Both gold and silver continue to trade well below their inflation-adjusted highs in nominal terms, and the market is now beginning to acknowledge the profit potential that precious metals equities offer at today’s bullion prices. We believe the equities will offer more upside than the bullion over time.  Many of the smaller names are well priced and have momentum behind them. The prospects for gold stocks look extremely bright [for very good reasons. Let us explain.] Words: 2250

So say Eric Sprott and David Baker (www.sprott.com) in an article* which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited ([  ]), abridged (…) and reformatted below  for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. 

Last week, the HUI Gold Index marked a new all-time high as it surpassed 600. Recent gold equity investors were undoubtedly happy with this move, but for longer-term holders, the recent strength is actually somewhat disappointing. If you review the chart below, you’ll notice that while the gold price has almost doubled since early 2008, the HUI Index has appreciated by a mere 22% over the same period (see Chart A).

Chart A

Source:  Bloomberg

If the HUI was justified at 500 in early ’08, it should surely be justified at 1,000 today, given the appreciation of the gold price over that time.

Why have the [gold and silver company] equities lagged [to date]?

1. the sell-side’s abysmal gold price estimates. Table 1 [below] shows the average gold price that analysts are using to value gold equities today. While the futures market is comfortably forecasting a continuation of today’s levels, the majority of sell-side analysts refuse to update their gold price estimates to reflect its recent strength. A rising gold price is normally a bad sign for the broader equity markets, and generally indicates a bearish trend. As bears ourselves, we’re completely fine with this, and invest accordingly but the sell-side has difficulty pairing bearishness with new underwriting opportunities. It doesn’t mean you have to believe their price forecasts, however.

 

2. gold’s volatility. The amount of paper gold and silver contracts that trade on the futures and equities exchanges still dwarf the amount of actual physical trading that takes place. Paper markets continue to set price discovery – thereby allowing for dramatic volatility with little or no influence from actual physical fundamentals. In the LBMA market, for example, market participants traded an average 19.6 million ounces of gold PER DAY in July 2011. Keep in mind that the total gold mine production in 2010, globally, was approximately 86.5 million ounces. Global gold mine production is not expected to increase significantly year-over-year, so the LBMA is essentially trading a year’s worth of production in less than a week – and this is just ONE market. When you add the COMEX futures and gold ETFs, the paper trading volume becomes absurdly high.

When price discovery is dictated by levered paper contracts with no physical backing, it’s extremely easy and relatively inexpensive to jostle the spot price around. The result for gold has been many days of extreme downside volatility, despite a strong and consistent overall upward trend. Investors don’t like volatility – and the constant whipsawing has probably kept many of them away from the gold equity sector as a result.

3. investors still remember how badly gold equities got crushed in 2008. There was a reason they sold off so aggressively however – they were the most profitable positions investors owned going into the ‘08 crisis. Gold equities had enjoyed a strong bull trend going back to 2001, with the HUI Index appreciating by 980% from its November 2000 low through to August 2008. Investor behaviour is fairly consistent – when panic hits, you sell your winning positions first.

A New Trend is Forming

1. Greater divergence between precious metals stocks and physical gold and silver has arisen in the precious metals equity market – a subtle, but plainly evident shift in recent daily performance. On Wednesday, August 10, for example, the Dow dropped 4% while gold stocks rallied 3%, for a delta of 7% on the day. That is significant outperformance, and not what we have come to expect on an equity market down day. Gold stocks, as represented by the HUI Index, also seem to be breaking away from their traditional correlation with the spot gold price. On August 29, spot gold dropped 2.16%, while the stocks fell by only 0.81%. On September 7, gold fell by 3.09%, while gold stocks rose by 0.33%. These small differences indicate a new trend forming. While gold’s daily volatility is expected to continue, we may be entering a new phase where the stocks react less harshly on gold down days, and outperform gold on days of strength.

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The gold equities’ recent divergence has played itself out even more prominently against the financials, with the HUI Index outperforming financials by a stunning 49% since the beginning of July (see Chart B below). As we wrote in “The Real Banking Crisis” two months ago, there appears to be a run on European banks, and financial stocks are reflecting that. IMF Managing Director, Christine Lagarde, recently confirmed as much in her Jackson Hole speech, where she warned about the banks’ need for urgent recapitalization: “They must be strong enough to withstand the risks of sovereigns and weak growth. This is key to cutting the chains of contagion. If it is not addressed, we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis.”  Investors aren’t waiting around to see if they’ll pull it off, and as the chart below suggests, at least some of them have reinvested their former bank equity capital into the precious metals sector.

