Tom Szabo

Leveraging Up on Precious Metals Ahead of Fed Meeting

If the market does not expect the Fed to do anything at Tuesday's meeting, why would confirmation of that put any sort of fire under gold and silver prices, which are at the moment in free fall mode?

The example of copper mining is not quite correct. At 80 cents copper the miners were basically breaking even. Now at $3.00 plus copper they make a margin around $1.50 to $2.00 or more per pound. That is huge and has already propelled many copper miners to multi-bagger gains. It could be the same in reverse on the way down, assuming copper prices collapse as have already lead, zinc, nickel, etc.

We don't see this as much in gold and silver mining because the mentality is somewhat different--the gold miner wants to extend the life of his/her mine as long as possible and therefore will go after lower, previously uneconomic, grades that are now profitable to extract thanks to the higher gold price. This, too, works in reverse, allowing the gold miner to somewhat cushion profit margins. The problem here is not with the gold mine manager's attitude but rather with the gold mine investor's attitude.

Silver Wheaton is a fine company with a great business model but it has risks as well and there are also limits to its leverage to silver prices. With respect to risks, consider that the mines contracted to deliver silver streams are primarily base metal operations (with the exception of Penasquito). If base metal prices fall far enough while silver prices remain high or even rise, these mines may not be profitable and could face shutdown or decreasing production (to conserve cash), thus depriving SLW of silver production. As far as leverage, I recently wrote a comment on a Seeking Alpha piece and don't wish to repeat it here, but suffice it to say that the leverage is something like 70% (ie., if silver prices go up 100%, SLW should go up 170%). Good but certainly not legendary.