Grab Metals’ Advances with These 2 ETFs

09/14/2011 7:00 am EST

Focus: MARKETS

Investors can capitalize on metal-sector strength with a couple of Canada-based ETFs, as Mo Dawoud, founder of Wall Street for Main Street, tells MoneyShow.com’s Kate Stalter in today’s interview. He also recommends silver-mining financier Silver Wheaton (SLW) and some large-cap blue chips.

Kate Stalter: Today, we are speaking with Mo Dawoud, a founder of Wall Street for Main Street, and Mo, you recently authored a report on precious metals called “Treasure Hunting for Precious Metal Stocks.” So tell our listeners what are a few things that people need to know about the precious metals these days.

Mo Dawoud: Well, one of the first things they should look at is the big picture, which is the macroeconomic environment that we are living in now. If you look at the monetary and fiscal policy that this country has taken on for the past couple of years, you would understand why people should have precious metals in their portfolio.

This week, President Obama is introducing a bill to try to get the economy stimulated with $500 billion, and also the Federal Reserve is expecting to announce some form of stimulus to try and get unemployment down and increase inflation, in order to stimulate the economy.

When you have inflation, there is only one sector that usually does well, and that is the precious metals, which is primarily gold and silver. The fundamentals for gold and silver are better than ever today.

I have my portfolio more heavily in silver than gold, because I think silver is more of an undervalued commodity compared to gold, mainly because it has an industrial demand for it. In 2011, there is estimated to be 980 million ounces of silver.

Kate Stalter: Mo, how do you recommend that people get into gold or silver? Through an ETF, through the actual commodity itself, through the mining stocks? What do you advise?

Mo Dawoud: Well, it depends on their risk preference. If you have a high risk tolerance, I recommend taking on the gold and silver stocks, the mining stocks, the royalty stocks.

Stocks like Silver Wheaton (SLW), which is a streaming royalty company that acts like a bank for all the miners. They go to the mine companies and they give them a payment, and in exchange they take their silver at a fixed price for the life of the mine.

That is a very attractive business model that I think every investor should look at, because they are getting their silver before market price...and therefore, their market profit margin is increasing every year, if we go look at the fundamentals of Silver Wheaton.

Kate Stalter: And they also don’t have the physical mining operations themselves, which I imagine is an advantage.

Mo Dawoud: Exactly, that is correct. These royalty companies are not exposed to the operation risk that the mining companies take on, such as bad weather, bad management. They are not exposed to any of that, so that is one of the big advantages that people should consider when they invest in the precious metal industry. I believe every investor who wants to invest in precious metals should have the royalty company as a core position.

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Kate Stalter: Mo, tell us your thoughts on gold, how people should play that trade.

Mo Dawoud: I like gold; gold is money. If you look back in history, if you go back in the early 1900s, the US dollar used to be backed by gold, partially, and before that, it has been used as money as well.

People talk down gold, because they think it’s in a bubble, which is not the case; the fundamentals justify the increase in price. The demand is so great for gold, better than ever.

The Chinese are buying gold for the first time ever, because they are worried about the inflation going on in China, which is around 15%. India is buying more gold than ever—and silver—so the fundamentals for gold are great and one of the ways people can get exposure to that is buying the gold bullion.

If they don’t want to buy the bullion, they can buy the trust funds. Eric Sprott from Canada has a trust fund that people can buy that I recommend. It’s the Sprott Physical Gold Trust (PHYS).

There is another trust fund, the Central Fund of Canada (CEF). This trust fund invests 50% in physical gold and the other 50% in physical silver, to get exposure to both.

Another way is to buy the gold mining companies, which provide great leverage to the price of gold, because of the increasing profit margin that they get and the low cash costs to pull the gold out.

Now, not all mining companies are great, so you have to be careful with due diligence and pick out the ones that have good management, high grade, and is in a good location. I recommend people stay away from locations that have had an unstable political environment.

Kate Stalter: Are there any companies in particular that you believe are worth a look because of their location?

Mo Dawoud: Well one company that I think people should look at is Sandstorm Gold (SNDXF.PK), which is a streaming company. What is good about this company is the CEO for Sandstorm Gold used to be the CFO for Silver Wheaton. What he did, he took the business model from Silver Wheaton and applied it to the gold-mining industry.

So the management is pretty much from the same field of Silver Wheaton, and I believe Sandstorm Gold is going to be one of the best plays in the gold boom for the next five to six years.

If people want to buy Sandstorm Gold on the Canadian Exchange it is SSL.V in Canada, and in the US it is SNDXF.PK. It is over-the-counter.

Kate Stalter: Let me ask you a little bit about equities, because I know you cover those as well. What are you seeing, in terms of these volatile market conditions, that you believe investors might want to take a look at, either in terms of research or buying?

Mo Dawoud: When they look at the equity market now, I think people should stay away from the financial sector. If you look at the trend right now, Bank of America (BAC) just announced that they are going to cut 30,000 jobs from their payroll and also cut I believe $200 billion out of their financial statement.

This is not the only bank with problems; there are other banks with the same problem. These banks have been bailed out, and they are still having trouble with standing tall, so that tells you a lot about how unstable the country is.

I believe people who are investing in the financial sector should stay away from that, as well as the retail sector because spending hasn’t gone up that much since the country went into recession, mainly because unemployment is still so high.

I go by the real unemployment, so the real unemployment is around 23%. So if unemployment stays high, I don’t see how spending is going to go up. So I assume people should stay away from the retail industry.

Kate Stalter: Anything that maybe is showing a little bit more potential at this time?

Mo Dawoud: I believe people should, if they have any exposure to bonds, they should think about moving their money from bonds to the blue-chip dividend stocks. I believe they are very attractive now, if you look at the dividend yield and the bond yield, percentage wise.

Many of these stocks have higher yields than the bond, so I think people should look at companies like Chevron (CVX) or Johnson & Johnson (JNJ) or Procter & Gamble (PG).

People are going to need this stuff no matter how bad the economy gets; they are always going to need energy, they are always going to need medicine and they are always going to need stuff for personal hygiene. They are always going to need this stuff. So people should look at these types of companies right now in this type of environment.

Kate Stalter: Right, and certainly the dividends on those can be compelling in this type of market.

Mo Dawoud: Absolutely, especially companies like Chevron. You get exposure to the commodities and you get a dividend, so it is two-for-one there. 

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