Ben's 2014 Guide To Precious Metals Investing

by: Ben Kramer-Miller

In response to a request to list my favorite gold mining stocks, I decided to go one step further and to give an overview of my approach to precious metals investing. While I do list my favorite companies, I also discuss the current state of the precious metals markets and my broader precious metals investing strategy.

I will discuss all four of the so-called precious metals.

  • Gold ((Au))
  • Silver ((Ag))
  • Platinum ((Pt))
  • Palladium ((Pd))

The Fundamental Overview: Why Invest In Precious Metals?

Precious metals are valuable insofar as they are a convenient store of value. In addition to their industrial applications, they have monetary value. While this fact has been lost among the masses, who believe that U.S. dollars or other fiat currencies are stores of value, the fact remains that if we look at precious metal prices over the long run and smooth out the shorter-term volatility, then we can observe that their purchasing power remains constant over long periods of time.

This cannot be said about fiat currencies, which are subject to central bank intervention and manipulation. As central banks buy and sell bonds in the market, they have an incredible impact on the purchasing power of fiat currencies. True, this impact isn't always obvious or immediate, but by changing the size of the monetary base and by controlling short-term interest rates, central banks can determine to a fairly large extent the capacity and incentive for banks to lend money and inflate the broader measures of the money supply. Thus, the value of fiat currencies is largely a function of politics, psychology, and a particular interpretation of statistical data.

People often make a similar argument for gold, and it is true that gold is an asset whose price is driven by psychology. However, there is a physical component--gold cannot be created or destroyed in the way that fiat money can. Consequently, so long as there is demand for a physical store of value, there will be demand for gold, and negative sentiment can only drive the price down so far before the physical reality of the supply/demand fundamentals force the downtrend to cease.

Silver, platinum, and palladium are different insofar as their demand is largely driven by industry. Historically, however, silver has been used regularly for money. It was only 50 years ago that silver was the most common component of American dimes and quarters. In fact, the Hebrew word Kesef was used to mean both "silver" and "money" in the Torah.

Platinum and palladium are a little different. These two metals are valuable for their extreme scarcity, coupled with their industrial uses and the fact that they cannot be substituted in essential products such as catalytic converters in automobiles. Nevertheless, people collect these metals, most notably platinum, in the form of jewelry and coins. While they haven't been used as money in any significant way, their monetary potential is similar to that of gold's insofar as they have monetary qualities (fungibility, durability, divisibility) and in their convenience stemming from the fact that a small amount of platinum or palladium is extremely valuable.

Why Buy Precious Metals (GOLD)?

The decision to buy a specific precious metal over others should come from an analysis of the fundamentals of each metal, which I discuss presently. However the decision to buy precious metals is an anti-investment decision--it is a decision not to deploy capital into any interest or capital-returning assets such as stocks, bonds, or real estate.

Let us look at gold in particular. If we look at the time frame when the gold price floated freely, we see that there are essentially three periods of time where we can make the following broad observations:

  1. 1968-1980: Gold is a good investment, stocks, bonds, and real estate are bad investments.
  2. 1980-1999: Stocks bonds, and real estate are good investments, and gold is a bad investment.
  3. 1999-present: Gold is a good investment, and stocks, bonds, and real estate are bad investments.

Obviously, these are not clear-cut delineations. For instance, gold peaked in 1980, but gold stocks peaked and the stock market bottomed in 1982. Also, real estate continued to go higher after 1999. Furthermore, stocks and bonds are higher today than they were in 1999 (although they are lower priced in gold). But broadly speaking, gold has been a winner when the returns of interest and dividend-bearing assets have been mediocre, and it has been a loser when the returns of interest and dividend bearing assets have been strong.

If this basic observation guides your investing strategy, you can come out a real winner in the long run. If you had held the Dow Jones Industrial Average from 1968 to the present day, you would have made 6% on your money per year on average. If you had held gold, you would have made 8%. However, if you had held gold from 1968, traded it for the Dow Jones in 1980, and then traded back to gold in 1999, you would have made nearly 19% on your money!

Of course, we all like to be a little more active in our investing, and we don't want to view things in black and white, but I think a good starting point for investing, given this observation, is to ask whether now is a good time to own stocks/bonds/real estate, or whether its a good time to own gold and precious metals. That is to say, do you want to be "invested" or "anti-invested"?

While I own assets in both categories, I believe that this is still a precious metals era, even if we have seen a significant correction. Recall that in the 1970's gold bull market, there was a cyclical decline that is larger than the decline we have seen thus far in gold.

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But the reason I believe that gold and precious metals are superior investments to interest-bearing assets is based on valuations. It is pretty much the consensus view that bonds are overvalued, and historically treasury yields should be 4%-6% higher. Stocks, however, are still generally liked by investors despite the fact that by historical metrics they are significantly overvalued. Furthermore, stocks did not hit a valuation in 2009 that would signify a bottom in the market. Typically, stocks bottom at a P/E ratio of 5-10. Now the market's P/E is around 23, and we hit a low of 15 in 2009.

