The leverage of gold mining shares vis-a-vis the price performance of gold bullion plus the added leverage of the warrants of such companies vis-a-vis the performance of their associated stock supports the possibility of amazing gains for the right warrants of the right junior miners in the years ahead. Words: 1106
In further edited excerpts from the original article* Lorimer Wilson goes on to say:
The only bull market we can compare the current eight year rise in the price of gold to is the ten year rise in the 1970s. The Aden sisters, Mary Anne and Pamela, have extrapolated the future price of gold using the same growth rate as in the ‘70s and applied it to the current bull market.
They have determined that if one were to compare the bull market’s second rise from 1976 to 1980 to the current bull market we could see gold eventually reach $4,100 during the next run-up.
They further report that if one were to take the entire bull market gain in the 1970s at 2,300% and extrapolate it to today’s situation then $5,800 would be the equivalent upside target.
The Adens conclude that “with today’s bull market being far more global in scope compared to the 1970s, we could eventually see these much higher gold price targets realized. This is especially so factoring in that gold’s peak in 1980 at $850 is the equivalent of about $2,400 in current dollars. Gold has not even approached that level yet and the situation is far more serious now than it was then.”
What about silver? “Silver is more volatile than gold. It fell more than gold in 2008, and it rose more than gold in 2009. This makes sense because silver is both a precious and a base metal.
To foresee silver’s potential compared to gold, look to copper as a guide. Copper is a good barometer because it rises during times of global economic growth. That is, when you see both gold and copper rising together then silver will most likely be stronger than gold… If global growth remains on a positive track, we will continue to see silver outperform gold.” Indeed, such is holding true today.
The Advantage of Owning Precious Metals Mining/Royalty Stocks instead of the Bullion Itself: Leverage
If gold, for example, were to escalate considerably in price (i.e. to $2,000, $3,000, or even more) in the next few years it would have a significantly positive impact on the profitability of the companies who mine it and the royalty companies that buy it from marginal producers.
For example, with gold priced at $1,000/oz., and the cost of production at perhaps $600/oz. the gross profit margin of gold mining companies would be 40.0%. If 2 years from now, however, gold were to increase to $2,000 and the cost of production were to increase by only 20% to $720/oz. then the mining companies’ gross profit margins would have gone up from $400/oz. to $1280/oz. or 220%!
That’s called leverage and historically, in a rising market, the ratio for gold and silver mining/royalty shares vs. physical gold ranges from about 2.5:1 for large-cap gold and silver mining/royalty companies on average to as much as 5:1 for smaller cap gold and silver mining/royalty companies, on average, and even 10:1 in exceptional circumstances for certain truly outstanding performers.
All the more reason to do your due diligence to find and invest in those gold and silver mining and/or royalty companies with the right mix of capable management, strong financing, major resources and geographically and politically well-located properties to reap the major benefits a surge in the future price of gold and silver will present.
The Added Advantage of Owning the Right Warrants of the Right Precious Metals Mining/Royalty Companies: Leverage-on-Leverage
For those who buy the right long-term warrants associated with the right gold and silver mining and/or royalty companies at today’s still undervalued prices, your eventual returns would likely be 1.5 to 3 times greater on average than had you invested in their associated stocks.
For companies whose warrant prices go through the roof with extraordinary gains, in and of themselves, or from extremely depressed values, as experienced in 2008, that ratio could represent a ratio as high as 10 times greater than having invested in the metal itself.
Such over-and-above gains are referred to as leverage-on-leverage or doubling-up on the leverage factor. The catch is, however, that you have to know whether or not the warrant associated with the stock you are interested in buying is the right warrant i.e. has a leverage/time value sufficiently high enough to justify its purchase given the anticipated appreciation in the price of the associated stock.
If gold were, in fact, to increase from its current $1050 or so to $5,800 that would represent an increase of 452%. The current leverage exhibited by the component stocks of the HUI is 2.5:1 vis-à-vis gold. Were that leverage applied to future gold and silver mining/royalty company equity prices it would extrapolate into an average price increase of 1130% for such large-cap stocks.
Applying the current YTD performance of the Gold and Silver Warrants Index (GSWI), which is out-performing gold bullion by a 3.9:1 margin, one could anticipate an average increase of 1,760% (452×3.9) in the average stock price of gold and silver mining/royalty companies with warrants.
The component warrants in the GSWI have out-performed the price of gold by a margin of 5.9 to 1 YTD which would suggest that the average warrant could expect to increase by approximately 2,668% (452×5.9) were gold to escalate to $5800 – and that is on average!
Indeed, if the trend to date from their 52-week lows were to continue the projected 452% increase in gold would extrapolate into a 1989% (452×4.4) increase in the price of the average precious metals mining/royalty stock and an amazing 4,113% (452×9.1) in the price of the average warrant!
Certain junior mining/royalty companies will hit the mother-lode and experience dramatically greater increases in their stock prices than the average and the leverage-on-leverage benefit of warrants should cause some of the right warrants of the right mining/royalty companies to experience 5,000% or more.
So “What does Adens’ $5,800 Gold Projection Mean for Gold and Silver’s Junior Equities?” In some cases it is going to mean higher prices – much, much higher!
– 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.