How to stomach volatility in gold and silver markets

It doesn’t matter what gold and silver prices do in the short-run. It’s the end result (inflation) that everyone knows is coming that’s important.

One of the trickiest parts of investing is refusing to get caught up in the day-to-day whims and volatility of the markets. I learned this the hard way in 2008. I was just getting started in stocks, and I thought banks were getting unfairly punished by the markets. I bought at precisely the wrong time, and watched some 60 percent or more of my portfolio evaporate. I was eventually forced out of my positions courtesy of a margin call. If I hadn’t been trading on margin, I would have been in the green by now, but alas, I didn’t have enough of a cushion to absorb the panic that struck the markets just a few short years ago.

It was a valuable lesson, and it’s one that I keep thinking about as I watch the volatility in the gold and silver markets. Over the past 30 days, writes analyst James West, the price of gold has swung between $1,340 and ounce, and $1,420 an ounce, giving it a volatility ratio of 5.6%. Silver, in the same period traded between $25.38 and 30.50, which gives it a 16% volatility ratio. Oil’s volatility range over thirty days lies between $80.28 and $90.87, or 11.65%.

Unlucky timing in your silver investment means you could be down double-digits on your precious metals investment in just four short weeks. That’s not a good feeling. During such times, though, it’s particularly important that you look at why exactly you’re investing in gold and silver in the first place.

For me, it’s not so much certainty that the price of metals is going to keep rising; it’s rather a certainty that the value of the dollar is going to keep falling. QEII is nothing more than a fancy name for borrowing cash. The U.S. government is pulling out its debit card in an attempt to spur banks into lending, small businesses into hiring and big fish investors into scrambling out of bonds and into riskier, more lucrative investments such as stocks.

When money’s cheap, it makes no sense to leave it stashed in a money-market account. Even my “high-yield” Virtual Wallet savings account with PNC is pulling in just 1 percent a year. That’s pitiful compared to the nearly 20 percent returns I could get from a well-picked REIT. We’re in an environment where borrowing pays, and that’s precisely the sort of environment that breeds bubbles. And the writing on the wall says that the bubble is going to be in commodities. Demand for things like gold, silver, copper, coal, oil and natural gas – even wheat, cotton and sugar – is going to keep rising, even as the value of the dollar and other currencies falls. That will push up commodity prices over time.

It doesn’t matter what prices do in the short-run. It’s the end result that everyone knows is coming that’s important. Keep that in mind while your silver stocks bounce around like a buoy in a storm, and you’ll be a lot better off than you would if you keep checking the charts every 20 minutes. I learned that the hard way, and I expect a lot of people are doing the same thing right now. Don’t be one of them, and you stand to come out ahead of the inflation that’s just starting to peek over the horizon.

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Analysts call for $50 silver in next “two to three years”

The average gold-silver ratio over the past 100 years has been somewhere around 45:1, but that its fallen as low as 15:1 during extreme price movements. Given the high cost of gold, I expect silver to look more attractive to both institutional investors and individual investors who want to hedge against inflation.

The high gold-silver ratio that peaked in November of 2008 has been gradually eroding over the past two years. That’s been a big boon for silver bulls, and many expect the trend to remain intact throughout 2011. At least one analyst is calling for $30 silver next year, and $50 silver in the next 2-3 years.

“Silver is in effect playing catch up with gold,” writes the International Business Times. “It remains undervalued versus gold on a historical basis. The gold/silver ratio remains favourable to silver at 50.25 ($1,367/oz divided by $27.20/oz) and the ratio is falling.”

The article points out that the average gold-silver ratio over the past 100 years has been somewhere around 45:1, but that its fallen as low as 15:1 during extreme price movements. Given the high cost of gold, I expect silver to look more attractive to both institutional investors and individual investors who want to hedge against inflation without going all in with gold.

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How to Short Gold, Part II

Relatively small upward moves in the dollar can lead to rapid drops in the price of gold. If your timing is right, you can not only protect yourself from losses in gold, you can capitalize on the strength in the dollar by shorting gold.