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Gold, on the other hand, is undervalued and it didn't come close to hitting a point of overvaluation in September, 2011. Historically, gold has peaked when the value of America's gold exceeds the size of the monetary base, and it has been good value when America's gold is valued at less than 25% of the monetary base. As the following chart shows, gold is a screaming buy.

In fact, the value of America's gold is just over 9% of the current monetary base, which means that by this metric, gold offers better value than it did in 1971 at $35/ounce, and in 1999 at $255/ounce.

Why Buy Silver, Platinum, and Palladium?

My reasons for buying all of these metals (aka the "white metals") are qualitatively more or less the same, although I am much more bullish on the silver price. Basically, the industrial demand for all of these metals is rising as more technologies employ them. But from a strictly monetary perspective, the prices of the white metals relative to their respective supply fundamentals suggests to me that platinum and palladium should trade at substantial premiums to gold, and that silver should trade at a much larger fraction of the gold price.

In addition to the fact that the white metals are consumed in industry while gold is not, we find that platinum and palladium production pales in comparison to gold production--16 ounces of gold are produced for every ounce of platinum and palladium produced. This means that without considering industrial demand, and even if we only assume that monetary demand is 20% of gold's monetary demand, platinum and palladium should trade at more than three times the gold price.

Silver production is only about 9 times greater than gold production. Assuming no industrial production and 50% of the monetary demand for silver, the silver price should be about 1/18th that of gold, not 1/65th.

The fact that most of the white metal supply goes towards industry implies that these ratios can favor the white metals even more relative to gold. Consequently, the bullish case for the white metals is a fortiori vis-a-vis the bullish case for gold.

Price Targets

Assuming a flat monetary base and that the value of America's gold peaks at 100% of the monetary base, gold should trade to $13,000/ounce. Based on the above ratios, which again, do not take industrial demand into consideration, platinum and palladium should trade to around $40,000/ounce each and silver should trade to about $720/ounce.

These appear to be outlandish given current prices, but they are conservative for the following reasons:

  • The monetary base is increasing at about $800 billion annually.
  • In the past, gold has peaked at valuations that made it so the value of America's gold exceeded the monetary base by 25% or more.
  • The gold peaks reached in the 1930s and in 1980 occurred at a time before Eastern countries began to heavily accumulate them. This should drive the gold price higher than what we have seen in the past.
  • As I have emphasized, these figures do not take into consideration the industrial demand for the white metals. Silver, in particular, will be a major beneficiary. The fact that silver is consumed while gold isn't means that actually, despite the fact that gold trades at a 65-fold premium, silver is actually rarer than gold, and could trade at a higher price!
  • Given silver's history as money, particularly as "the poor man's gold," I think its monetary demand is going to rise substantially higher than 50% of that for gold.
  • The supply of platinum and palladium in particular is at risk, as these metals are mined primarily in South Africa and Russia, which are high-risk mining jurisdictions (especially South Africa). This means that there can be a supply shock if a geopolitical or labor problem arises, and this can send the prices of these metals soaring.

Given these figures, the case for investing in precious metals is extremely strong despite the negativity in the mainstream media. Of course, this doesn't mean that the cyclical bear market can't continue. While gold found support at a double bottom at $1,180/ounce, there is much stronger support that may have to be tested at around $1,000-$1,030/ounce. In fact, it may reach a capitulation point below $1,000/ounce to scare away the last of the speculative money before soaring higher.

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Silver appears to have reached a bottom, having found major support in the $18.50-$20/ounce range. It may not race higher from here, but I would be surprised if it traded much lower than this range.

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Platinum and palladium have very different charts. Platinum has traded much like the other base metals, despite the potential supply shock than can result from political turmoil in South Africa.

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Palladium arguably has the most interesting chart of the four. It hasn't even broken its 2000 peak of $1,100/ounce.

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Furthermore, given its supply and its use-value, I think it should trade more in line with platinum, although at a small discount.

How I Invest In Precious Metals

In what follows, I discuss my precious metals investments. They mostly consist of coins and bars, although I have shares in several mining companies and royalty companies.

Essentially, I view precious metals as a "risk-off" trade, while at the same time I like to take risks when the reward is overwhelmingly compelling. Therefore, I take a "barbell" approach to investing. I own several relatively speculative mining companies and a lot of physical metal. At the same time, however, I do not own a lot of large mining companies or of the large, profitable, dividend-paying royalty companies. With this approach, I get to protect a good chunk of my portfolio, while at the same time I can get lucky with one of my smaller speculative stocks and vastly increase my wealth. As will become apparent, my favorite smaller mining companies have multi-bagger potential even before metal price appreciation.

