Rather than taking a new position in gold at current levels…there are a variety of alternative investment ideas that are preferable and should be considered for your portfolio. [See below for details.]
By Douglas Ehrman
While many of the same factors that impact the price of gold (GLD) also drive the price of silver (SLV), over the past two years silver prices have dropped far more significantly than gold prices. That means that a reversal in precious metals [are more] likely to reward silver investors more generously than gold investors.
A study by Claude Erb and Campbell Harvey has calculated the fair value of gold at $825 per ounce, [while,] conversely, silver may have already experienced a fall to near fair value, making its risk profile and downside protection more attractive. Ultimately, silver remains a more attractive metals investment than gold.
Similar to silver over the past two years, the stocks of gold mining companies (GDX) have fallen significantly more than the price of gold over the past year….During downturns in the price of the underlying commodity, the stock prices of those companies in the industry tend to fall more sharply. If and when the price of gold finally reverses, the price of the gold miners will reverse more rapidly…
An alternative to buying silver directly through SLV is to take a long position in silver streaming company Silver Wheaton. Silver Wheaton makes money by entering into offtake agreements with various miners to purchase some or all of those miners production of silver and gold at a predetermined price. The company earns the spread between what they pay for these streams of precious metals and what they can sell them for in the open market. In order to enter into these streaming deals, Silver Wheaton often provides financing to miners as an inducement to enter some kind of arrangement.
The stock has been hit particularly hard as precious metals prices have fallen. When the ultimate reversal in prices occurs, Silver Wheaton should be expected to significantly outperform the commodities themselves. This offers plenty of upside for investors. In the interim, the stock offers a 1.43% dividend yield, meaning that an investment in shares of the stock will provide a modest return while you wait for a reversal.
The last argument for buying into Silver Wheaton at current levels is the structural position of the precious metals markets overall. With prices as depressed as they are, the company has a great opportunity to find attractive new streaming relationships under current conditions. The value of these will take time to materialize and be fully realized in the stock’s price, but the company has demonstrated significant expertise in this area over the years…
Read “Why Silver Wheaton Will Outperform Traditional Miners” for additional information.
Ultimately, the position for gold looks uncertain at current levels and any of the alternatives above should be considered more attractive by investors.
The original article was written by Douglas Ehrman and is presented here by the editorial team of munKNEE.com (Your Key to Making Money!) and the FREE Market Intelligence Report newsletter (see sample here – register here) in a slightly edited ([ ]) and abridged (…) format to provide a fast and easy read.]
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