Let me be clear up front: I do not think that now’s an appropriate time to short gold. That said, investing always moves in cycles, and we’ve got to be ready to jump ship if it looks like the fat cats are losing interest in the yellow metal. In my last post on shorting gold, I pointed out four simple ways to short gold. What I neglected to mention was one rather roundabout way that are a lot of people don’t think about when it comes to shorting gold: namely, going long the dollar.

Gold and the dollar have long had an inverse relationship as gold is frequently a hedge against inflation. When the dollar goes down, investors move into gold and vice versa. If you’re looking to short gold, then, but you don’t want to deal with the unpredictability inherent in gold mining stocks, you might consider going long the dollar in the form of an ETF such as the PowerShares DB US Dollar Index Bullish (NYSE:UUP).

Relatively small upward moves in the dollar can lead to rapid drops in the price of gold. If your timing is right, you can not only protect yourself from losses in gold, you can capitalize on the strength in the dollar.

Want more? Read my original post: How to Short Gold.

Tocqueville Gold Fund (TGLDX) moves higher on Morningstar’s list of top-performing mutual funds

The Tocqueville Gold Fund has edged out the PIMCO Real Estate Real Return Strategy A (PETAX) mutual fund for the No. 2 spot on Morningstar’s top mutual fund performers YTD. That puts it behind only the Dynamic Gold and Precious Metals I (DWGOX) mutual fund, another gold-focused fund that’s returned some 50 percent YTD.

The Tocqueville Gold Fund has edged out the PIMCO Real Estate Real Return Strategy A (PETAX) mutual fund for the No. 2 spot on Morningstar’s top mutual fund performers YTD. That puts it behind only the Dynamic Gold and Precious Metals I (DWGOX) mutual fund – another gold-focused fund that’s returned some 50 percent YTD. The Tocqueville Gold Fund has returned just shy of 36 percent YTD, and here’s a look at its Top 10 biggest holdings as of Aug. 31, 2010:

Holding % of Total Assets Ticker
Physical Gold 7.2% n/a
Osisko Mining Corporation 6.2% TSE:OSK
Randgold Resources Limited – ADR. 4.5% NASDAQ:GOLD
Ivanhoe Mines Ltd. 4.4% NYSE:IVN
Eldorado Gold Corp (pvt) 4.1% NYSE:EGO
Andean Resources 4.0% TSE:AND
IAMGOLD Corporation 3.8% NYSE:IAG
Silver Wheaton Corp (pvt) 3.6% NYSE:SLW
Newmont Mining Corporation 3.5% NYSE:NEM
Goldcorp, Inc. 2.9% NYSE:GG

Compare their holdings with Dynamic Gold and Precious Metals I (DWGOX) mutual fund, and you’ll see Tocqueville Gold Fund’s more conservative – although there are quite a few overlaps. Namely, both funds count the following stocks in their Top 10 holdings:

  • Osisko Mining Corporation (TSE:OSK)
  • Eldorado Gold Corp (NYSE:EGO)
  • Andean Resources (TSE:AND)

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Top five mutual funds returns in 2010

Top five mutual funds returns in 2010

Dynamic Gold & Precious Metals I (DWGOX) sets itself apart from other mutual funds with a return that’s more than 11 percent greater than its nearest competitor. The fund invests 100 percent of its cash in materials with small-cap gold-mining stocks leading the way. Here’s a run-down on their most recently available Top 10 holdings.

There’s still time for some moving and shaking in the mutual fund markets, but two out of the top five funds tracked by Morningstar have started to differentiate themselves: Dynamic Gold and Precious Metals I (DWGOX), which has returned 41.97 percent YTD, and PIMCO’s Real Estate Real Return Stategy A, which has returned 30.56 percent YTD.

It shouldn’t be a surprise that gold and real estate are leading the charge into 2011. Inflation appears imminent and that’s good for both precious metals and land values. Consider it a harbinger of things to come.