Physical Metal

I think every portfolio needs to contain some physical precious metals. By this, I don't mean SPDR Gold Trust shares (NYSEARCA:GLD) or iShares Silver Trust shares (NYSEARCA:SLV). I mean actual coins and bars that you can hold in your hand.

I outline the reason for this in an article I wrote back in March on the need for investors to diversify their counter-party exposure. While investors think of diversification by asset class (stocks, bonds, commodities, currencies), country, risk-level (i.e. "beta"), company size, and company sector, diversification means having some assets outside of the banking system all together. If this sounds overly paranoid, then consider that in Cypress last year, citizens could not access their deposits. Americans forget that they themselves could not access their financial assets on 9/11/2001. If something similar happens and you have some gold and silver coins, you will be better prepared than somebody with GLD shares or mining company shares.

How I Like To Own Physical Metal

I like to buy all sorts of physical metal items--coins and bars of various denominations issued by various mints. However, I do have certain tendencies.

First, I prefer small-denomination items to large-denomination items. This can be expensive. For instance, as I write this, the online bullion dealer Apmex is selling 1 ounce Gold American Eagles for about $1,300 vs. a spot price of $1,240. If I want 10 1/10 ounce Gold American Eagles, I'll end up paying $1,420. This is steep, but it has its advantages.

  1. First, if you ever have to trade your gold for consumables, an ounce of gold will have far too much value to purchase things such as food or basic clothing items. A tenth of an ounce is sort of like a $100 bill, and is far better suited for this purpose.
  2. It is much more difficult and less economical to create a phony small coin than a phony large coin. Recall the tungsten-filled gold bar conspiracy from a few years ago. Regardless of its veracity, it is a possibility. Since smaller coins are more difficult to fill with tungsten, it follows that there is inherent relative safety in owning smaller coins.

In addition to preferring smaller coins, I like items that are widely recognized as authentic. This means I prefer to own coins that are made by some governments and bars made by the most widely-recognized dealers/refiners. These items will cost slightly more than bars minted by "Joe's Metal Refinery," but they are also far easier to transact in. The following is a list of the items that are most highly recognized.

Gold Coins

American Eagles
Canadian Maple Leafs
South African Krugerrands
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Gold Bars

Pamp Suisse
Credit Suisse
Perth Mint
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Silver Coins

American Eagles
Canadian Maple Leafs
Austrian Philharmonics
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Silver Bars

Johnson Matthey
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Canadian Mapleleaf
Pamp Suisse
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Canadian Mapleleaf
Pamp Suisse
Russian Ballerina
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*All images are courtesey of Apmex

Ultimately, by owning physical precious metals, I can sleep at night without fearing that I will lose all of my wealth overnight because of a problem with the FDIC, SIPC, the Fed, the U.S. government, or any other entity that wields a lot of power in the financial markets. Depending on a variety of factors such as your need for dividend income or your risk tolerance, you should probably keep between 5%-25% of your wealth in physical metals that are purchased into market weakness.

My preference for the four metals in questions is as follows, in descending order: silver, palladium, platinum, gold. Investors should keep in mind that my stock investments do not include any platinum or palladium companies.

Mining Companies

Most of my paper precious metal assets are held in shares of mining companies. The one exception is a small position in the Central Fund of Canada (NYSEMKT:CEF), which is a closed-end fund that holds both gold and silver and which trades at a discount to its NAV.

Mining companies have a different risk/reward profile than physical precious metals. On the one hand, they offer leverage. If a gold mining company trades at 10-times cash flow and produces one ounce of gold for $1,000, then at $1,240/ounce gold, this company trades with a market cap of $2,400. But if the gold price rises 10% to $1,364/ounce, then the company trades with a market cap of $3,640, which means the shares will appreciate 52%. Mining companies can also return capital to shareholders and expand their businesses. Physical precious metals, on the other hand, just sit there storing value.

But all of these benefits come with a price. Mining companies have to deal with the following issues:

  1. Varying production costs
  2. Tax increases
  3. Natural disasters that can close down mines
  4. Labor issues
  5. Environmental impact
  6. Raising capital to develop projects
  7. Uncertainty regarding resource estimates

This is why I prefer physical metals to mining companies.

Nevertheless, the potential upside that some of these companies offer to investors is too tempting to pass up. If you pick the right mining companies and the prices of precious metals rise, then these companies can make you rich.

Here, I have picked out nine stocks--4 low-risk and 5 high-risk--that I own and consider to be solid investment opportunities going forward. These are not my only investments, but I do consider them favorites.

