Sooner or later, I expect an impending, if not actual, default by one or another sovereign borrower or failure of one or another major European bank (what some are calling a "Lehman" moment, recalling America's 2008 banking crisis) will trigger an unprecedented flood of new money from the Fed, the European Central Bank, and other central banks in Europe and Asia - assuring that gold and silver once again shine brightly. -- Jeff Nichols, Managing Director of American Precious Metals Advisors and Senior Economic Adviser to Rosland Capital
The above quote makes anyone who remembers the financial fiasco of 2008 swallow hard. Having recently read a very sobering article that contained this quote, I've been giving the subject a great deal of thought. Since it seems clear that the inside causes of that 2008 "Lehman Moment" have not yet been purged from the financial markets, the next such economic disaster may be nearer than we think.
For the here-and-now, we all had a glimpse on Wednesday of the minutes of the Fed's Open Market Committee June 2012 meeting. Any way you slice those minutes, you can't help but concluding that the Federal Reserve is moving toward further action to support the feeble U.S. economy.
The minutes give us a snapshot going back to June 19-20 of how the Fed really feels about the global economy, as well as our own. On the front page of Thursday's Wall Street Journal were these headlines "Fed Weighs More Stimulus." The following excerpt tells a lot:
Fed officials expressed worry about risks to the American economy stemming from the euro-zone debt crisis, the possibility of a 'significant slowdown' in China's economy and the prospect of deep U.S. government spending cuts and tax increases...
Bottom Line: A bold and unequivocal move in the direction of taking perhaps unprecedented steps to prop up the U.S. economy. You can call it QE3 or you can call it Ben Bernanke's Ace-in-the-Hole Plan. In the final analysis, it will be designed to keep interest rates at zero and re-inflate a deflationary U.S. and global economic mess.
This should lead to a powerful reversal in precious metals prices and the companies that mine them in the weeks and months ahead. Self-made Billionaire and Chairman of Sprott Inc. (SII.TO) Eric Sprott recently told Bloomberg "I just can't imagine the demand for gold is going down," he said in a July 9 interview at Bloomberg's Toronto office. "I don't personally see a solution to the problem that we're in, the financial leveraging issue that we all have where everybody wants to shed debt and there's no buyers."
Sprott sees gold ending the year at new highs and the possibility of a 22% advance (or more since this week's correction)from current levels. "We have a fundamental problem in the sovereign and banking system in the world," Sprott said. "Probably nobody has any conception of how bad it is."
Here are Stocks That Should Perform Very Well in This Scenario
Let's begin with the higher risk/higher return possibilities. I've been impressed how well the price of Yamana Gold (AUY) has held up.
The Toronto,Ontario-based precious metals producer is off i's 52-week high of $18.16 and is trading at a forward P/E ratio (1 year) only 9.77.
The bottom Bollinger Band is around $14, and it wouldn't take much for AUY to crater near its May 2012 52-week low of $12.35. Traders might take a beginning position with AUY at $14 and then try a second helping if it falls below $13. Learn more about AUY here.
Two other precious metals producers in the mid-size range worth targeting are Eldorado Gold (EGO) and low-priced silver producer First Majestic Silver (AG). EGO is not for risk-adverse investors. Its global panoply of gold properties are in places like Brazil, China, Greece, and Turkey. Eldorado has one of the highest operating margins among producers of all sizes (49% trailing-twelve-months) and pays a 1.76% dividend (if you're lucky enough to buy the shares at the 52-week low of $10.20). When you factor in its year-over-year quarterly earnings growth of 29%, it Levered Free Cash Flow (TTM) of over $251 million, modest debt ($75 million) and its 25% payout ratio and you can feel the potential.
First Majestic Silver looks mouth-watering below $14 with its forward P/E ratio (1 yr.) of a measly 8. As I write its trading around $14.48, yet it wouldn't surprise me see one last dive toward the 52-week low of $12.12 (see 1-year chart below).
Analysts at Casey Research "...think the company will institute a dividend plan in part due to its growing cash levels. Company cash levels will continue to grow with production. While much of it is being used to fund growth," Casey reported, "cash flow will climb substantially higher over the coming years, too."
Learn more about EGO by clicking here and AG by clicking here.
If you're looking for a more conservative way to leverage the current threat of a Lehman Moment Meltdown, consider these two royalty-streaming companies.
Franco-Nevada (FNV) is gold-focused and especially attractive below $45-a-share.
Silver Wheaton Corp. (SLW) is the silver-focused equivalent to FNV and is priced attractively below $26. SLW pays a current dividend of 36 cents annually. If silver prices shoot skyward that payout should increase. Even if silver prices rise modestly, SLW may raise their dividend since the current payout ratio is around 9%. FNV's payout is $0.60 per year. SLW has almost $1 billion of total cash (most recent quarter) and a low, manageable debt of a little over $71 million.
From a sheer momentum standpoint, it certainly favors FNV.