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22 June 2024

Jump on the bullion bandwagon

By Peter Cooper


With gold comfortably topping $1,000 an ounce and silver above $21 it looks as though higher precious metal prices are now firmly on the agenda.

To match previous inflation-adjusted highs gold needs to be more than $2,000 and ounce and silver $100. But buy the smaller gold and silver stocks for maximum capital gain.

Gold is a proxy for the health of the global financial system reeling under a credit crisis and falling asset prices. At the same time incredibly lose monetary policy is creating inflation in all commodity prices, mostly in energy, food and precious metals.

The injection of hundreds and perhaps thousands of billions of dollars into the global economy is necessary to prevent a systemic collapse. Nobody wants to see that. But the side effect of these monetary injections is that monetary inflation is snowballing and that means the US dollar is devaluing fast.

Conversely monetary assets with a fixed supply are rising just as sharply in value against the US dollar. In short, you can print dollars but you can not print gold and silver, and you can consider silver as poor man’s gold in this market, although in the past it has often outperformed gold in precious metal bull markets.

For investors who find the value of their dollar-denominated deposits and shares falling by the day and interest rates down below inflation, the attraction of gold and silver is naturally increasing as a store of real value.

Precious metal holdings pay no interest but they certainly do hedge against a declining US dollar, and move exactly in the opposite direction.

Indeed, gold and silver are an insurance policy against exactly the sort of financial storm we are living through at present.

And who really know how bad this will get as the true length and depth of the US recession becomes apparent? Wall Street could well crash in these circumstances, so do you want to keep your money in stocks?

Actually you should be looking at gold and silver stocks, particularly the smaller producers and junior exploration companies. Hedge funds have recently been buying the bigger producers but shorting the smaller companies.

Gold bugs point out that the smaller gold and silver shares and exploration companies have actually never been cheaper in history when compared to the price of gold and silver.

This anomaly just has to be corrected as the price of precious metals accelerates upwards. It is pretty obvious why.

Take a small silver producer in say Mexico: as the price of silver goes up its operating costs will stay the same so the additional price feeds back into profits, which are therefore rising faster than the price of the metal itself.

You also have to ask yourself about the value of the silver left in the ground, which is barely considered in pricing the shares right now. Or what about reconsidering the value of a junior gold exploration company?
Hedge funds have been shorting them because these companies are spending money to find gold and seldom have any profits. However, what junior gold exploration companies do have are “claims” or rights to explore for gold in a certain number of areas likely or known to hold future reserves.

Again the current market is forgetting that these claims do have a value, and a value that will rise exponentially with the increase in the price of gold and silver. Claims which could be picked up for tens of thousands of dollars a few years ago are now worth millions. But you would not think so from the share prices put on the junior exploration sector today.
Yet here in lies opportunity for those investors who now wish that they had jumped on the bullion bandwagon a few years ago. There is still time to buy into smaller gold and silver stocks and especially the junior exploration companies. Many are trading for cents when they will soon be worth several dollars.