Chart B

Source:  Bloomberg

2. Greater wealth redistribution has taken place since 2000 as per Chart C [below]. Those investors who have owned precious metals equities have prospered, while those who have invested exclusively in the broader equity market or financials have little to show for it. We clearly see this trend continuing, and even accelerating, in the coming years.

In many of the funds we manage at Sprott, we’ve transitioned out of gold bullion and into gold equities to better participate in the continuation of the trend indicated above. As long-time investors in this space, we can assure you that the production growth rates will be significantly higher in the junior stocks. They continue to trade at discounted valuations, and we believe they offer the best opportunity to build exposure.

Chart C

Source:  Bloomberg

 

3. the market is now acknowledging the miners’ improvement in margin capture – which has occurred despite the increase in capital and operating costs (see Chart D below). We meet with a large number of gold mining management teams on a weekly basis, and based on those meetings, it appears that the average cost of producing an ounce of gold today, all in, is now around $800. At $1,200 gold, these companies can capture roughly $400 in EBITDA. At $1800 gold, however, they’re now capturing $1,000 per ounce in EBITDA – representing an increase of 150% in profit margin. That is significantly far above what any other equity sector has been able to generate over the past year.

Amazingly – despite this new reality for gold producers, we are still finding opportunities in select gold and silver mining companies that can be purchased today at 2-3 times their 2-year-out forecasted cash flow. These multiples are based on the current gold and silver spot price, and if these companies hit their production targets, and gold and silver continue their appreciation – we may discover that these stocks were trading at less than 1 times 2-year-out cash flow today. Having been in the business for many years, we can tell you that investing in a stock at 1 times 2-year-out cash flow tends to be a winning proposition – let alone in an industry that literally mines the world’s reserve currency out of the ground.

 

Chart D

Source:  BMO Capital Markets

4. gold stocks represent a bona fide growth sector in an otherwise dreadful equity market. All other equity sectors are weakening due to sovereign uncertainty and the reemergence of soundly weak economic data. The recent disconnect between gold equities and bullion isn’t new either. We’ve seen it before over the past decade, and the returns generated after previous divergences have averaged around 26% (see Table 2). Given the recent performance correlations, the HUI’s breakout above 600 and spot gold now firmly above $1600, we expect this rebound in gold equities to be prolonged and much more significant in percentage terms.

Conclusion

Equity investors shouldn’t let $1800 gold dissuade them from participating in precious metals equities [see article 6 below for particulars]. The world is still dramatically underexposed to gold, and we firmly believe it should represent a higher percentage of investors’ total portfolios today. The fact remains that both gold and silver continue to trade well below their inflation-adjusted highs in nominal terms, and the market is now beginning to acknowledge the profit potential that precious metals equities offer at today’s bullion prices.

We believe the equities will offer more upside than the bullion over time.  Many of the smaller names are well priced and have momentum behind them. The prospects for gold stocks look extremely bright. 

*http://www.industrymailout.com/Industry/View.aspx?id=301954&q=357299914&qz=778a96

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The magnitude of current private and government debt, coupled with massive unfunded contingent liabilities for promises of future services to their citizens, will prove to be impossible for many nations to fund. Massive inflation in the money supply will become the preferred vehicle to deflect the default monster and will result in vastly devalued currencies and price inflation as a prelude to default. Such action will be a desperate attempt to buy time to stave off the inevitable and will result in social unrest caused by persons whose comfortable lifestyle and elevated standard of living is about to disintegrate before their very eyes. Words: 1525

So says Arnold Bock (www.FinancialArticleSummariesToday.com) in an article edited by Lorimer Wilson, editor of www.munKNEE.com  (It’s all about Money!), for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.  Bock goes on to say:

‘Sovereign Debt’ was once only a phrase found in the arcane prose of economists writing in academic journals. Internet blogs started carrying commentary on the subject after the near-death experience of many large banks but only in the last few months has the mainstream media tuned into the issue of sovereign debt. Quite simply, they could not ignore the omnipresent financial clouds any longer.

What is ‘Sovereign’ Debt?
In its simplest form, ‘ sovereign’ debt means ‘government’ debt, the financial debt of a country. It usually also means the accumulated debts of government sub-entities such as states, provinces, municipalities, agencies, boards and commissions for which the senior government is ultimately responsible.

