012 to the present $5 level. It pays a semi-annual dividend (June and December) of $.125 for a current yield of about 4.8%.
For the quarter that ended March 31, 2013, revenues dropped by 14% and earnings ($.15) slid by 91%. Its return on equity is about 7%, and the stock's book value is $9.90, which is encouraging. Estimates for future earnings have been revised downward. IAG's costs to produce an ounce of gold is $787 an ounce. Looking at the five-year forward compound annual growth rate [CAGR], I noted that according to Yahoo Finance, it is presently at just 3%.
SVM is also a Canadian company, and its business is very similar to that of IAG, except its primary focus is in China, with some activities in British Columbia. Metals mined include: silver, lead and zinc. Shares have traded between a high close to $7 and lows around the current price of just under $3. SVM pays a quarterly dividend of about $.025 and yields about 3.5% at today's price.
For the most recent quarter (March 31, 2013), its revenues declined by 25% and earnings also fell by 34%. Return on equity is 8%, and its future earnings outlook is improving. SVM's book value is presently $2.46. Profit margins have declined (with recent commodity prices), and the CAGR is 5%.
SLW, unlike IAG and SVM, is a metals streaming company for both silver and gold. It has in place long term purchase contracts (20) with mining assets in various locations around the world. This affords SLW the opportunity to purchase silver and gold at low fixed costs.
Its shares are quite volatile, and as can be expected trade in direct relation to the price of the underlying commodities. The stock has traded as high as $41, and as low as $21 over the past 52 weeks. At its current price in the $23 area, it is near recent lows. SLW pays a quarterly dividend of $.12, and has recently announced that going forward, the dividend payment will be tied to 20% of the average cash flow from the four immediately preceding quarters. I am guessing that over the next few quarters under this policy, the dividend could be reduced somewhat.
Earnings for the quarter ending March 31, 2013 were $.37, where analyst estimates were calling for $.40. Revenues however increased by 3%. SLW's book value is presently $9.10. Earnings estimates for the coming quarters have been reduced by analysts, which is commensurate for commodity price expectations.
The forward five year CAGR is an encouraging 20%.
I have already stated that I am not a big advocate of owning precious metals. Mining stocks do not offer a dividend yield attractive for their inclusion in the Protected Principal Retirement Strategy portfolio. However, I do realize that precious metals and mining stocks can be an inflation hedge.
My preference right now is to avoid them until such time that we see a clear trend for the underlying commodity prices. I happen to think that at some point, silver is the commodity to invest in, since I think it has the potential to "catch up" better with gold prices and the historic gold/silver price ratios.
If I were to add precious metals stocks to the Protected Principal Retirement Strategy portfolio in the future, my thought would be to purchase a small position in SVM (more of a speculation, since its activities are primarily in China), and a larger position in SLW, which seems to be the cream of the crop in the precious metals asset class.
Whatever I decide to do, I would certainly limit precious metals to less than five percent of the total portfolio value.
Additional disclosure: This article does not recommend either the purchase or sale of any of the stocks mentioned.