By Liu-Yue (Louie) Lam, Co-Founder and Chief Investment Strategist, Oxstones Investment Club, 4/14/12
Some of you have inquired whether you have already missed the boat for investing in precious metals. The answer is No! The recent correction in gold and silver provides a very attractive entry point. Right now it appears precious metals are out of favor at least temporarily. However, given that the global issues revolving around sovereign debt and insolvency have not been resolved, we can expect that eventually another round of quantitative easing and currency debasing will occur again in the near future. In the developed world, many countries have used up all available public debt capacity; there will no longer be any fiscal stimulus available for the next crisis. With persistently high unemployment and increasing social unrest, there are no political will to tackle the structural issues needed to truly rehab economies. You can therefore expect central banks around the world to come to the rescue once again by continuing to print money because there are simply no other less painful alternatives.
In the short run, stocks behave like a popularity contest, but in the long run it is a weighing machine. Make sure to take advantage of the gifts Mr. Market temporarily provides you. I don’t invest directly in gold because as Warren Buffett pointed out many times – gold does not generate income. However, there are currently some good opportunities to buy gold that will also pay you income by investing in high quality blue-chip gold companies. If you believe the dollar will continue to decline in the future; a great way to play the dollar decline as well as participate in gold appreciation would be to invest in U.S. based gold companies. Newmont Mining is one of my favorite U.S. blue-chip gold companies as a leverage play on continued gold price appreciation as well as dollar decline. NEM also pays you a nice dividend yield of 2.90%. Another favorite blue-chip gold company is the Canadian gold giant – Barrick Gold. ABX also has a dividend yield of 1.5%. Other dividend paying Canadian gold companies worth investing in at current prices include Kinross Gold (KGC) and Agnico-Eagle Mines (AEM) with dividend yields of 1.7% and 2.5%. NEM, ABX, KGC, AEM are all currently at or near 52 week lows with limited downside risks. The risk vs. reward is definitely in our favor.
If you believe in the global economic recovery story, but at the same time want to hedge your bets with precious metals, you can get the best of both worlds by investing in silver. Silver is an industrial metal that directly benefits from global economic growth, but is also a precious metal. The current gold to silver ratio is 51-52x. The historical ratio is 16x. If you believe in reversion to mean, then you can expect the gold to silver ratio to move closer to historical ratios in the future. I personally see much more upside potential in silver. My favorite silver bets are in silver companies like Hecla Mining, which also pay a dividend yield of 1.2% and another favorite is Coeur d’Alene Mines. Both HL and CDE currently trades near 52 weeks lows and near or below book value which limits downside risks.
There are also some very attractive special situation stocks which I like a lot. My favorite is Golden Minerals (AUMN) a post-bankruptcy stock play with a low leverage balance sheet and smart institutional ownership. Some of my favorite institutional investors including the natural resource specialist from Canada – Sprott Asset Management are owners. AUMN is a more speculative small cap stock with lower liquidity but downside risks appears limited because it also currently trades near 52 week lows and below book value. I see tremendous upside potential in AUMN the next time silver makes another move higher.
Another interesting price abnormality is currently occurring between gold and platinum. Gold is currently priced higher than platinum which usually does not occur since platinum is actually a rarer metal than gold. After three years of hibernation and frugality among global citizens I think the global automotive industry is set to re-start engines and drive off. Demand for platinum should benefit from global economic growth and the continue creation of new emerging middle class societies across Latin America, Asia, and Middle East which should support the global automotive industry. Impala Platinum Holdings (IMPUY.PK), a South African company is one of the world’s largest platinum miners and provides a direct play on platinum.
I’m an eternal optimist so I don’t believe the world is going to end anytime soon. We will probably have another recession in another year or so from now because it is simply part of the business cycle. However, I am not investing in the total market, but rather in individual companies and sectors. There will always be mini booms and mini busts happening in the market. Therefore for the hard working investors that digs a little deeper and hunts for new ‘Oxstones’ around the world, there will always be opportunities. History has proven that the best time to invest is when there is widespread negativity in the world. With so much unresolved global issues from social unrest in the Middle East, to rouge nations (Iran and North Korea) threatening to blow up the world to sovereign debt bombs (EU nations) waiting to implode the world back into a global recession, there will always be events that can cause investors heart burn. But history has always rewarded the pioneers willing to venture out into uncertainty when no one else will. Just remember uncertainty creates opportunities. So be bold and be brave.
Your Adventurous Entrepreneurial Investor,
Liu-Yue LamABX, AEM, alternative investing, Barrick Gold, big picture, black swans, blue chip gold companies, blue chip silver companies, business cycles, By Liu-Yue (Louie) Lam, CDE, central banks, Chief Investment Strategist, Co-Founder, Coeur d’Alene Mines, commodities, dividend paying mining companies, global automotive industry, global economic recovery, global events, global uncertainty, gold, gold and platinum ratio, gold stocks, gold to silver ratio, Golden Minerals (AUMN), government fiscal policies, hard assets, Hecla Mining, HL, Impala Platinum Holdings (IMPUY.PK), industrial metals, investment opportunities, KGC, Kinross Gold, Kinross Gold (KGC) and Agnico-Eagle Mines (AEM), Liu-Yue Lam, macroeconomics, market corrections, mini-booms, mini-busts, monetary policies, mr. market, NEM, Newmont Mining, Oxstone Capital Management, Oxstone Investment Commentary, Oxstones Food for Thought, Oxstones Food for Thought – April 2012 - A Big Thank You to Mr. Market for Precious Metal Opportunities!, oxstones investment club, platinium, post-bankruptcy stock play, precious metals, quantitative easing and currency debasing, recessions, silver, silver stocks, South African company, sovereign debt and insolvency, special situation stocks, stock analysis, stock market, stock picks