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“Why I’m Overinvested in Precious Metals This Year”

admin (February 4, 2010)

In short, there are about a dozen reasons to buy metals right now – and plenty of reasons to short everything else. So I’m working with what the market is giving me and padding all our portfolios with a generous helping of gold and silver for 2010.

I’ll tell you why 2010 will be the year for gold and silver in a moment. First, let’s consider the alternatives for investing this year…

  • Foreign Stocks: Yes, I like a couple (including a handful of infrastructure plays that I love). But overall, 2010 will NOT be an exciting year for stocks. We have seen too many months of straight gains with very few corrections. Hence, about 99% of foreign stocks are NOT the place to be.
  • AAA Sovereign Bonds: Again, I can think of one or two I like. But overall, interest rates are just not what they used to be on these foreign bonds. Also, interest rates are heading higher, and you always want to buy foreign bonds when rates are heading lower NOT higher. That way you can get the best rates, and your bond is worth the most. So at this point, not a whole lot of bonds offer any real value.
  • The U.S. Dollar: In general, I’m always telling my American clients to sell the dollar and buy as many foreign currencies as possible for the long-term. Now this year, it’s VERY possible that the dollar could rise temporarily. In fact, a dollar rally has already begun. But long-term, I still feel the dollar is heading lower. So I would use any strong dollar moves to build up your own personal reserves of foreign currencies and precious metals. (After all, it works for the biggest central bankers in the world – why not use the same trick for your own portfolio?)

Again, by a process of elimination, precious metals are definitely the best play for 2010. But that’s just the beginning. The gold and silver story for 2010 goes far beyond that…

Lucky 7: Why Gold & Silver Are Poised to Soar Again

Of course, I am sure you know that gold and silver have been in a bull market for years. As such, it’s not guaranteed that precious metals will continue to rise forever. In fact, I would consider selling some of your positions in early 2011.

But for the next year, there is still plenty of time for new investors plenty to buy now and still profit.

In fact, currently gold prices are at a crossroads. In the last 24 hours, gold has dropped nearly $50. It’s now holding above $1,060. That’s the breaking point. It’s unlikely that gold will drop below $1,060. So in other words, gold just gave you another opportunity to buy.

As my U.S. colleague, Andrew Packer mentioned yesterday, silver prices tend to closely track gold. So any good news for gold will be even better news for silver. Hence, it’s worth your while to buy both for maximum profit potential.

At the same time, there are events playing out around the world that will almost guarantee that gold and silver will break higher this year.

1. Central Banks are net buyers of gold again, which should push it to new highs. Conversely, when central banks are net sellers of gold, the prices will drop to lows (i.e., Britain in 1999).
2. Gold and silver serve as hedges against fiat currencies — so metals are a great play for “quantitative easing” polices and stimulus.
3. Gold and silver can also act as a store of value and stability during periods of deflation.
4. Gold has yet to beat its inflation-adjusted high of about $2,200 in 1980.
5. Silver has yet to beat even its nominal (not adjusted for inflation) high of $50 in 1980.
6. Compared to the return of paper assets since 1980, gold and silver are still significantly undervalued.
7. And as I mentioned, gold prices are holding tight above $1,060 so gold is offering even better value right now.

So now you know the why to buy. Let’s focus on the how to add precious metals for 2010. Now of course, you can buy coins or bullion. Both are excellent choices at this crossroads for metals.

But personally, I would rather buy the two companies that also give me exposure to my favorite currency this year…the Canadian dollar.

My Favorite Gold & Silver Plays This Year

Just like Australia or Russia, Canada’s currency, the Canadian dollar soars or falls based on Canada’s commodity exports. Of course, that includes the country’s generous oil reserves. But Canada also profits from her rich precious metal resources.

So any good news for gold and silver can indirectly reward the Canadian dollar. I’m counting on that extra currency appreciation from my two favorite stock plays this year…

Silver Wheaton (SLW) is the largest and most stable company engaged in pure-play silver operations. It’s key to remember that silver is often produced as a secondary metal to copper and gold, so Silver Wheaton employs purchasing agreements with other metals companies for the silver they recover.

Many of these agreements happened in the early 2000’s before silver’s run-up of over $10.00 per ounce, and consequently Silver Wheaton enjoys a high “‘spread” between what it purchases the silver for and what it sells for. This business model is highly lucrative for investors, and is not for those who expect a traditional ‘pick and shovel’ mining company. In 2009, this monster company ran nearly 16 million ounces of silver and 17,000 ounces of gold, for total production of 17 million silver equivalent ounces.

Goldcorp (GG): While hedging agreements with mining companies for their silver has proven lucrative for Silver Wheaton, for Goldcorp (GG), hedging contracts make little sense, as the company sees higher prices for gold in coming years.

Goldcorp is North America’s lowest-cost gold producer, the best metric to determine the leverage to the price of gold. The company estimated those costs in 2009 at approximately $300 per ounce. That means the company makes $700 for every ounce of gold it sells at $1,000. If gold prices increase 100% to $2,000, the company makes $1700, nearly 242% higher.

Now keep in mind, both of these plays are traded in Canada, so if the Canadian dollar should rise, you get extra currency appreciation from both these plays in addition to straight gains.

Bottom line: Gold and silver still have another year of gains ahead. Be sure you get in early to profit.

Best Regards,
ROBERT VRIJHOF, President and Partner at
Weber, Hartmann, Vrijhof & Partners (WHVP)
Zurich, Switzerland
info@whvp.ch
www.whvp.ch

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