For silver, we want to reiterate our bullish thesis on Silver Wheaton (SLW), whose balance sheet strength, dividend payout, and less leverage to mining risks make us prefer it over iShares Silver Trust (SLV).
The third phase of quantitative easing (QE3) proved to be a catalyst for precious metals, especially gold and silver, as these commodities are looked upon as safe havens against a risk of inflation, which is expected to increase after this round of stimulus measures. We reiterate our previous recommendations on gold and silver equities and exchange traded funds. Our favorite gold equities remain Yamana Gold Inc. (AUY), Newmont Mining Corp (NEM), Barrick Gold Corporation (ABX), and Goldcorp Inc. (GG), in a declining order of preference. We consider silver as more volatile than gold, and hence advise investors to buy shares of Silver Wheaton , which is a silver streaming company i.e. it purchases a share of future silver production from a mine via upfront payment, rather than mining itself. This unique feature gives it a sustainable competitive advantage over its peers, as it is immune to mining risks that other companies face.
The Federal Reserve took an aggressive step in bolstering the pace of economic activity yesterday, by launching the third round of quantitative easing - QE3 - in which it tied its bond buying directly to the prevailing economic conditions, unlike the previous two rounds. The Fed is going to inject $40 billion into the economy each month till the weak job market sees sustained upturn, by engaging in a bond-buying program. It also pledged to keep interest rates to negligible levels until at least the midddle of 2015.
According to Li Ning, an analyst at Shanghai CIFCO futures, "The Fed's move will flood the market with liquidity, which will consequently push up inflation and drive investors to assets known to be good hedges, such as gold and silver. At least in the short-to-medium-term, the Fed's actions will provide solid support for gold, and help it test $1,800, or even $1,900."
Gold hit a six-month high yesterday and touched $1774.96 before easing out a bit later. The most-active gold futures in the U.S. also surged to near 6-month levels.
Meanwhile, other precious metals also touched multi-month high levels. Silver touched six-month high levels of $34.92 per ounce, and its Shanghai futures jumped by more than 5% to touch $35.93 per ounce. Platinum also surged by more than 2% to hit a six-month high, as monetary stimulus acted as a catalyst in addition to the worsening labor problems in top producer South Africa. The strikes in South Africa are increasing worries about the supply of other platinum group metals (PGMs) as well, like palladium, which is set for its 11th-straight session of gains. Please read our previous article to have a detailed insight about PGMs.
In our previous article on gold equities, we advised investors to take long positions in three gold miners, AUY, ABX, and GG, as a way to realize a big upside amongst rising gold prices. We also advised increasing holdings in physical bullion and SPDR Gold Trust ETF (GLD), but the equities were the more preferred options, considering their relatively cheap valuations, growth prospects and good dividend yields. We later added Newmont Mining Corp to our portfolio, as its dividend yield was the highest among its peers in addition to the fact that its dividend yield is directly correlated with gold prices. These positions could be hedged by taking a short position in Market Vectors Gold Miners ETF (GDX).
For silver, we want to reiterate our bullish thesis on Silver Wheaton , whose balance sheet strength, dividend payout, and leverage to mining risks make us prefer it over iShares Silver Trust .
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.