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Chapter 4: Silver Equities

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From the Archives : Originally published July 24th, 2009
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Category : Gold University

 

 

 

 

 

Leverage is the name of the game when it comes to owning silver mining stocks. In Chapter 4 of our " Guide to Silver Investing," David Morgan highlights the benefits of owning silver equities and shares his criteria for choosing companies. Read on. . .

Why Should an Individual Look at Owning Silver Mining Stocks?

Leverage pure and simple, you get leverage to the price of silver both up and down. In other words if silver moves up 10%, a large silver miner might move up 20% or 30%. Conversely, if silver goes down 10%, then a large silver miner might go down 20% or 30%.

This amount of leverage has not appeared in the market recently and is typical during this consolidation phase. Many gold and silver bugs are getting tired of the back and forth action of the precious metals markets, especially as reflected by the mining equities. However, once this phase of the market is finally completed the mining equities will be one of the hottest sectors available in my view.

Compare Equities to Owning Physical

Nothing beats the real thing and owning real metal is the safest and most prudent way to have a precious metals portfolio. The real metals (gold and silver) are the only assets that move opposite to all other assets classes, this cannot be said about mining stocks as they sometimes move with the general stock market. One further word, silver has maintained results that are superior to both the XAU and HUI to date. In other words, even though mining equities do provide leverage, silver by itself has done as well as these two precious metals indexes.

Do the Reasons to Invest in Mining Stocks Change with Economic Times?

Yes, during stable economic times top tier conglomerates in the mining industry can provide some income, something like a utility stock. But generally, mining stocks are most sought after during uncertain economic times such as we are now experiencing.

What Are the High Level Themes in the Economy that Signal to Buy or Sell Mining Companies?

  • Buying- Leverage to gold and silver, uncertain economic conditions, special cases (big discoveries) or new mining methods that produce an economic shift.
  • Selling- Very high P/E ratios have been the best indicator in the past for producers, and I expect the same at the top of this cycle. The discovery cycle moves in its own fashion and I have provided this information in workshop format, it is outside the purview of this discussion, but is imperative for anyone that seriously invests in this sector.

What Are Your Criteria in Choosing Companies?

Pretty basic. Serious Money goes into serious companies. I run a priority program each month and send out the top 3-5 gold and silver companies. The strategy of how to own these companies is explained in "How to Use the Morgan Report," which is accessed in the members only section.

Speculations: This is where you want to bet a little money to win a lot. Many of these companies are what I call "story stocks." Each one has a story that goes along with the company, and many new investors get caught up in the story even though some are so fantastic or unbelievable I cannot fathom that people would "buy into" such nonsense. This is the exception however, since the Bre-X fiasco most of the companies in the junior sector are truly doing their best in a legitimate fashion. My criteria here are not set in stone, but we normally visit the project and are very picky. We have had great success, and also failed a few times, which is why we spread out in this sector. Buying one story stock is not the way to spread your risk.

Are There "Silver Mining Mutual Funds" Available to Investors?

Not at this time for U.S. investors, I do know of a couple for Europeans. There were two in days gone by¡XThe Strategic Silver Fund and another by the Pilgrim Group of Funds. There are several gold mutual funds and some of them do have a bit of silver exposure.

What Is the Advantage of Owning a Basket of Individual Mining Stocks?

It spreads the risk; even the best run mining company in the world can experience a natural event such as earthquake, flood, political problems, labor problems, smelting issues, transportation problems and on and on. I like to spread the risk, but at the same time hate long lists, a list of 50 companies is not that valuable to me, give me five or six major companies I can buy and hold and let me speculate with 10 or so well-chosen juniors that I can follow and that is sufficient. Will this guarantee you will have the best performing stock in the sector? Of course not, but it is the best approach that I have found in over 30 years in this sector.



 

David Morgan

The Morgan Report


 

 

 

Companies Mentionned : Metals X | Signal | Strategic |
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Mr. Morgan has been published in The Herald Tribune, Futures magazine, The Gold Newsletter, Resource Consultants, Resource World, Investment Rarities, The Idaho Observer, Barron's, and The Wall Street Journal. Mr. Morgan does weekly Money, Metals and Mining Review for Kitco. He is hosted monthly on Financial Sense with Jim Puplava. Mr. Morgan was published in the Global Investor regarding Ten Rules of Silver Investing, which you can receive for free. His book Get the Skinny on Silver Investing is available on Amazon. His private Internet-only newsletter, The Morgan Report, is $129.99 annually.
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