If you want to get rich from gold and silver, physical bars and coins won’t cut it.
Physical metals are great as a store of value, but that's it. The best we can realistically hope for with gold and silver bullion is to stay one step ahead of inflation, and protect our principle. Physical gold has never, ever paid a dividend. There’s no compound interest. No cash-flow.
To invest in precious metals, many people still opt for buying physical gold or an ETF such as the SPDR Gold Shares (GLD). But the way to make the biggest profit from rising gold and silver prices is to own mining stocks – companies that actually pull the metals out of the ground.
Not only can miners benefit from selling gold and silver at a higher price, but they can produce more of the metals when prices increase. Gold and silver don't have to move significantly higher from current prices for miners to post huge gains in profitability. Because their costs are essentially fixed, profit margins expand as the price moves up.
So long as gold and silver prices remain fairly stable, miners will be locking in sales at attractive prices. If prices continue to increase (and don’t let the brief respite over the past few weeks fool you; gold’s going higher), miners will see margin expansion.
We're in the midst of the year's best time to buy silver and gold, if 2011 proves to be similar to nearly every year over the last decade. Richmont Mines (RIC) is one of my favorite junior gold miners. The stock is one of my recommendations to take advantage of 2011's ironclad investment themes, which include higher gold and silver prices.
Richmont recently reported its final 2010 drilling results, which included a 14 percent growth in gold sales to 68,123 ounces. The company had an impressive fourth quarter, during which gold sales were up 43 percent over the comparable quarter in 2009.
Looking forward, Richmont is forecasting 2011 gold production growth of an additional 17-27 percent, to between 80,000-85,000 ounces.
At a time of year when gold and silver prices are historically weak, miners like Richmont, that are expanding production quickly, are a good buy. Many gold and silver mining companies are essentially on sale right now, and investors that add exposure in the seasonally weak months at the beginning of the year are likely to be sitting on profits within six months.
The drop in the price of silver and gold shouldn't come as a big surprise. Both have been on a heck of a run. As the three-year chart below shows, the recent price decrease of both precious metals is well within the normal price fluctuation -- a sign that the trend higher remains intact.
There’s little reason why investors wouldn't put themselves in position to profit if the pattern holds.
Disclosure: Ian Wyatt owns shares of GLD in his personal investment account