Here’s a look at the Morningstar’s current top five mutual funds with the highest returns:

DWGOX Dynamic Gold & Precious Metals I 41.97
PETAX PIMCO Real Estate Real Return Strategy A 30.56
VEDTX Vanguard Extended Dur Treas Idx Instl 28.27
PEDIX PIMCO Extended Duration Instl 27.99
BTTRX American Century Target Mat 2025 Inv 27.21

Dynamic Gold & Precious Metals I (DWGOX) sets itself apart with a return that’s more than 11 percent greater than its nearest competitor. The fund invests 100 percent of its cash in materials with small-cap gold-mining stocks leading the way. Here’s a run-down on their most recently available Top 10 holdings:

Company Ticker % Holdings
Osisko Mining Corp. Sh TSE:OSK 9.67
San Gold Corp. CVE:SGR 9.55
Perseus Mining Ltd. ASX:PRU 6.77
Red Back Mining Inc. TSE:RBI 6.35
Aurizon Mines Ltd. AMEX:AZK 5.50
Eldorado Gold Corp. TSE:ELD 5.26
Andean Resources Ltd. ASX:AND 5.25
Allied Nevada Gold Corp. AMEX:ANV 5.09
Agnico-Eagle Mines Ltd. NYSE:AEM 5.08
Alamos Gold Inc. TSE:AGI 4.71

All but one of the mining stocks on the list above have had positive returns YTD: San Gold Corp., which has returned -4.32. Others, though, have exploded to the upside. Most notable among them: Andean Resources Ltd., which has returned 143.46 percent YTD, and Red Back Mining Inc., which has returned 101.87 percent. The moves prove two things: 1) all serious investors should study mutual funds for ideas on where the big money is, and 2) gold isn’t a fad – at least not yet.

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Tocqueville Gold Fund (TGLDX) moves higher on Morningstar’s list of top-performing mutual funds

How to short gold

Not convinced that gold’s upward march in price is going to continue? One of the best ways to profit in that scenario is to short gold. There are several ways to go about it from puts and options to ETFs and shorting shares.

Not convinced that gold’s upward march in price is going to continue? One of the best ways to profit in that scenario is to short gold. There are several ways to go about it:

1) Short shares in a gold stock. Find a gold company that seems particularly overbought and start a short position in that company.

2) Short shares in a gold ETF or ETN. The flagship gold ETF is offered by ProShares. Known as the SPDR Gold Trust (NYSE:GLD), the ETF seeks to reflect the spot price of gold. As of Sept. 7, the fund had a market cap of $51 billion.

3) Buy shares in an inverse ETF or ETN. Inverse ETF’s seek to move in the opposite direction of the underlying stock or commodity that the fund is matching. ProShares UltraShort Gold ETF (NYSE:GLL), for example, seeks 2X the inverse of the daily performance of gold bullion in London. A small move in the gold spot price would be compounded 2X in GLL.

4) Buy and sell a put option in gold. A put is a bet that the future price of gold will be lower than the current market price. You can buy and sell puts and options at most online brokerages. Options, however, aren’t as heavily traded as stocks, and may involve substantial risk.

Keep reading: How to Short Gold, Part II

Is there a bomb strapped to Taseko Mine’s (AMEX:TGB) chest?

I’ve long been a fan of Canadian gold mining company Taseko Mines Limited (AMEX:TGB). TGB’s trading at a P/E Ratio of 7.5 and the future at their massive Prosperity Mine appears bright. At least, it did until several Indian chiefs started a very vocal protest in the run-up to some necessary governmental approval for the mine. What exactly does the future hold for Taseko?

I’ve long been a fan of Canadian gold mining company Taseko Mines Limited (AMEX:TGB). TGB’s trading at a P/E Ratio of 7.5 and the future at their massive Prosperity Mine appears bright. At least, it did until several Indian chiefs started a very vocal protest in the run-up to some necessary governmental approval for the mine.

“At a news conference in Ottawa last week, (Xeni Gwet’in Chief Marilyn Baptiste) said she and members of her nation are willing to lay down their lives to protect Fish Lake, and suggested there could be confrontation,” according to the B.C. Local News.

The Department of Fisheries and Oceans, Transport Canada, and Natural Resources Canada have until Sept. 10 to weigh in on the mine with the Canadian Environmental Assessment Agency.

All told, 12 environmental groups have urged the agency to block construction at the Prosperity Mine. Not good. Taseko’s hung a big chunk of their future on Prosperity.