Major, Mid-Tier Miners, and Royalty Companies

As I stated, I take a barbell approach in my precious metals investments, meaning that I overweight the lowest-risk and the highest-risk assets and underweight everything in between. That includes the major producers, mid-tier producers, and the larger royalty companies. Nevertheless, the best larger companies are going to perform very well relative to gold and silver prices. They will also pay dividends if they don't already, and therefore, they are good investments for retirees.

Of course, not all of these companies are created equal. In picking my favorites, I generally stick to companies that meet the following criteria.

  • Relatively low production costs
  • Meaningful foreseeable growth
  • A proven track-record of value creation
  • A strong balance sheet

So as not to rank my choices, I have listed these companies in alphabetical order.

First Majestic Silver

First Majestic Silver (NYSE:AG) is, in many ways, the best-run silver miner in the industry. It has a very disciplined strategy in that it only purchases mines that meet the following criteria:

  1. The mine must be located in Mexico.
  2. The mine must have low production costs.
  3. The mine must generate most of its revenues from silver.

While the company does not execute this strategy flawlessly, it has done a phenomenal job of mostly sticking to it. Of the six mines the company has in production, or intends to have in production over the next couple of years, only La Guitarra is not profitable at the current silver price, and only Del Toro has significant exposure to metals other than silver.

i should note that the first two criteria have been of particular importance in the past year. Mexico recently passed a 7.5% mining royalty that hits First Majestic directly. While the company hasn't hinted at it, it will be interesting to see if, going forward, management decides to expand outside of Mexico given this new tax. Regarding the second criterion, focusing on low-cost production this past year really paid off considering that the price of silver behaved so poorly. First Majestic didn't take any write-downs and it didn't show any losses. These two observations run counter to the rest of the industry.

Aside from operating by the above three principles, First Majestic has grown production rapidly in the past and it has plans to continue growing into the future.

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Furthermore, the company has a strong balance sheet with $72 million in cash, $70 million in working capital, and $650 million in shareholder equity compared with just $75 million in debt.

Ultimately, investors who want to own a relatively low-risk silver mining company should look no further.


Goldcorp (NYSE:GG) started as a junior mining company that was developed by Rob McEwen into a multi-billion dollar juggernaut that at one point in 2013 traded with the highest market capitalization of any company in its sector. McEwen ran the company from 1993 until 2004 and created 30% annualized returns for shareholders, despite a relatively flat gold price, and set the foundation for the company's ongoing success. Goldcorp is now run by a very capable management team led by Charles A. Jeannes, who has been with the company since 2006.

Goldcorp owns 11 producing gold mines, all of which are located in the Western Hemisphere. It produces about 2.5 million ounces annually, which costs shareholders about $1,150/ounce when we include all of the company's expenses. The specific production figures for its mines is given in the following table.

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You'll note that there are two mines--Eleonore in Canada, and Cerro Negro in Argentina--which will begin production next year. While they will not contribute much to the company's total production in 2014, they will eventually bring this figure up to 4 million ounces annually in the next couple of years. Furthermore, these new projects should bring down the company's average production costs.

Admittedly, Goldcorp is not the cheapest gold miner among the other major producing companies. Although its share price is down to $24 per share from its 2011 high of $56.00, the shares have a higher P/E ratio, a higher price-to-sales ratio, and a higher price-to-cash flow, compared to many of its peers. In fact, Goldcorp has a larger market capitalization than Newmont Mining, which produces twice as much gold, and it has a market cap that is almost as large as Barrick Gold's, which produces three times as much gold.

However, Goldcorp's management has demonstrated an ability to grow rapidly and consistently. During the 21st century, Goldcorp has increased its revenues 20 times, while it has increased its stated book value over 10 times. While cash flow and profits are down this year, 2012 cash flow and profits were 20 times greater than they had been 10 years prior. Furthermore, the company has been paying regular monthly dividends since 2004, and the dividend is larger than that of the S&P 500 and it is growing at a faster rate--since I first bought the stock in 2009, it has raised its dividend from $0.18/share to $0.60/share annually.

Goldcorp is generally a low-risk investment. The company has an exceptionally strong balance sheet, with just $2.3 billion in debt vs. $20.7 billion in equity. Furthermore, it does not operate in high-risk areas such as the Middle East or South Africa, where mining companies have faced opposition from governments and workers.

Royal Gold

Royal Gold (NASDAQ:RGLD) isn't a mining company. Rather, it is a royalty company.

Royal Gold makes money by buying royalties from mining companies that entitle it to a portion of the gold or other metal produced on a specified property. In essence, it "lends" mining companies money in exchange for repayment in gold. Mining companies often need capital, and since the smaller ones don't have revenue, they will have a difficult time paying interest on a conventional loan. Thus, Royal Gold and its peers take advantage of this situation and provide leverage to the prices of precious metals to their shareholders.