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While existing government debt is the problem for today, contingent liabilities for promises of future services to its citizens dramatically complicates the current debt problem. Unfunded future liabilities are obligations which represent the one ton gorilla peering through the front window of many nations.

What does Debt ‘Default’ Mean?
‘Default’ is a word similar to the word ‘bankrupt’ when referring to the inability of a private individual, business or institution to meet its financial obligations. When debt is unable to be repaid, a formal declaration of this fact triggers a bankruptcy in a court of law. In the case of government, the inability to pay its accumulated debt from past spending, because it can’t raise adequate taxes or borrow additional funds, means that the government has become insolvent forcing a formal default on its debt.

Which Countries are Most Likely to Default?
According to the Maastricht Treaty which sets the terms of compliance for the sixteen member nations of the Euro currency club, annual deficits are limited to 3% of GDP. Of the 27 European Union member states, according to the IMF and the Global Financial Stability Report of April 2010, only 5 countries (Luxembourg, Finland, Denmark, Sweden and Bulgaria) are below that ceiling. Even worse, of the 22 that do not comply, 14 have a ratio that is more than twice the established and agreed upon limit. Indeed, the EU-27 as a whole, posts a huge 6.9% budget deficit-to-GDP ratio which is expected to increase in 2010 to 7.5% matching Japan’s at 7.5% but paling in comparison with the U.S.’s deficit-to-GDP of 9.2%! For the record, Canada’s stands at 3.0% and Sweden’s is only 0.8%!

Moreover, when we contemplate the Maastricht Treaty’s limit on gross external debt as a % of GDP, set at 60%, we note that the majority of EU member states fail to comply. Indeed, according to a recent study by the IMF, of the top 20 offenders when it comes to gross external debt to GDP globally, 15 were European Union members with the other 5 including the countries of Japan and the United States.

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According to the Bank for International Settlements the number-one offender globally in 2011 is projected to be Japan at 204% gross debt as a % of GDP followed by Greece and Italy at 130%; the U.S. at 100%; France at 99%; Portugal at 97%; the U.K. at 94%; Ireland at 93%; Germany at 85%; the Netherlands at 82% and Spain at 74%. Interestingly, the U.S. level of 100% is actually greater than all but one of the much ballyhooed countries of Portugal, Ireland, Greece and Spain (the PIGS). On average the EU had a gross debt to GDP ratio of only 72.6% in 2009 (albeit up from only 61.5% in 2008) but this is expected to reach 83.7% in 2011 (88.2% in the euro area) as compared to 41% for Asia, only 35% for Latin America and just 29% for central Europe.

Economists Reinhart and Rogoff recently published comprehensive new research covering several hundred years of economic history which determined that countries that reached debt levels of 90% of their GDP, rapidly descended into the flames of default hell. Specifically they found that when government debt-to-GDP rise above 90%, it lowers the future potential GDP of that country by more than 1% and locks in a slow-growth, high-unemployment economy. The authors point to history that shows that public debt tends to soar after a financial crisis, rising by an average of 86% in real terms. Defaults by sovereign entities often follow. That being the case, it certainly raises a very red flag as to what we can expect the future to hold for the U.S. and the U.K. let alone Japan, Italy, Ireland and Portugal.

Given that current interest rates are at multigenerational lows, it seems entirely plausible that when interest rates start rising, the burden of higher interest rates on the bonds issued to secure additional borrowed funds, will become virtually unserviceable. If interest rates were to double from their current 3% levels on 10 year maturing bonds or double from the current 5% on 30 year bonds, most of these nations would very quickly reach the brink of default.

What are the Common Characteristics of Debt Default Candidates?
Many countries are advanced first world economies with high standards of living. Most share political traditions and values whereby the welfare state ensures high living standards and guarantees protection and security against most of life’s challenges. Such cradle to grave security requires ever higher levels of savings and investments which result in wealth generation and serve as a growing tax base sufficient to deliver on promises of current and future benefits, especially with the universal demographic of rapidly aging populations.

Virtually all countries subject to concerns about default, however, show shortfalls in economic growth resulting in anaemic tax revenues requiring more credit and borrowing in order to compensate. Now that credit is either tightening or isn’t available and interest rates are rising again, this game of spend and borrow is about to end.

