Monday, March 19, 2007

Precious Metals Bargain Hunting

We’ve had a rocky few weeks but I’m convinced that bottom has been hit for this year and we are on the way back up. My belief is that Silver and Gold will begin to reflect their inherent strength despite the over all market condition. Our recent drops have been caused by funds liquidating to cover other paper losses, these were weak hands and flushing them out of the market will in the long run makes the metals market more stable for the next run up. In my little circle of metal owners, nobody has panicked or seems on the verge of dumping their physical positions. Staying the course is the rational thing to do as there is no data showing the U.S. dollar is in better shape; there is however data (U.S. gov) that says Consumer inflation is rising at about 2.2% and more accurate data (Shadowstats) showing U.S. consumer inflation hovering about 10%.

Inflation is good for metals as they are a physical asset that will appreciate with inflation while dollars loose their value during inflation. The shaky stock market and housing market cannot withstand the higher interest rates required to check inflation leaving the Fed in a serious predicament. To raise rates will kill the domestic economy; to lower rates will fan inflation, weaken the carry trade and the U.S. ability to borrow, feed its gluttony all while weakening the dollar making creditors less than happy.

The supply/demand situation for silver is still the same and no big move away from deficit usage is expected as far out as the end of the decade. Gold supply from South Africa is way down; Zimbabwe’s entire mining industry has almost shut down; Central Banks sales are expected to decline in Europe while other countries are increasing gold reserves. Support from the IMF for GATA’s position on gold price manipulation and the IMF call for more honest and transparent accounting of Gold loans, leases etc will be nothing but bullish for the price of Gold.

All these factors make me more than content sitting on my physical position knowing that the reasons I bought in the first place have not changed.

In Silver: I still expect strong long term price growth with a likely shortage and mega price spike.

In Gold: I expect an honest accounting of Central Bank gold will shrink the world’s real supply and raise prices regardless of the U.S. financial situation.

In Silver and Gold There is a reasonable potential for the monetization of metals stemming from some form of U.S. fiscal crisis which would result in massive spikes for both Silver and Gold.

PM Stocks

I’ve said before that physical silver is safer than paper products, this is still true. However, once you have attained your goal for a base physical position there is great potential for generating wealth from the leverage inherent in precious metals stocks, despite the risk. My methodology was to acquire a bare minimum physical position in my case weighted 10% gold, 10% junk silver, 10% 1oz silver rounds and maples, 70% large silver bars. Once I had acquired my target number of ounces I began splitting any new investment money 50/50 between mining stocks and a larger physical position. This allows me to grow my physical position to maintain a fixed percentage vs. my net worth for safety sake making me feel better about taking on the added stock risk as my portfolio grows.

The main point for my writing today is the apparent disconnect between bullion prices and the price of Silver and Gold mining shares. Before the big melt down two weeks ago I found the stocks of some producing mines and certainly most juniors were either not keeping up with bullion prices or sliding in the opposite direction without any news justifying the drop in share prices. Some stocks would even announce results I thought were favourable yet the stocks still headed south, I don’t get it. When the big blow off came, many of the stocks I own or at least follow took a complete nose dive way out of proportion to the price drop in bullion.

While I feel this recent run down in prices has once again made physical bullion a good buy, the unbalanced drop in many precious metals stocks has created some great buys. I picked a couple of my favourite stocks and increased my meagre little positions as much as I could. People will eventually catch on that Gold and Silver mines don’t just produce a commodity they produce real, honest money distinct from the constantly devaluing paper currencies of the world. The world wide money supply is growing at more than 10% per year debasing paper money and making metals with their 1.5 % supply increase year over year, even more valuable.

I’m not going to flog or pump any particular stock, I’m not qualified and there are already too many unqualified voices doing so. My rational in picking stocks has yet to be proven particularly good or bad but is as follows.

I don’t usually (with 2 exceptions) buy stocks in South America, Asia, or Africa. It’s not that they don’t have good resources and cheap labour but they do carry various political risks ranging from, Government seizure and Nationalization to civil war. There are enough good viable juniors in Canada, U.S, Australia, and even Mexico that I can’t follow let alone purchase all the ones that sound like possible producers and 10 bangers. Keeping up on the domestic news of dozens of countries is impossible for a part time investor, so I suggest pick your markets, learn about them then look for good choices in that region. The reverse is finding a couple of miners you like in one region and then research the political situation before buying.

Personally I try to avoid as much political risk as possible but it is impossible to avoid it entirely; you may be more willing to accept high risk than I.

I like Mexico for reasonable labour cost, good resource base, qualified experts, and a pro mining stance by government, there is some political risk however.

I like Canada for stability, huge untapped resources, a reasonable tolerance for the mining industry, and especially in Quebec with a great tax structure for exploration and the mothballing mines during periods of low prices.

The U.S. has many great untapped resources but many states are a bitch to get permits in. You have to go state by state. Mine shut downs usually invite a visit from the EPA and huge clean up costs.

Australia has great resources, lower P/Es than many stocks trading in North America but generally trade on their own exchange making it harder for part time investors to follow and trade.

Juniors have a greater potential and a greater risk than senior mining companies; while this should not dissuade you from dabbling, don’t put all your eggs or even more than 5% of your eggs in one basket. Another consideration is the kind of mines you invest in, if you are trying to play a precious metals position do not buy base metal miners with gold and silver as a by product, stick to specialists.

Bargain hunt while you can.


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