Royalty agreements take various forms. Typically, they are net smelter return royalties, or "NSR royalties," meaning that Royal Gold gets a portion of the revenues from the gold sold minus what the mining company pays the smelter--a virtually negligible amount in the broader scheme of things. So, if Royal Gold buys a 1% NSR on the gold produced at a mine that ends up producing 100,000 ounces of gold, then Royal Gold will get the revenues from the sale of 1,000 ounces of gold minus what the company pays the smelter.

Royal Gold has royalty agreements on over 100 properties, although most of its value is in its ownership of royalty agreements on the following properties:

  • A 52.25% NSR royalty on the gold produced at Thompson Creek's (TC) Mt. Milligan mine. Royal Gold pays $435/ounce.
  • A 2% NSR royalty on all the metal produced at Goldcorp's Penasquito mine.
  • A 75% NSR royalty (that drops to 50% at a certain point) on the production at Teck Resources' (TCK) Andacollo mine.
  • A 5.23% NSR royalty on the gold produced at Barrick Gold's (NYSE:ABX) Pascua Lama mine.
  • A 2.7% NSR royalty on Vale's (NYSE:VALE) Vosey's Bay poly-metallic mine.

Royal Gold trades at a relatively high multiple to earnings--58-times trailing earnings--however, investors should keep in mind that going forward the company's earnings should grow, given that production at Mt. Milligan should reach full capacity in 2014. The stock price also takes into consideration the values of non-producing assets of value such as the Pascua Lama and El Morro royalties. Finally, the company has a solid history of rapid earnings growth, dividend growth, strong profit margins, and a clean balance sheet. Given these points, a relatively high P/E multiple is justified.

Silver Wheaton

Like Royal Gold, Silver Wheaton (NYSE:SLW) is a royalty and streaming company. The justification for owning Silver Wheaton shares is much the same for owning Royal Gold shares, except that Silver Wheaton focuses more on silver, with a small emphasis on gold.

Silver Wheaton is a little different than Royal Gold in its strategy in other ways too. For instance, many of Silver Wheaton's silver streaming deals are with primary gold or base metal mines. A company that wants to develop a copper mine, say Augusta Resources (NYSEMKT:AZC), comes to Silver Wheaton and offers all of the silver, which is secondary, in exchange for an upfront payment. Many of Royal Gold's deals, on the other hand, are small, say 2% royalties on the gold produced, but the mine in question is primarily a gold mine. The result is that Silver Wheaton has indirect exposure to these other metals. If, for instance, the price of copper plummets, then Augusta Resources may decide not to develop its Rosemont mine, and this would hurt Silver Wheaton.

In all, Silver Wheaton has 24 royalty and streaming deals on various properties throughout North America, South America, and Europe. Some of the most valuable include:

  • A stream on 25% of the silver produced at Goldcorp's Penasquito mine in Mexico (Silver Wheaton pays $3.90/ounce).
  • A royalty on 25% of the silver produced at Barrick Gold's Pascua Lama mine in Chile/Argentina.
  • A stream on 25% of the gold produced at Vale's Salobo Mine in Brazil (Silver Wheaton pays $400/ounce plus 1% added annually).
  • A stream on the silver produced at Primero Mining's (NYSE:PPP) San Dimas mine up to 6 million ounces, and 50% thereafter (Silver Wheaton pays $3.90/ounce).

In a recent article, I calculated that Silver Wheaton's streams and royalties are worth roughly the company's current market capitalization in a pessimistic scenario (i.e. if the company's more questionable assets are valued at $0 or at a minimal valuation). Yet, this doesn't include the incredible exploration potential that Silver Wheaton's partners have on these mines. Further, Silver Wheaton has very high profits and low costs so that it is in a position to redeploy its free cash flow into new projects while paying out a dividend that is correlated to the silver price. This makes Silver Wheaton an excellent stock for retirees and for growth investors alike.

Junior Gold and Silver Miners

If I am right about the direction and magnitude of gold and silver's price action, then it follows that the best junior gold mining companies will make you rich. These companies have a greater probability of trading at a small fraction of their intrinsic value because they are esoteric. These companies can also skyrocket in value with just one or two lucky discoveries.

In picking these companies, I tend to gravitate towards companies with an aggressive exploration agenda (e.g. GoGold Resources) or with feasible long-term growth plans (e.g. Asanko Gold). While I don't completely avoid them, I don't own many companies that have large projects with outsized capex needs, as these become bets on management's financing strategy rather than on organic production growth.

Again, to avoid any ranking, I have listed these companies in alphabetical order.

Asanko Gold

Asanko Gold (NYSEMKT:AKG) would not have made the list prior to announcing its intent to acquire PMI Gold (OTC:PMVGF). Prior to the deal, the company had a large cash position that was nearly large enough to fund the development of its mine in Ghana--Esaase--that will produce 180,000 attributable ounces of gold annually at $843/ounce. While this is a promising scenario, management's longer-term plans were vague and characterized by words such as "expansion" and "growth," that lacked a substantive road map.

