6 Metals Plays Primed for Strong Gains

12/06/2011 11:00 am EST

Focus: ETFs

Peter Way

Founder and CIO, Peter Way Associates

The gold and silver rallies have cooled off for now, but they’ll be heating up as the weather cools, observes Peter Way of Block Traders’ Oil and Gold Monitor.

The US of A, with its “supercommittee” nonsense, sets a horrible example for the rest of the world.

Particularly bad for the European community, which is quickly running out of time and the patience of its creditor-investors. That transformation from acceptance, even enthusiasm, to rejection and flight, is the principal key to investment value—for government bonds every bit as much as for IPO equities.

The “sovereign debt” paper of Syria and Egypt at the moment may not be considered a realistic part of even the junk-bond market. Easy to identify at the extreme, the issue of confidence is ever-present in all investments. It’s what generates much of the volatility in markets for securities. The spillover into precious metals markets is an obvious warning sign.

It is apparent that Europe and the euro now are in an “in extremis” condition. But what might it take to put the US Federal Reserve and the Treasury into the same situation? A failed bond sale, like Germany has just had—again?

The ten-year rise in gold prices, in dollar terms, is too persistent to be ignored, except at the investor’s peril. Concern over a possibility of the present US administration allowing itself to be dragged into a “save the euro” political position may strengthen that trend. Current market weakness provides an opportunity to replenish or expand precious metals holdings.

If that becomes your inclination, please be aware of the risk and return differences between prospects for gold and for silver. Simply put, silver is the higher-return, higher-risk candidate. Relative to straight investments in the physical metals, investments in producing (mining) companies are also being appraised by market pros as the higher risk and return candidates.

The most striking distinction is in the past records of drawdown for the two ETFs providing direct investment in physical gold, ETFS Gold Trust (SGOL) and iShares Gold Trust (IAU). The average and maximum drawdowns for both are -2%.

Comparisons with stocks of gold miners Agnico-Eagle Mines (AEM) and Gold Resource Corp (GORO), and silver ETFs ProShares Ultra Silver (AGQ) and ETFS Silver Trust (SIVR), find several double-digit exposures.

The trade-off is in the prospect for, and actual experience of, returns. The gold commodity ETFs have the smallest forecast and smallest actual historical gains of these six buy candidates. Buys at all prior Range Index forecasts at least as favorable as at present and held to sell targets set by those forecasts (or a holding patience limit of three months) produced excellent opportunities for annualized gains.

Still, no guarantees of future results can be made. The data simply indicates what is possible, based on prior experience, and gives some sense of the likelihood of its occurrence.

Given the uncertainties inherent in the present period, diversifying actions in these issues (or any others) through time is highly recommended. Many small decisions, each with their own price objectives and time limits have been shown to be a good risk-management approach.

At this point in time some of the best risk-return tradeoffs in energy or precious metals stocks seem to be in the half-dozen candidates just discussed.

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