Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
While it is never too late to buy gold one look at the current gold:silver ratio clearly suggests that silver and/or the stocks and warrants of quality gold and silver miners and royalty companies are a MUCH better buy than buying gold at their current prices. Words: 1157
In further edited excerpts from the original article* Jeff Nielson (www.bullionbullscanada.com) goes on to say:
There are two types of investors:
a) One group prefers buying into investments where prices are already rising. Depending on how you choose to characterize such investors (or how long they wait to buy-in), these are either investors who like to “go with the trend” or “jump on the bandwagon”.
b) The second type of investors are much more focused on buying things while they are “cheap” than in looking for already-established trends. These “value” investors typically buy their investments while prices are falling because if they were to try to buy something at its cheapest point they would be doing so until the price of that asset had already established an up-trend.
Many financial advisors fall into the first group, for a couple of reasons:
1. Since they are managing other peoples’ money, they often are more conservative with their buying and selling.
2. If the investment goes sour it’s much easier to justify buying something on the way up than on the way down.
Are You Entering or Adding?
As an investor are you seeking to:
a) enter a market, or
b) add to an existing position.
The reason why the decision to invest will vary between these two categories of investors relates to “opportunity cost”. In this case, the opportunity cost in question is what does an investor stand to lose if he/she does not buy today, the price of the investment continues to rise, and there is never another opportunity to buy at this price? This is the only scenario where the issue of opportunity costs arises because if the investment should go down in price in the future then the “opportunity cost” is zero – and thus a moot question.
In the above scenario, the opportunity cost is different between those investors who already hold some gold, and those who hold none as follows:
a) For those with no gold, the opportunity cost is 100% of the profits they could have realized if they had invested all they wanted to invest in this sector at current prices.
b) For those with existing holdings, their opportunity cost will only be a fraction of that total (depending on what percentage of their maximum holding they have already purchased). This means that from a purely mathematical standpoint the investor who already holds some gold can afford to be more patient and “choosy” about if or when to make their next purchase. Having established that there is a lot more pressure on an investor with zero gold holdings to buy today, does this equate to answering the original question with a simple “yes”? No.
Are There Alternatives to Buying Gold?
Assuming that the investor is looking to purchase gold for the specific virtues of this investment i.e. wealth preservation and protection from significant “shocks” to the economy), and with gold currently setting new (nominal) highs, a second question must be asked: is there an alternative to investing in gold bullion which offers equal or similar virtues? The answer to this question is “yes”.
a) buy a different precious metal
b) buy shares in the producers of this commodity (or other precious metals).
Should You Buy Silver Instead of Gold?
The most-obvious alternative to buying gold bullion today is to buy silver. While silver has actually outperformed gold in this most-recent rally by 2 to 1, silver began its latest run from a position of being extremely under-valued versus gold.
The historic gold:silver price ratio has averaged roughly 15:1 yet today, despite the larger move higher for silver, that ratio is over 60:1. This historically lop-sided ratio exists despite the fact that roughly 90% of the world’s stockpiles of silver have been consumed and with current inventories (the amount of silver available for sale today) also near historic lows. As such, both the price ratio and the supply ratio dramatically favor silver. This offers people buying silver today some “downside insurance” which does not exist if they buy gold today.
Should You Buy Gold and Silver Mining Shares Instead?
The other attractive alternative to buying gold bullion today is to buy into the producers of gold (or silver). There are both powerful short-term and long-term arguments for favoring the miners today over bullion:
1. Many, if not most, precious metals stocks have yet to recover to their 2006 highs when gold was trading below $700/oz and silver was trading at less than $15/oz. Even after the impressive rally which the precious metals mining sector has recently experienced, these companies remain inexpensive versus the price of bullion.
2. Historically, when bullion ultimately reaches some sort of medium- or long-term top, the miners have always greatly outperformed bullion. This is not simply some market idiosyncrasy, but rather an expected behavioral pattern because:
a) a market top implies the peak of greed amongst investors and when greed is at its maximum, this is the time when the leverage offered by the miners will have the greatest appeal to the most investors.
b) with the tiny size of the precious metals sector (just one of the trillions of dollars being thrown around by the U.S. government could buy-up every ounce of gold and silver on the planet – with enough left over to buy most or all of the miners, as well) there simply is not enough bullion in existence to satisfy total demand.
With many investors unable to sate their appetites for this sector through buying bullion directly, they choose instead to buy the best proxy for bullion: the precious metals miners.
What Should an Investor Do?
For investors who have not yet entered this sector, and are worried about “missing the boat”, there is no need to panic and feel that you must buy gold today. Personally, I have no doubt that anyone buying gold at $1000/oz to $1500/oz will look back a couple of years from now and consider that a “cheap” purchase. However, as I have pointed out, investing is also about being able to sleep at night between the time you purchase an investment and the time you sell it.
As of this minute, my suggestion is that buying silver, or buying shares in quality, precious metals miners is more conducive to a good night’s sleep than buying gold at its current price.
*http://www.bullionbullscanada.com/index.php?option=com_content&view=article&id=3936:gold-is-now-the-time-to-buy&catid=48:gold-commentary&Itemid=131
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.
– Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
– Submit a comment. Share your views on the subject with all our readers.
– Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.
Comments
Tom Foolry
Wow, I never would have guessed that you’d want to invest in silver, rather than gold! Lately, I’ve really only heard anything about buying/selling gold. I guess, though, I’ve never really done much research on precious metals, so I think I’ll go out and buy silver!