Can Debt Default be Avoided?
Remember the alarm we experienced less than 2 years ago when the largest investment banks seemed to be taking the entire world into a financial abyss? More importantly, remember how it was ‘resolved?’ Over US $700 Billion was allocated immediately by the U.S. Congress to the Treasury Secretary for whatever mitigation measures were thought necessary. The Federal Reserve Board followed with many other exceedingly inventive measures costing US $Trillions of borrowed taxpayer dollars designed to lubricate creaky financial joints. That was government bailing out private institutions in the financial sector, but what happens when governments themselves require emergency financial assistance?

Greece represents only 2.5% of the Euro club GDP economy, yet it took weeks to arrange US $140 Billion of assistance. What happens when countries with much larger economies and needs ask for assistance? The International Monetary Fund is making itself visible, but after the recent levy on member nations, they have only managed to bring their kitty from US $50 to $500 Billion. Spain, Italy or the UK could mop that amount up in short order. Then what? Financially broken nations will be funding other financially broken nations. Does that seem like a workable plan? What happens when the banks which are creditors of these nations line up for assistance again, as they did in late 2008? Who bails them out this time when their own governments are broke?

A cynic might even suggest that sovereign debt bailouts are not primarily designed to assist nations nearing default, rather it allows them to pay their obligations to their foreign bank creditors which hold the bonds of the nations nearing default. In other words, collective efforts from the likes of the French, German, British, Spanish governments and others recently, was merely an elaborate ruse to keep their own banks solvent from the impending default of debtor nations.

The staid and highly regarded Bank of International Settlements based in Switzerland recently issued a sobering report in which it stated the need for “drastic measures … to check the rapid growth of current and future liabilities and reduce the adverse consequences of long term growth (of debt) and monetary instability.” It went on to note that there is currently over US $600 Trillion of global financial Derivatives Debt … which is 10X annual global GDP.

Can sovereign debt default be avoided? Unfortunately, it doesn’t look like that is in the cards.

Where Should You Invest in Times Such As These?
Precious metals are ‘Real Money’ which will be your safe haven during the very financially troubled and volatile period ahead and shield you from the rampant inflation and currency devaluations that are on the horizon.

As such, I believe that investments in gold and silver in the form of bullion or mining company shares, complemented by investments in other commodities such as select base metals, oil and gas and agricultural grains, will give you peace of mind.

*http://www.munknee.com/2010/11/sovereign-debt-defaults-social-unrest-much-higher-gold-and-silver-prices/

The most important thing you need to know is that silver is the single best investment for the next decade. In the opinion of the National Inflation Association (NIA) investing in silver is the only sure way to tremendously increase one’s purchasing power over the next ten years. Words: 865

So says the National Inflation Association (www.inflation.us) in an article* which Lorimer Wilson, editor of www.munKNEE.com, has reformatted below for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) The NIA goes on to say:

Throughout world history, only ten times more silver has been mined than gold. If you go back about 1,000 years ago between the years 1000 and 1250, gold was worth ten times more than silver worldwide. From year 1250 to 1792, the gold to silver ratio slowly increased from 10 to 15 and the Coinage Act of 1792 officially defined a gold to silver ratio of 15. The ratio remained at 15 until forty-two years later when the ratio was increased in 1834 to 16, where it remained until silver was demonetized in 1873.

The gold to silver ratio remained between 10 and 16 for 873 years! It is only over the past 100 years that the gold to silver ratio has averaged 50. History will look back at the artificially high gold to silver ratio of the past century as an anomaly, caused by the dollar bubble and the world being deceived into believing that fiat currencies are real money, when in fact they’re all an illusion. This fiat currency experiment will end badly in a currency crisis. The wealthiest people will be those who bought silver today and were smart enough to research and pick the best silver mining stocks.

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While the vast majority of the gold ever produced remains sitting in vaults, 95% of the silver produced has been consumed by industry for thousands of applications in such tiny amounts that most of it will never be recycled and seen on the market again. Nobody knows the exact above-ground supply of silver today, but most likely it is somewhere in the neighborhood of 1 billion ounces. That’s a total worldwide market value of only $17.4 billion, when the world has over $7 trillion in foreign currency reserves, mostly in fiat currencies that they will need to diversify out of due to rampant inflation.