The PMI Gold acquisition changes that. Now, the company will be able to go forward and use the cash flow it generates at Esaase and develop the mine next door--Obotan, which will begin producing a few years later (hopefully by 2017) and more than double attributable production.

In short, the company has a clear path to 380,000 ounces of attributable production without uncertainty regarding the source of its capital.

As production approaches, I think Asanko shares are going to perform extremely well. Investors should note that in the recent past most gold and silver mining companies performed very poorly, but those companies that are rapidly approaching low-cost production without large capital needs have outperformed substantially. Such companies include Klondex Mines (OTCQX:KLNDF), which will be producing later this year, and Tahoe Resources (NYSE:TAHO), which will also be producing later this year. Asanko will soon be grouped with these outperformers.

Furthermore, Asanko shares are going to provide investors with significant leverage to the gold price, while remaining comfortably profitable in the current gold price environment. In a recent article, I calculated that Asanko shares can more than triple in value if the price of gold rises even modestly to $1,500/ounce. Those who are far more bullish on the price of gold can expect substantially more upside, should the company's plans pan out successfully.

Despite this, Asanko shares have lagged miserably since the PMI Gold deal was announced back in December, as the following chart of Asanko shares in terms of the Market Vectors Junior Gold Miner ETF illustrates.

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In all likelihood, fear of rising share supply coupled with a downtrend in the gold price is leading investors to sell, as the stock trades at the cash held on the company's balance sheet. Prudent contrarian investors are strongly advised to take advantage and accumulate shares now.

Avino Gold and Silver Mines

Avino Gold and Silver Mines (NYSEMKT:ASM) has incredible unrealized upside potential. Avino is an old company with a past history of production at its Avino mine in Mexico. However, due to low metal prices, the company ceased production at the turn of the century.

Now, with metal prices on the rise, the company has begun producing again at the San Gonzalo vein on its Avino property. It is also in the process of developing the main part of the Avino mine, which should be in production later this year. While there is uncertainty regarding this mine's economic feasibility, the fact that management raised over $5 million is a sign that management is moving forward and is optimistic about doing so.

In addition to having promising growth plans, Avino has stood out among silver miners as one of the few that has been able to turn a net profit in this depressed silver price environment. Avino didn't take any write-downs because it doesn't have any mineral reserves, and it has been able to focus on high-grade areas of its San Gonzalo mine in order to generate $1.45 million in net profits in the second quarter and nearly $1 million in net profits in the third quarter of last year. While we don't have 4th quarter financials yet, the company reported a large increase in silver and gold production over the fourth quarter of last year--193,000 silver equivalent ounces versus 151,000 silver equivalent ounces. It is also reporting higher ore grades, which likely entails lower production costs.

With the company valued at about $60 million, these figures are extremely promising. Investors have been bidding up the shares despite the recent secondary offering announcement. As a result, the shares have been outperforming those of other silver miners.

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I think this outperformance will continue, and that the stock has the potential to trade much higher over the coming year and beyond as investors begin to see low-cost production at the Avino vein and at the high-grade oxide tailings resource in 2016.

GoGold Resources

GoGold Resources (OTC:GLGDF) is an exploration and development company with properties in Mexico. It has a unique strategy, whereby it is bringing its Parral Tailings mine into production this year in order to fund exploration at what is likely its flagship property--San Diego. Recently, it acquired the Gertrudis property from Animas Resources (OTC:ANIMF), which has several small gold deposits that the company hopes to begin mining next year. After the company agreed to purchase Gertrudis, Animas received a takeout offer from Marlin Gold (OTCQX:MLNGF), which prompted GoGold to step in with a higher bid. Assuming the deal goes through, the company will get a huge land package (270 square miles) in addition to just the Gertrudis property.

As is evident from this, the company plans to use a small amount of production from one property to finance exploration of several other properties. While the company is over-valued strictly on a discounted cash-flow basis, the exploration potential at the company's other properties, coupled with management's aggressive strategy, has convinced me to own the stock.

As a company with aggressive exploration operations, GoGold will have plenty of cash flow to cushion the share price even if the company doesn't find another significant resource. Parral Tailings will be producing 1.8 million silver equivalent ounces (1.3 million ounces of silver) annually, with gold as a by-product. The company secured financing last summer, and it is in the process of developing this project now. It should be able to generate $7/ounce at $20/ounce silver.

As the company ramps-up production here, it will be preparing a feasibility study for its Gertrudis property, which is expected to be released in the middle of this year. With cash flow from the Parral Tailings and a nice cash position ($31 million), it will be in a position to develop its mine (mines?) at Gertrudis. It will also have the funds to continue to explore its San Diego property, which has several projects that could turn out to be profitable gold/silver/copper mines in the coming years. The Brecchia Hill and Chispa de Oro areas in particular show enormous potential, with large drill holes showing more than enough gold and silver to predict large deposits.

