Dangerous Gold ETF Lures Greedy Investors
After a hot start to the year, gold is under heavy selling pressure.
The yellow metal climbed as high as $1,258 per ounce in late February.
But it’s been cratering lately, with the price briefly dipping below $1,225 per ounce.
As you know, I’m the market’s foremost small-cap analyst.
So to play the precious metals market, I recommend buying shares of the world’s best junior miners.
Top-shelf junior mining companies can give you a $3 price pop for every $1 uptick in the price of gold.
Nonetheless, some investors will always try to outsmart the market.
The result, regrettably, is oftentimes fatal.
Case in point: Volume on the Direxion Daily Gold Miners Bull 3X ETF (NUGT) is through the roof.
NUGT is a “triple bull” fund that magnifies the daily movement of the NYSE Arca Gold Miners Index by 300%.
Scoring 3X gains sounds great, doesn’t it?
As long as the miners index heads north, it’s fantastic!
But when the index changes direction, look out.
In addition to the losses being magnified at 3X, such funds also suffer price decay. That is because the ongoing purchase of forward contracts to gain the necessary 3X leverage gets pricey.
So NUGT is presently a bloodbath.
I hope you’re not among the carnage.
Since gold’s mini-correction provides a nice entry point for shares, I asked my senior analyst, Martin Hutchinson, to find the safest company with the biggest upside.
As it turns out, the play here isn’t even a gold miner.
Hutch’s full report is below.
Ahead of the tape,
Investment Director, Wall Street Daily
Question: Martin, last week we dove into the fundamentals behind copper — the foremost base metal and economic bellwether. What do you say this week we look into precious metals? Can you do that for us?
Martin: Absolutely, yes. They’re very interesting.
Question: What are you seeing out there?
Martin: Inflation is ticking up in the U.S. and elsewhere. The consumer price index was up 0.6% in the U.S. last month. And in Europe, German inflation is 2.2% and eurozone inflation in general is up at 2%. So they’re both right up at their target range — and they look like they’re going higher.
The global economy looks to be moving into higher gear. I mean, obviously, the bull market in the U.S. is helping that. The Fed is raising rates slowly in the U.S. But nowhere else in the world’s major countries are central banks raising them at all. And of course, interest rates generally are extremely low. So that combination makes us look closely at precious metals.
Question: Should our readers be looking to increase their exposure to gold?
Martin: I think even more interesting than gold is silver. With silver, there’s a supply/demand imbalance. Silver demand globally has exceeded supply by 5% or 10% in each of the last three years. It was last in balance in 2012, when the average silver price was $31, compared with today’s price of around $19. And so that suggests the price will go a little higher. Mined silver supply was down 3% in 2016, and it’s expected to be down again in 2017 and 2018, because we’ve had relatively low silver prices in the last few years.
Today, silver at $18–19 is barely more than 1/70th of the price of gold. And that ratio is pretty interesting, historically. It’s averaged about $16–20 to 1. It was about 50 to 1 in 2012, so it really is very high at the moment.
And the U.S. Geological Survey estimates that there’s 17.5 times as much silver as gold in the Earth’s crust. So that suggests that in the long run, the ratio should be about 17.5. So if you think gold’s got a pop, silver should have an even bigger pop. It could rise to $30 fairly quickly.
Question: That’s more than a 50% increase from its current levels?
Martin: That’s right, yes. I think there’s a long way to go there. It touched $40 in 2011, so there’s a historical trend for it.
Question: Great, so playing silver, we get the same hedge against the market crash as gold. But it sounds like silver has some better fundamentals in its favor, considering the imbalance you just described. So how do we play it, Hutch?
Martin: As with gold mines, there are a number of silver miners around. It’s just a question of finding one with good fundamentals.
One I particularly like is Fortuna Silver Mines (FSM), which is on the New York Stock Exchange. It’s a silver and gold miner in Mexico and Peru with a big Lindero project in Argentina, with about $900 million in market cap, which is a nice size. And it has the advantage that it’s already producing. I like companies that are making money in what they’re doing, even if they’ve got some expansion.
Mexico and Peru are pretty stable countries. They’re fairly mining-friendly. Mexico, of course, is historically the world’s No. 1 producer of silver. Fortuna forecasts 8.1 million ounces production of silver and 52,400 ounces of gold. All in, that’s up about 10% from 2016 at an all-in sustaining cost of $9.80 per ounce for silver. That’s well below the current price.
Question: That sounds really good, that cost to production. Hutch, what else is bullish going on with the company?
Martin: Well the other thing that’s interesting is that they’ve just done their annual reserve revaluation. That’s 45 million ounces. It was up 28% in 2016. They have raised $75 million in a bought equity deal for development of Lindero, which means the share price has been weakened in the last couple of weeks. So you’re buying it at a good level. And I think overall, with good costs, expanding production and a temporary benefit in the share price, you’ve got something very attractive there.
Question: Great, all right. Thanks for your time today, Hutch.
Martin: Great, good to be with you.
Question: This is Wall Street Daily, signing off.
Senior Analyst, Wall Street Daily