Besides the fact that the world has been ignoring the monetary value of silver, silver prices are artificially low due to a large concentrated naked short position. It’s not a coincidence that the day silver reached its multi-decade high of over $21 per ounce in March of 2008, was the same day Bear Stearns failed. Bear Stearns was a holder of a massive short position in silver. In our opinion, this was likely a naked short position because there is nobody in the world who owns such a large amount of silver for Bear Stearns to have borrowed.

The reason why we believe the Federal Reserve was so eager to orchestrate a bailout of Bear Stearns, is because Bear Stearns was on the verge of being forced to cover their silver short position. Because the silver market is so small and tightly held, if Bear Stearns was forced to cover their short position, silver prices could have potentially risen to $50 per ounce or higher overnight. The world would have seen how economically unstable our country is and confidence in the U.S. dollar would have rapidly deteriorated.

JP Morgan still holds the silver short position they inherited from Bear Stearns. The concentrated naked short position in silver today is the largest short position in the history of all commodities, as a percentage of its market size. Eventually, JP Morgan will have to cover this short position or it could jeopardize their existence.

The best evidence that the short position in silver is naked and not backed by real silver, is the differential between what silver trades for on the Comex and what real people are willing to pay for physical silver on eBay. Every hour on eBay, there are dozens of one ounce silver coins selling for approximately $25. That’s about a 43% premium over the current spot price of silver. With so much demand for physical silver, we doubt the silver shorts in the paper market will be able to manipulate prices downward for much longer. A major short squeeze could be right around the corner and silver could take off in a way that shocks even those who are most bullish.”

The fiat currency experiment will end badly in a currency crisis. The wealthiest people will be those who bought silver today and were smart enough to research and pick the best silver mining stocks.

*http://inflation.us/silverbestinvestment.html

Editor’s Note:

• The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
• Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.
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We are staring at a startling increase in the price of gold and precious metals mining stocks. Gold will reach mind- boggling levels because the actions of our political leaders and their academic and credentialed enablers are virtually guaranteeing it with their current actions. Words: 996

So says Arnold Bock (www.FinancialArticleSummariesToday.com) in an article edited by Lorimer Wilson, editor of www.munKNEE.com  (It’s all about Money!), for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.  Bock goes on to say:

1. Currency Traders Strengthening Price of Gold
The US dollar has and continues to be pummelled by currency traders because they see the US Treasury and FED attempting to deliberately devalue the dollar in response to politicians who think that spending money the country doesn’t have on programs it doesn’t need is the answer to the continuing economic malaise. Setting interest rates at near zero percent obviously exacerbates the dollar problem.

2. Carry Trade Supporting Price of Gold
The dollar has now replaced the Japanese Yen as the favoured currency of the carry trade. Borrowing US dollars at nominal interest rates is the hedge fund manager’s most obvious go-to strategy. Currency traders will be most reluctant to allow a sudden rise in the US dollar to cut the legs from beneath the carry trade of which they are participants. Consequently, there is little reason to think a rise in the US dollar will interfere with the consistent and persistent rise in the price of gold.

3. Supply and Demand Ratio Increasing Price of Gold
The limited supply of above-ground gold and the fact that mine production has been declining year over year the inevitable consequence is demand exceeding supply resulting in gold being bid to ever higher prices.

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4. Perceived/Actual Loss of Safe-Haven Status for U.S. Dollar Supporting Price of Gold
The US dollar is no longer perceived as the automatic safe haven harbour for concerned investors around the globe. While this statement cannot be made definitively, the fact is we are already a long distance from the fall of 2008 when global investors reflexively flocked to the US dollar as a safe haven in the face of the global financial turmoil.

5. Increased U.S. Budget Debts Strenthening Price of Gold
The actions of the US administration and Congress place it on an unprecedented spending binge organized by the Treasury and FED which dishes out vast quantities of new digital dollars designed to mop up the flood of new and maturing debt. This revolting process is causing foreign central banks to rapidly lose their appetite for US Treasury bonds. The expanded FED balance sheet coupled with monetizing debt inherent in quantitative easing is the boogeyman of international finance.

6. Increased Investment Demand Maintaining Price of Gold
Gold is the only safe haven refuge of undisputed value and that is why many foreign central banks are quietly and actively accumulating it. Investment buying, especially by the big money players as represented by central banks, sovereign wealth funds and leveraged hedge funds inevitably spring into the purchase mode whenever price weakens, even modestly. They provide a floor price for the metal on its inexorable trek upward. You and I can invest with confidence knowing that major pullbacks almost certainly will not happen and that whatever pullbacks do occur will be purely a very temporary, brief and shallow phenomenon.

