By Relmor Demitrius
With record gold and silver prices hitting in 2011, many investors are exploring different ways to profit off this trade. The obvious way is to buy or sell physical gold or silver. This is the safest and most tedious way to play the precious metals trade. Some purchase gold certificates or buy into Gold bonds or Trusts, like the Central Fund of Canada (AMEX:CEF), which owns a mixture of both gold and silver, or the SPDR Gold Trust (NYSE:GLD), which tries to match the exact price of gold. The common direct silver play is purchasing the IShares Silver Trust (NYSE:SLV), which tries to emulate the exact price of silver. All these are relatively safe investments for people looking to play gold or silver with paper long term. However, more profits can be made by wisely and timely playing a gold or silver company through their equity offering, especially after gold has already reached record highs. Also, ETF’s and funds tend to loss value over time. It’s never a bad time to buy gold or silver for long term, but for a trade other than directly playing the price of gold or silver, I recommend possibly looking into Newmont Mining Corporation (NYSE:NEM) for that.
This is an interesting time in the gold/silver ratio right now. In March it broke a long term low of under 40, coming in at 37.99. This means that the price of silver was around 40 times the price of gold. This is a ratio that is coming closer to the actual mined ratio of around 12 to 16 to 1. Meaning for every 1 ounce of gold mined in the world, 12 ounces of silver is mined. This means in literal terms (market doesn’t of course exactly work this way) that silver should be priced around 12 times the price of gold at any one time. In the early 1990′s the ratio was around 100 for example. I took that to mean the economic force driving silver was lagging the inflationary trade gold was receiving. Inflation before economic boom? There are some interesting correlations that can be made.
There are slightly different factors driving the price of each, for instance silver is considered more of a true commodity, as it is used more in industrial purposes, and gold is considered a hedge against inflation or just another form of money exclusively (gold is a rare commodity as it can’t be consumed, used, or made into something else). So your worldview and economic view are important factors in determining which way to go. I do like silver right now, but there are few exclusive silver companies and even harder to compare them. If the ratio being at a decade low tells you gold is about to drop, silver is about to drop, or gold is simply going to appreciate faster than silver going forward, and as mentioned before you are going to make a paper trade, then a gold stock might be the answer. If you think gold is your play, let me give you some reasons why I would agree with you.
1. Gold stocks tend to move up with the market.
2. Gold stocks tend to move up when the dollar is weak.
3. Gold stocks tend to move up when there are rumors of war, natural disasters occur, or general economic or monetary concerns. We have seen more than a fair share of these lately.
4. Gold stock companies can have good quarters. Playing gold straight doesn’t allow for certain companies to be more efficient at mining it than others.
5. As the price of gold increases, if wages and costs aren’t matched with equal inflation, which they rarely do with rapid increases in gold price, so does the companies profits.
6. Some gold stocks pay a dividend. Gold itself will never pay you a dividend.
But what gold stock is the right play and when would one enter the position?
First, what gold stock to purchase. As mentioned above, I like Newmont Mining Corporation. You may like others. There are many good choices and some not so good, so be careful here.
Costs are relatively static in the gold business, but the price you sell your product for isn’t. Newmont is not hedging their gold production, meaning they haven’t pre sold any gold at a lower price (price is increasing over time). This is a good thing if prices keep going up or stay flat. Newmont stopped hedging their gold in 2007. Miners hedged their gold sells to protect against price drops. Barrick Gold Corporation (NYSE:ABX) stopped their hedge around a year later. Keep in mind, with massive inflation could come higher wages and higher energy costs, so as the price of gold goes up, so can some costs. It’s not a complete win win, but it can be close to one at certain times. Lately, the price increase in gold is far exceeding any symptoms associated with equally rising costs to mine it.
Newmont gold has a low P/E ratio for their industry. 12.68 P/E ratio is lower than Barricks at 15, Yamana Gold at 21, Rangold Resources (NASDAQ:GOLD) at 76, El Dorado (NYSE:EGO) at 47, Nova Gold (NYSE:NG) doesn’t even make money, and Buena Ventura (AMEX:BVN) at 15. Also Buena Ventura recently had a strike, there is uncertainty surrounding Peru’s elections and direction, and both candidates had commented on taxing miners more, so I would definitely go with Newmont right now as my first choice, but keep an eye on BVN dropping more on fear. Also Newmont pays a 1% dividend to its shareholders. But when should I enter a position?
I would wait for now. Chart is showing a major resistance level currently being tested. I would sit out and watch to see who wins. If this stock breaks $60 I would see that as a bullish move going forward, and would maybe start entering in there. If that price fails to break and hold, then a good support area to dabble in might be around $42 to $45 area. Those prices would be hard to pass up, baring any fundamental changes not foreseen at this time. Also be careful of a before summer blow off top in gold and the main markets. Not the greatest time to be entering a new position, so some caution would be in order here.
Also institutional ownership in the stock is high, which should provide long term support over time. This stock currently is 81% institutionally owned with a small 2% short interest against it. Just enough to add some buying on any big run, but not enough to sniff an underlying unforeseen problem.
Visit www.kingofalltrades.com/community where I go into greater technical analysis regarding this stock and trade.
Disclosure: I have no positions in any of the above mentioned companies and have no plans to initiate any positions in them in the next 72 hours.
