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Investors the
world over are constantly evaluating the leverage, risk and potential rewards
of their investment decisions. Whether you are an individual investor or an
analyst for a large mutual fund, leverage, risk and the pot of gold at the
end of the rainbow are always factors to be considered.
We currently
have differing opinions among analysts as to where the gold and silver
markets are going in the near term. Should new investments wait until the
much anticipated next collapse occurs in the financial markets? Or should we
follow the lead of gold and silver and continue to invest as gold appears to
be on the verge of a major upward move?
Even those
analysts preferring to wait believe that gold and silver will be the next big
place to be.
What if they
are wrong in the short term?
For us, we
believe there is a great probability the time is now and we are positioning
ourselves and subscribers with this viewpoint. If we are early, so be it. We
will increase our positions on the consolidations. But what if we are correct
and the markets blast off?
Thus, as we
continue to find values in the markets we add them to our portfolio and/or
increase current positions. Our view is that we are 'building inventory', an
inventory of shares and warrants to be sold at some point in the future. Will
there be corrections along the way? Sure, but we will take the opportunities
that the markets give us and do not believe in chasing anything.
Back to Basics:
With few
exceptions, most of us writing and those reading the articles on these gold
oriented websites are bullish on the precious metals, right? So, let's look
at a few very simple ideas on the use of leverage and risk. I'd like to first
say, we do not personally use nor do we suggest that an investor use margin
accounts. The markets can be quite volatile at times and we do not wish to be
thrown off of this bull market by a margin call.
If an investors
basic beliefs are that gold will say, double from current levels for a 100%
gain, are there other ways to invest other than an outright purchase of gold
bullion? Sure, gold coins and the gold ETF must mimic the price of gold.
But what if we
wanted to utilize some leverage in an attempt to increase our investment
gains?
Below is a list
of investment alternatives of which each takes on an additional level of risk
and leverage to the price of gold.
Gold Shares --
Producers
Gold Shares -- Junior Mining companies
Gold Shares -- Exploration companies
Investors
interested in the precious metals but yet seeking greater safety will stick
with the large producing mining companies. At the opposite end of the
spectrum will be those investors looking to make a killing by investing in
the shares of the exploration companies of which we seem to have an endless
supply.
It is commonly
known, that gold shares over time will outperform the increase in the price
of gold, so investors as a general rule, are looking to own gold shares as
their investment of choice. Each investor depending on their level of risk
tolerance and their individual beliefs in the strength of this bull market
must factor this into their investment philosophy.
Warrants &
LEAPS:
Investors
looking for even more leverage may wish to consider the use long-term
warrants and even LEAPS in their investment decisions. If one or more of your
favorite mining shares has LEAPS or long-term warrants trading, why should
you not consider them? There is absolutely no reason not to consider them.
Simply put, long term warrants will usually out perform
the gains in the underlying common shares by 2 to 1 thus providing investors
with great leverage.
If you find a
LEAP or warrant with more than 2 years of life remaining you can greatly
reduce your investment at risk while greatly increasing your potential gains.
There are LEAPS on some companies going out 2 years and there are currently
many warrants being issued with a 5 year life. The most important factor in
considering LEAPS and warrants is the underlying company. Would you want to
own shares in this company? If the answer is yes, then evaluate the current
leverage of the warrants or LEAPS and decide which is the
best investment for you. Sometimes, the warrants may be overvalued and
not the best choice, but more often than not, warrants and perhaps LEAPS will
provide you with much more bang for your buck with a decrease in your dollars
at risk.
Perhaps you
will find that there are LEAPS or warrants available on some of the large
producing companies, so instead of owning a conservative company, you can spice
up your investment with leverage by the use of LEAPS or warrants.
Visitors to our
website can now see our free warrant database
which will give you all of the warrants currently trading on all of the
natural resources companies.
We have
intentionally left call options out of our discussions as we believe the use
of call options will not give investors sufficient time thus placing you in
the role of a speculator as opposed to an investor.
For more
information on the use of warrants, we invite you to visit our website and for
information on options and LEAPS, visit the CBOE.
For
subscribers, we furnish a complete listing of all natural resource shares
having call options, LEAPS and warrants in a simple to read table format.
At the end of
this bull market we would like to critique ourselves as having made sound
investment decisions and employing the use of leverage, always tolerate of
the risk, with our goal to maximize our investment returns. So far, so good.
For those
readers unfamiliar with our services:
- PreciousMetalsWarrants.com provides an online database
for all warrants trading on the natural resource companies in the United
States and Canada.
- InsidersInsights.com tracks the buying and
selling of corporate insiders with a focus on the junior mining and
natural resource sectors. Buy and Sell Alerts are issued as deemed
relevant based upon our analysis.
We encourage
all readers to sign up for our free weekly email.
Dudley Baker
PreciousMetalsWarrants
Also
by Dudley Baker
Dudley Baker is the owner/editor of Precious Metals
Warrants, a market data service which provides you with the details on all
mining & energy companies with warrants trading on the U. S. and Canadian
Exchanges.
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