By Ethan Messenger
News about gold and silver has dominated the market lately. Silver had reached 30 year highs, only to be followed by a 27% fall this month. Gold has fallen 4.7% in the past week. Where should you invest in such a turbulent precious metals market? Six investments have been chosen, including both ETFs and stocks, to help better understand current investment options in gold and silver.
Silver Wheaton Corp (SLW) is a pure play silver mining company, the largest in the silver streaming industry. It sells over 19 million ounces of silver mined by other companies as a by-product (i.e. not their primary product) including Barrick Gold (NYSE:ABX) and Goldcorp (NYSE:GG), both of which I will discuss later in this article. Silver Wheaton’s impressive track record is due to a multitude of factors, but the fact that it is routed through a Cayman Island subsidiary, and pays no income tax as a result, is certainly important in understanding its bottom line.
Silver Wheaton's CEO, Peter Barnes, said in an interview with CNBC that silver prices could go through $50 in the next two to three years, and that hedging the company's silver is not on the horizon. Silver Wheaton has come to embrace its role as the world's largest buyer of silver streaming contracts. Many mining investments can often take years to yield a return due to factors in production. Silver Wheaton has diversified with its contracts by investing in three out of four of the world’s major silver deposits, and in nine countries on three continents.
It is also important to consider for the first quarter that revenues were up 84% to a record $158.2 million. The company's net earnings increased to a record $122 million. Lastly we see a 10% year-over-year increase in production. But what may be most appealing of all is the approval of a quarterly dividend. SLW is currently trading at $33.83, with a P/E ratio of 32.37, and a dividend yield of 0.12 (0.40%).
Silver mania has grossly inflated the price of silver over the past year. With prices correcting themselves a sensible way of profiting is by shorting. An easy way to get the benefits of shorting is by investing in ProShares UltraShort Silver (NYSEARCA:ZSL). ZSL is an inverse ETF that seeks to produce twice (200%) the opposite investment result of the daily price movement in silver. An inverse ETF for silver is therefore a means of profiting from a downward move in silver as measured by the U.S. London fix price. In theory, a 10% drop in the price of silver would result in a 20% gain in the price of the ZSL.
The average volume in February and March was 2,000,000 shares. The average volume today is closer to 20,000,000, a 10-fold increase. Similarly, net assets under management have swelled from $127 million to $336 million.
An investment in ZSL should be monitored daily since the return for longer periods of time can vary significantly from short-term results. For the investor who understands the risks associated with a double inverse ETF, ZSL can be a valuable tool to manage the risk of a large investment in silver. ZSL is currently trading at $21.93.
Barrick Gold Corporation is the largest pure gold mining company in the world and is headquartered in Toronto, Canada. As a global institution it has four regional business units located for operations in North and South America, Africa and Australia. Barrick’s mining operations are as diverse as its business strategy with mining operations and exploratory projects on every major continent except for Europe and Antarctica. Top producers in gold ounces per annum include mines in the U.S. and Peru.
What makes Barrick a strong company in a fluctuating gold market is - much like Silver Wheaton - it too has diversified its operations with strong positions in both silver and copper.
Why buy Barrick? There are two simple reasons to buy. First, Barrick has made some recent acquisitions, notably Equinox Materials, which helped to diversify its portfolio and expanded its interest in copper. Copper should be facing supply shortages in the future and much higher demand in the coming year. The second reason is a new well-qualified CEO, Aaron Regent, who is aggressively expanding the size of the company, keeping Barrick a force to be reckoned with in the industry.
While George Soros dumped his gold holdings in the first quarter he did put some money into two large-cap miners, Barrick Gold and Goldcorp. Ultimately I would suggest acquiring Barrick because of its new management and increased diversification, certainly a long-run portfolio acquisition. ABX is currently trading at $45.26, with a P/E ratio of 13.09, and a dividend yield of 0.50 (1.10%).