Of the company's here, I think this is the most speculative because much of the value is found in properties that have not been sufficiently explored to contain geologically-defined resources. But I also think that of these small miners, this one has the best chance at becoming a large, multi-billion dollar mining company.

Klondex Mines

Despite weakness in the gold price in 2013, investors bid up the price of Klondex Mines by roughly 30%. While I generally like to be a contrarian and buy stocks at low prices (e.g. Asanko Gold), I think Klondex Mines has one of the most compelling stories in the gold mining space, and investors can still find value in the company's shares even at the current price of $1.55/share.

Klondex Mines owns a significant amount of exploration land in Nevada. The company is focused on one of these-the Fire Creek project, which it expects to bring into production sometime this year. This should be a low-cost mine that will almost certainly be profitable even in a depressed gold price environment.

Late last year, the company reconfigured its resource estimate for the Fire Creek property. Prior to the reconfiguration, the company had between 1.4 million ounces and 2 million ounces of gold. With the new configuration, the property has just over 700,000 ounces of gold. Despite the reduction, this is actually an improvement. Management decided that it would be better to define the resource focusing only on highly profitable gold, and as a result the grade of the ore more than doubled from less than 10 grams of gold per tonne to over 20 grams of gold per tonne. This means that the company's direct production cost (aka "cash cost") per ounce of gold should be significantly lower than initially thought. In fact, the company should be one of the lowest-cost gold producers in the world with ore grades this high.

Management showed enthusiasm for the potential of this new resource by buying a land package with a mill nearby the Fire Creek property from Newmont Mining (NYSE:NEM). While the company will end up issuing shares and debt to finance this deal, it demonstrates management's intent to begin production at Fire Creek very soon. Not only that, but now that the company has a milling facility, we know its capacity for processing ore, and we can therefore estimate its production at a minimum of 100,000 ounces per year minimally.

This is excellent news, because 100,000 ounces of low-cost gold can produce a lot of cash flow for a company that is valued at just $165 million (note that this valuation assumes that the company will issue stock in order to fund the mill purchase from Newmont). For example, if the company can generate $400/ounce of gold then it will see $40 million in free cash flow for at least the next 6 years, and this means that Klondex shares are still undervalued, despite last year's strong performance. Furthermore, the shares offer leverage to the gold price. Using our current example and assuming today's $1,250/ounce gold price, if the gold price rises to $1,450, then cash flow rises to $60 million per year-a 50% increase.

In addition to the upcoming production plans for Fire Creek, Klondex Mines has plans to expand its resource base at Fire Creek and at its other Nevada exploration properties. This gives investors cost-free upside potential. Therefore, I think the shares can still be purchased today, and I think that they are a screaming buy on any pullback.

SantaCruz Silver Mining

Over the past several months, shares of SantaCruz Silver Mining (OTCPK:SZSMF) have underperformed both the price of silver and the price of silver miners more generally, as measured by the Global X Silver Miners ETF (NYSEARCA:SIL). However, the fundamentals do not support this underperformance-SantaCruz has recently made meaningful advances towards growing its resources and becoming a multi-million ounce producer. Not only has the company ramped-up production at its flagship mine-Rosaline, but we saw a huge boost recently in its total resources at the company's (formerly) tertiary property--Gavilanes. With this in mind, SantaCruz shares should have outperformed the broader sector, and consequently I think the shares have significant upside in the near future even if the price of silver remains at around $20/ounce.

SantaCruz Silver Mining has an interesting strategy: it plans to develop small and inexpensive mines on its Mexican properties in order to generate a small amount of cash flow in order to further explore its these properties. The company paid just $10 million in order to bring its flagship property-Rosario-into production. By the end of the year, this production should reach an annualized rate of 800,000 ounces of silver equivalents. In employing this strategy, management hopes to fund its own exploration and incremental expansions of its producing mines without seeking large amounts of outside capital. This is a very appealing approach, because it limits the amount of dilution that existing shareholders have to endure.

The company has three primary properties-Rosario, San Feliz, and Gavilanes. Rosario is a small producing mine that contains about 12.5 million ounces of silver. Production has been increasing from virtually nothing over the summer to hopefully 800,000 ounces on an annualized basis by the end of the year. Furthermore, the silver here is high grade-300 grams (about 10 ounces) per tonne, which means that the operation will likely be profitable and it will generate significant cash flow that the company can use to expand its resource.

San Feliz has a smaller resource of just over 5 million ounces of silver equivalents. It, too, is a relatively high-grade deposit, which means that once it goes into production, it should be profitable. Right now, SantaCruz is working on a feasibility study. This report has been delayed somewhat, but it should come out some time early this year.

