A Better ETF for Metals Investors
01/09/2012 7:00 am EST
The most common silver and gold ETFs may present risks unknown to most investors, says asset manager and analyst Mo Dawoud. He suggests some little-known stocks as well as some blue chips for what he predicts will be a challenging 2012.
Kate Stalter: Today, I'm speaking with Mo Dawoud from Wall Street for Main Street.
Mo, you said to me yesterday in an online exchange that you believe that there is really a lot going on with the macro events; they really could be affecting investor's portfolios in 2012. We certainly did see the macro have a big effect in 2011. What do you believe people need to be aware of going forward?
Mo Dawoud: Well, I believe since the economy has become more globalized the past two decades, whatever happens in the US is affecting Europe, and whatever happens in Europe and the US is affecting China, so people need to have a global outlook on what's going on in the macro economic picture.
In Europe, there's a big euro crisis that dominated much of 2011, starting with Greece. Then the domino effect happened in Spain and Italy and Ireland.
People who had a lot of exposure to the European economy took a big hit-especially people that invested in the euro and even the Swiss franc took a big hit because they decided to peg their currency to the euro, which declined their own currency.
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For 2011, the people that took a big hit were people who were invested in stock that had too much exposure to what was going on in Europe. To be specific, the financial sector did not do well in 2011, mostly because of, well, what happened in Europe allowed the banks here and overseas had too much exposure to the Euro bonds. For example, MF Global...and also Goldman (GS) and JP Morgan (JPM) had this same problem as well. And so they took a big hit.
Other investors took a big hit in the homeowner sector, such as Toll Brothers (TOL) and Ryland Homes (RYL), because the housing market here is very sluggish, mainly because of high unemployment. That affected people's portfolios because a lot of them invested in real estate.
Going forward for 2012, I believe we'll expect more of the same as 2011. In Europe, I believe that it could basically get worse. I believe more bailouts will be coming for Europe. It will be coming from the IMF, the Federal Reserve, and the ECB. I wouldn't be surprised if there is a bank holiday in Europe, similar to what we had with FDR in the Great Depression, where he called a bank holiday and devalued the dollar.
I wouldn't be surprised to see that in Europe. That will affect a lot of people's portfolio, especially people that have a lot of exposure to the euro currency. A great way that people that could hedge against that-I spoke about this many times-is to invest in hard assets; which is actually gold, silver, and oil. Either the stock or the ETF.
For the US economy, going forward in 2012, I believe the biggest concern would be inflation...the same as 2011. We use the Austrian true money supply, which is different from what the government uses to measure their money supply. The Austrian true money supply only counts money that's available for exchange immediately.
According to the Austrian true money supply, inflation is around double digits...I believe 15%. So anybody who had exposure to the US bond market-and you know the yield is terrible for the US Treasury Bond, around 2%-so if you take the interest rate on some of these ten- to 30-year Treasury bonds and subtract it by the inflation rate, people are getting negative return on their investment.
It's going to hurt a lot of people with fixed income going forward in 2012. A lot of people who have retired should think about diversifying their assets to hard assets. As I mentioned before, like gold and silver and oil, and if they want fixed income they could think about dividend stocks. I think people should look at stocks that invest in hard assets.
Tobacco stocks-they performed pretty well in 2011, a 50% return, compared to the S&P. For Philip Morris (PM), the dividend yield is almost 4%, so you get a pretty decent return there.
Or they could look at a company that makes stuff that people need every day, like Johnson & Johnson (JNJ)-they make Tylenol and other products that we need every day-or John Deere (DE) that makes farming equipment, or Chevron (CVX), an oil company. These yields are a lot more attractive than what the bond market is offering right now.|pagebreak|
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Another alternative is an oil trust fund, Kinder Morgan (KMP), which owns pipelines all across this country and deals with natural gas and other petroleum products. Their dividend yield is 5.9%.
The big advantage of the oil trust fund is there is no double taxation, so whatever profit they make goes straight to the shareholder. That's a big advantage, and I think people who are living off fixed income should look at that.
Kate Stalter: Those certainly did become popular in 2011, that's true.
Mo, I want to come back to something you said a moment ago, regarding purchasing hard assets. You had mentioned that that could be done via stocks or via ETFs, for example. Can you say a little bit more about that, to give some of our listeners a few ideas of what they might invest in?
Mo Dawoud: Yeah, definitely. I mean, rather than hard assets, I was relating to commodities such as oil. One oil company that we like is Mart Resources (Toronto: MMT), and they're a junior oil producer based in Nigeria. They produce light sweet oil, and that kind of oil is very rare nowadays. It's because it's easy to refine, so the cost is low.
It's over the counter on the US exchange. Mart Resources I recommend, because first of all, as I mentioned, they make light sweet crude oil, and they have no depletion for the next two years. They are possibly thinking about giving out a dividend payout next year, because they are sitting on so much cash from pumping all this oil from the well.
The only disadvantage on this stock is that it's in Nigeria, which is an unstable country. If you're diversified enough, you won't have too much exposure to that kind of risk.
Another hard asset that people can look at is gold and silver. If people don't want to buy the bullion, they can always look at ETFs, such as Central Fund of Canada (CEF).
What they do is, if you invest in that fund, they take your money and buy 50% gold and 50% silver and store it in a vault for you in Canada, which is much better than the SPDR Gold Trust (GLD) and iShares Silver Trust (SLV) because they have so many red flags...starting with that they don't allow auditors into the vault, so the Comex may not have any gold and silver in their vault for their investors. I recommend people should stay away from those two ETFs.
If people want to take a little bit more risk, they can look at mining stocks for gold and silver. I recommend people do their homework and understand that business, because it's a very risky business. It takes a while to learn how it works, and because a lot of the management don't understand the macro picture today, and tend to mismanage the company through massive dilution, operational errors, or high production costs.
But if people want to invest, one of the stocks I recommend is Silver Wheaton (SLW), which is a leader in the silver industry. Silver Wheaton is a royalty company; they act like a bank. They go out to all these mining companies and they'll give them cash, and in exchange for the cash they take the metal that they have at a discount.
For Silver Wheaton, the average price on the silver they get is around $4. So as the silver prices go higher, the profit margin will increase more and more, so it's a very attractive and lucrative stock for anyone to own.
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And they pay out a dividend, too, which they started to do last year. So that's a big plus for anyone that's on fixed income. For people want to look into investing in silver stocks, Silver Wheaton is my first recommendation.
They also announced that once silver prices increase, their dividends will increase as well. That's a very good sign for the company.