SPDR Gold Trust (NYSEARCA:GLD) is an ETF that denotes a share of gold bullion, which is unlike many ETFs which represent ownership in a basket of stocks. The purpose of the ETF is to track and emulate the price of a tenth of an ounce of gold. It attains this goal through a correction by the fund's manager exchanging blocks of 100,000 shares for 10,000 ounces of gold. This way if a share of stock differs from the price of gold, a correction can be made. Such practices keep the ETF price roughly in line with the gold price, although the prices can diverge during the day. GLD, in keeping with its design, has exchanged 36 tonnes since the start of May, with an estimated net outflow of more than $1.7 billion, an indication the fund is being sold off. An investment option may be to short the fund for a quick gain. It is currently trading at $144.66, and has net assets of $60.68 billion.
Another stock that may be of interest is Gold Corp, currently trading at $48.39, with estimates having it as high as $65 by year's end. Its P/E ratio is 18.12, with a dividend yield of 0.42 (0.90%). Much like Barrick, Goldcorp is poised for returns through its promising business model. It is both the lowest-cost gold producer and the faster growing major gold miner in the world.
What makes Goldcorp Inc. so appealing are several factors. For one, its mines are in stable regions. Secondly, it has an aggressive expansion strategy, earmarking $170m for exploration this year alone. Thirdly, its expansion strategy extends to 23 joint ventures in both exploration and financing.
Let's consider the following. At today's commodity prices, its gold is valued at $87 billion and its silver valued at $45 billion. Compare this with the company's $39 billion market capitalization, and it is simple to understand why this is a low-cost way to enter the gold market.
As mentioned above, George Soros, while dumping most of his gold holdings, has chosen to invest in such large-cap mining operations as Barrick and Goldcorp. Much of the decision about whether or not to buy both Barrick and Goldcorp centers around the future price of gold, if gold remains stable at $1,400-$1,500 then you can expect future earnings in both companies to increase.
Newmont Mining Corporation (NYSE:NEM) is headquartered in Denver, Colorado. It is one of the world's largest producers of gold, with its primary mines active in North and South America, Southeast Asia and West Africa. Some smaller operations can be found in Bolivia, Mexico and Canada. Year-to-date, the price of NEM has fallen 13.4%. But Newmont’s first quarter revenues rose by 10% from a year ago to $2.5 billion. Also, operating cash flow increased by 36% to $989 million from $728 million a year ago.
As with previous investments examined, Newmont does have some unique advantages, one aspect being its hedging program. Volatility in various sectors of the market including currency and particular types of commodities, most notably fuel, can have a serious impact on a mining operations' bottom line. Fortunately Newmont was able to foresee certain risks and hedge against them. Most notably for 2011 was a hedge on contracts issued in Australian dollars. The issue being the risk associated with the Australian dollar’s appreciation against the U.S. dollar. The far more impressive hedge came in regards to the rising costs of diesel fuel. For some perspective U.S. diesel fuel today is on average $4.06, up $0.97 from the same time last year. Newmont was able to “purchase” or hedge its fuel prices at $2.43. While this is a limited 17 million gallons of fuel, only about 55% of its expected usage for the year, it still represents millions of dollars in expenses cut.
On the negative end, many have Newmont flagged as “above normal risk," with a short-term stop of $50.97 and a long-term stop of $49.75. Much like other investments mentioned, Newmont’s success as an investment in the coming months and years is heavily dependent on the stability in the price of gold. It is currently trading at $53.49, with a P/E ratio of 11.96, and a dividend yield of 0.80 (1.50%).
Where gold and silver will go is relatively unclear. We know a strengthening dollar is what has caused much of the recent havoc in the commodities market. But with QE2 coming to an end and that money slowly trickling down I believe we can expect the dollar to once again weaken, as inflation rises. A long-run outlook for a weakening dollar will see commodity prices once again on the rise. Gold and silver can be played well in both the long and short run, and the above are some promising options to do so.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.