How High Will Precious Metals Equities and Gold Go?
My sense is that it will be in orders of magnitude far greater than most analysts allow themselves to state or believe. We frequently see price projections of 20 or 50 percent higher than today. Some even allow themselves to suggest that gold will double in price before it has reached its cycle high. We even see a rare analyst allow himself to speculate that gold prices may find and end at the $3,000 an ounce level. Of course a few discredited gold bugs suggest numbers even greater.

Why Am I So Optimistic About the Eventual Price of Gold?
It is because an affinity for and an understanding of the political mindset causes me to understand what decision makers will do…and why. Because a politician follows the political calendar, s/he only concerns himself/herself with the time horizon leading to the next election. Anything requiring decisions beyond the date of the next election will be the responsibility of whoever is on the next watch so major and difficult, but necessary, decisions are inevitably deferred. In their place spending money gives the appearance of concern and of doing something to fix the apparent problem. More cynical observers would characterize these actions by the political class and their senior bureaucratic minions as buying time hoping that something positive might magically emerge. Those who are super cynical would even conclude give-away programs are designed simply to bribe the voters in order to curry goodwill for another term at the levers of power.

There is no discipline or inclination to do anything of real value to fix the core economic and financial problems. That being the case, new programs, more spending stimulus and money creation will always be the order of the day. Hence the U. S. dollar will devalue and investors will find gold as their best safe-haven refuge.

The dollar will devalue because massive dilution caused by incessant money creation allows future obligations to become more manageable – for government – because it is the only way that it can meet its future obligations for employee pensions, accumulated debt, medicare and social security.

A nominal dollar which buys much less in the future than it does today is still a dollar. Unfortunately the holders or recipients of those devalued pieces of paper will find they are essentially fraudulent promises.

The above realities make gold the closest thing to a sure-bet investment. They are also the reasons why gold will go much higher than most of us allow ourselves to contemplate. Buckle your seatbelts and enjoy the ride ahead!

Editor’s Note:

• Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above

Why should you invest in the precious metals sector? How much of your investment dollars should you allocate to precious metals? Should it be invested in bullion, ETFs, mutual funds, individual mining/royalty stocks or warrants? Words: 1407

In further edited excerpts from the original article* Jeff Nielson (www.BullionBullsCanada.com) goes on to say:

Use the Gold:Silver Ratio to Determine your Mix
For those of you who would like a very simple means of allocating your precious metals dollars let the gold/silver ratio dictate where your dollars go by purchasing silver related investments in a percentage equal to the current ratio. With the current ratio ranging somewhere between 60:1 and 70:1, this would dictate putting 60% to 70% of new dollars into silver/silver mining stocks, and the remaining 30-40% into gold/gold mining stocks.

The next decision to make is in what form of precious metals holdings you should invest i.e. bullion, ETFs, mutual funds, individual mining stocks (and either producers, developmental or exploration), royalty stream companies or the warrants associated with each.

ETFs
For those who are adamant about using bullion-ETF’s rather than holding the “physical” metal directly, you must do your homework. Examine the prospectus carefully, and automatically shun any fund which does not hold/store all of its own bullion. Keep in mind that the “custodians” of the vast majority of ETF “bullion” are the same bullion-banks who are currently holding the largest short positions in gold and silver in history. Do you really think these bankers want to help small, retail investors enter this market (and undermine their massive “short” positions)?

Physical Bullion
Assuming investors allocate 100% of their precious metals dollars in real bullion or precious metals mining companies, the percentage to assign to those two categories is partially a function of risk-tolerance and partly an issue of time-horizon.

I can certainly understand after the events of 2008 that many investors are much more concerned with maximizing the safety of their investments, rather than simply seeking to maximize profits. I would not fault any investor for choosing to invest all of their precious metals capital into bullion. This is especially true for investors only wishing to focus a small part of their portfolio into this sector. For more elderly investors with a short investment horizon, it would also be prudent to focus on bullion, itself.

Precious Metals Mining Company Stock
For those investors who are wishing to invest 20%, or 25% (or even a greater percentage) into precious metals, I would strongly urge investors to put at least ¼ of those dollars into the stocks of quality precious metals miners. Even in the event of a complete breakdown in the global monetary system (which remains a distinct possibility), the worst-case scenario for holders of these equities is that they could become completely illiquid for an indefinite period.

