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We recently posed this question while re-assessing our silver portfolio and concluded that we were currently not getting the leverage to the metals that investing in the stocks should return given the inherent risks associated with mining operations.
We kick off with the following probe:
Question: What is it that we are trying to achieve?
Answer: Exposure to the Gold Bull Market.
Which vehicle will give the best returns and enable us to maximize our profits?
4.Options and/or futures trades.
The physical metal in your very own hands negates any third party risk and from time to time does perform better than the stocks as it has done recently, for instance.
The funds, some of which may or may not have the physical metal, track gold prices and are liquid for those who wish to trade on a frequent basis.
The gold producers suffer from the numerous inherent risks of mining but do offer leverage to gold prices, but not on any consistent basis.
The options and/or futures trades can provide wonderful returns but they are risky and can also wipe you out completely.
For a pictorial view of this situation we have plotted some of the investment vehicles available on the chart above and have also thrown in Silver Wheaton (SLW) as it was the outright winner when we performed a similar exercise over at silver-prices.net over a six year period. The first observation that sticks out like dogs' balls is that Silver Wheaton has outperformed both gold and the gold producers by a long way and the gold producers have not.
The other point to note is that the leverage of the producers to gold and silver, which was evident when the bull market began in 2001 has now diminished considerably. This lack of leverage calls into question the use of gold stocks as an investment vehicle.
If we now fast forward and take a look at the chart below covering the past year, we can see that SLW has still outperformed gold itself and the other asset classes once again. Also note that the gold producers have been unable to keep up with gold prices suggesting that investors don’t want to expose themselves to the risks that come with mining.
So far, the obvious move would appear to be that we avoid the stocks and redeploy our cash into the metal itself and SLW as it has performed incredibly well.
Many of our peers are calling for the precious metals stocks to rally and perform like gladiators and we agree that they should head to higher ground. However, we want the best bang for our buck not merely an improvement on our account statement.
The ignition for these stocks is a dramatic move in gold prices. So we can profit from holding the metal itself and hopefully from holding the stocks. In choosing stocks we are now leaning to being overweight on SLW and reducing our exposure to the producers. Going forward SLW has the price of silver pegged at around $4.04/oz with the overall cost running at around $8.00/oz, as it is a silver streaming company and not a miner. So any improvement in gold prices will have a knock on effect on silver prices and have an immediate impact on their bottom line.
On the other hand the miners do not have such a luxury and are subject to rising costs such as the price of oil, labour, taxes (note the recent proposed 40% tax by Australia), political change, transport costs, management issues, etc. The list goes on and on with any one of these reasons having the potential to hit their bottom line and at times can be a show stopper.
In conclusion we are now doubting the wisdom of investing in gold and silver producers and are seriously considering avoiding them completely.
Disclosure: Author owns shares of Silver Wheaton
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