Gavilanes became a valuable property in SantaCruz's portfolio just over a month ago, when the company put out a news release that stated that it contains a sizable resource. It is this recent development that was somewhat unexpected, and it is the primary reason why I believe the company's shares should be outperforming other silver miners.

Prior to the December 17th news release, Gavilanes was SantaCruz's least important property. True, it was being explored aggressively with tangible success, but it didn't have a defined resource base. Meanwhile, the company's other properties were far ahead of Gavilanes. As previously stated, Rosario was seeing initial production and San Feliz had defined resources and was undergoing a feasibility study.

However, with the release of Gavilanes' resource estimate, the significance of the project in the company's portfolio suddenly became apparent.

In a nutshell, Gavilanes has more silver than the company's two other properties combined, even if we use the most conservative cut-off grade of 140 grams of silver equivalents per tonne of ore. While much of this silver is in the "inferred" category, which means that it has the lowest likelihood of being profitable to mine in mining jargon, the fact that the company announced such a large resource goes a long way in bolstering the case for SantaCruz shares.

The announced resource has the obvious direct quantitative benefit--the company has more silver, so statistically it will be able to produce more silver and earn more money. But more importantly, this impressive resource goes toward confirming one of management's recent forward-looking statements, namely that Gavilanes can produce by 2016. This speaks of management's competence and credibility.

The fact that the resource is 24 million ounces of silver equivalents using the conservative cutoff grade indicates that production can easily top 2 million ounces annually. This would likely make Gavilanes the company's largest producer. While it is difficult to predict actual production figures or costs without a more formal analysis, there is a high probability that the company will be able to develop a long-life mine (>8 years) with meaningful production compared to the company's $62 million valuation.

This news probably should have sent the shares soaring 20% higher at the very least, and possibly more--it does not take much to get a small junior mining company's stock soaring. But the stock is flat-to-slightly down since the announcement. Rather than attempting to rationalize this, I think investors should simply exploit the situation and buy the shares.


As I have argued, precious metals investments have enormous upside potential. While there may be some downside remaining in this cyclical downtrend, we are still in the midst of a powerful bull market. Gold, silver, platinum, and palladium are still incredibly undervalued and under-owned, as is common during the early stages of a bull market. By the time it is truly time to sell, we will be seeing headline stories that show people lining up outside of coin shops claiming that a dollar collapse is imminent. Therefore, investors need to prepare for the sort of economic environment in which this fantasy becomes an oncoming reality. The best way of doing so is to buy precious metals while we see headlines referring to a "strong dollar" or an "economic recovery" peppered throughout the financial media.

We have seen all sorts of ways that investors can participate in this bull market, and investors with all sorts of portfolio strategies and risk appetites can find a combination of stocks and bullion holdings that suit their needs. While these opportunities are fairly obvious to me, I think a lot of investors have trouble wrapping their heads around precious metals investments, and herein lies the source of the aforementioned opportunity.

The fact of the matter is that gold and precious metals are viewed as "alternative assets." They fall outside of the paradigms that are promoted in the financial press: "stocks vs. bonds," "growth vs. value," "high yield bonds vs. government securities," and so on. Precious metals are viewed as "insurance."

But we have seen that no matter what you call them, precious metals, as a core part of any portfolio, can greatly enhance returns, especially if investors hold them when interest and dividend-bearing assets are overvalued. This happens far more often than our perma-bullish financial media would have investors believe. Since the price of gold was allowed to float freely-unofficially in 1968 and officially in 1971-the gold market has markedly outperformed "blue-chip" stocks. Furthermore, of the past 46 years, there has only been one extended time-frame when stocks consistently and substantially outperformed gold. The ongoing reversal of this has brought the price of gold down to its lowest relative valuation in decades, while at the same time, the beloved stock market is trading at the same valuation at which the 1968-1982 bear market in stocks began. These trends can continue, but not for long. Eventually, demand for physical precious metals will outweigh the negativity and the speculative short-selling that is going on in the paper markets, and we will see prices snap back towards a more realistic valuation that will shock the masses.

Ultimately, investors should strongly consider the notion that gold and precious metals are not "alternative" assets, but rather they are undervalued assets. At the very least, investors who don't "get" gold can understand the industrial demand for the white precious metals and accumulate positions in these. Those that do and go against the grain will be greatly rewarded. Not only will they see potentially unfathomable gains, but they will likely be given a much better opportunity in the not-too-distant future to re-enter the stock market at a far better valuation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long the stocks I discuss in this article. I own many of the coins and bars mentioned although sometimes in different denominations than shown. I own other physical bullion products and precious metal mining and streaming companies as well. I will likely add to many of the positions I have in the near future.