However, with gold and silver as the best “stores of value” of any asset-class, clearly the companies that produce these hard assets would be favored above any other class of equity – and would thus be first to regain their value as markets returned to normal.

For more aggressive investors, or those with a longer investment horizon, I would suggest that at least 50% of their precious metals dollars be invested in the miners – since they will always outperform bullion over the course of any bull market in precious metals. As I have detailed previously, it is the “junior” miners (and especially junior producers) who provide the best risk/reward profiles amongst the mining companies.

Trading
Of course, placing your investments in this sector is literally only half of the task of managing your precious metals portfolio. Regular profit-taking is an essential part of any long-term investment strategy, so deciding how/when to take profits is a critical determinant in the long-term performance of your investments. As a firm believer in the KISS principle (“keep it simple, stupid”), again I would suggest a very basic strategy: do not sell any of your bullion holdings.

Given that the mining companies offer superior performance to bullion, itself, trading and profit-taking exclusively through buying and selling these shares provides ample opportunities to lock-in gains – with the greater volatility of the mining shares giving investors the best opportunities to re-invest their profits on the inevitable dips which occur in even the strongest sectors.

As for when to take profits, in this case precious metals are no different than any other asset class. Many investors strongly favor selling half their positions on a “double” (a 100% gain), so that your remaining investment represents “free shares” – already fully paid-for through profit-taking. Personally, I don’t like to be that rigid with my own buying and selling.

With my favorite holdings, I rarely sell more than ¼ at any time. On the other hand, with companies which I don’t regard quite as highly, I’m quite happy to sell 100% on any short-term spike – as there are no shortage of quality, under-valued companies to pick from. For those who are investing in the junior miners, do not allow yourself to “fall in love” with any of these companies.

Diversification
Seeing some of the spectacular gains which these companies have achieved just in this current rally, the temptation for novices to this sector is to look for a “home run” – and put most/all of their precious metals capital into one or two companies which they see as “can’t miss” prospects. Never forget that there is always risk with these companies, no matter how competent or conservative is the management team.

Accidents occur, governments change, and there are always the dreaded “Acts of God”. You must distribute your dollars into a basket of these companies. As I suggested earlier, for those only wanting to put a small portion of their capital into this sector, you are much better off to stick with buying bullion, rather than placing a “bet” on just one or two mining companies.

I personally have more than ¾ of my own portfolio concentrated in this sector – with that ratio having risen substantially due to the outperformance of this sector. I am fully conscious of the conventional wisdom of “diversifying” into many sectors/asset-classes under normal conditions, however, “this time it is different”.

This Time is Different
The last forty years is the first time in history that the entire, global financial system has been completely detached from a gold-standard. In every individual instance of purely “fiat” currencies (i.e. money backed by nothing), this banker-driven adventure has ended badly. Now, for the first time, the current system is facing the imminent risk of collapse.

As is always the case, the cause of this instability is the grossly excessive (and extremely unstable) mountains of debt (created by the bankers), combined with recklessly “easy” monetary policies (also courtesy of the bankers) which are fueling a rapid expansion of these mountains of debt. Unless an investor truly believes that you can “put out a fire with gasoline”, there is only one way this recklessness can end.

This doesn’t mean that everyone should put 100% of their investments into precious metals (or even close to it). What it does mean is that investors must be focused first and foremost on protecting their wealth – and only once that is accomplished do we have the luxury of seeking to maximize returns.

The precious metals sector is not the only place for people to make their investments, it’s simply the best sector. No other category of investment offers the combination of wealth preservation with superior up-side, investment potential. However, this does not mean that those investing in this sector can afford to be lazy or complacent.

The generational shifts taking place in our societies, economies, and markets means that we will see unprecedented volatility – and no shortage of “shocks” to markets. Because there are so many major stresses at work in the global economy (mostly derived from excessive debt/leverage), there are a near-infinite number of possible calamities ahead.

Focusing a significant portion of one’s portfolio into the precious metals sector provides a realistic strategy for small investors to protect themselves – versus the option of leaping from sector-to-sector as various crises unfold in the years ahead. As with all investment cycles, those who engage in such preparation first will be amongst those who benefit most from this strategy.

*http://www.gold-eagle.com/editorials_08/nielson120109.html

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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