The mine could prove immensely profitable. Even after construction costs of $775 million, they expect their cost per ounce to be negative $330 (assuming gold prices of at least $900 per ounce)!

Expect an enormous pop in the stock if the Canadian government green lights the project. If they don’t? Well, I wouldn’t want to be holding TGB.

Gold rockets up $14 per ounce on New York NYMEX

Typically, gold moves opposite the dollar, but both climbed in tandem yesterday signaling that the shortened trading week might be more treacherous than most investors might have imagined after the Dow climbed more than 4 percent last week.

Unease in financial markets around the world has pushed investors back into gold and bonds. Indeed, three-year treasury notes for the lowest price on record yesterday, as investors fear another Greece-style banking crisis in Europe.

Precious metals were the beneficiary yesterday with gold adding $14 to its 15 percent gain on the year. Popular gold stocks Hecla Mining Company (NYSE:HL) and Coeur d’Alene Mines Corporation (NYSE:CDE) were both up more than 1 percent on a day when the Dow Jones Industrial Average lost more than 1 percent.

“You saw a little bit of asset allocation shift,” Charles Nedoss, a senior market strategist with Olympus Futures in Chicago, told the Wall Street Journal.

Typically, gold moves opposite the dollar, but both climbed in tandem yesterday signaling that the shortened trading week might be more treacherous than most investors might have imagined after the Dow climbed more than 4 percent last week.

Silvercorp Metals Inc. (NYSE:SVM): The Most Under-Bought Silver Stock on the Market?

If inflation does hit, expect to see Silvercorp Metals Inc. (NYSE:SVM) around its May peak of just under $9 per share.

All signs appear to be pointing to a bull market in metals as gold finished off a remarkable August, where it surged from $1,180 to $1,245 per ounce. Silver’s ride was less consistent. The metal rose from $18 to just under $19 per ounce, but it did most of it’s moving in the last week of the month.

With inflation fears held at bay by fear of a double-dip recession, you would think that investors would have give up on precious metals all together, but that’s not the case. Gold’s chart (see below) looks like it’s in the heart of a trend that will likely steepen once inflation becomes a reality.

30-Day Gold Chart

That brings us to one of my favorite stocks: Silvercorp Metals Inc. (NYSE:SVM). Trading at a P/E ratio of 26.85, Silvercorp would be appropriately valued if the threat of inflation didn’t appear to be around the corner. Throw that in the mix, and the Chinese metal producer could look like it’s trading at bargain prices a year from now. Indeed, the stock was recently upgraded by BMO Capital Markets, and it looks and heads and shoulders better than its competitors Silver Wheaton Corp. (NYSE:SLW), which is trading at a P/E of 42 and Pan American Silver Corp. (NASDAQ:PAAS), which is trading at a P/E of 28.

Even better than the upgrade? Silvercorp’s gross profit surged to $26.5 million in the quarter ending June 30. That’s better than the company has done in the past four quarters, and the stock maintained its dividend of $0.02 per share. That’s good for a 1 percent yield on top of any appreciation the stock might see. If inflation does hit, expect to see this stock around its May peak of just under $9 per share.

Lackluster day for gold stocks despite powerful market rally

Irrationality in the markets leaves gold stocks in the dust while driving up just about every other sector. The perfect short environment seems like it’s just around the corner.

The dollar dropped an average of roughly 1 percent against the Pound and the Euro. The Dow rallied 208 points (1.99 percent), and the FTSE was up 2.65 percent. What’s going on with gold? Despite an early surge on the New York NYMEX, the yellow metal spot price and corresponding stocks couldn’t keep pace with other equities. Here’s a handful of the most obvious underperformers in gold stocks:

  • Hecla Mining Company (NYSE:HL), +1.01 percent
  • Coeur d’Alene Mines Corporation (NYSE:CDE), +0.46 percent
  • Richmont Mines Inc. (AMEX:RIC), +2.12 percent
  • DRDGOLD Ltd. (NASDAQ:DROOY), +1.21 percent
  • Allied Nevada Gold Corp. (AMEX:ANV), +0.75 percent

The best performers were the international majors who are more tied to basic materials. Among them:

  • Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), +4.56 percent
  • Rio Tinto (NYSE:RTP), +5.26 percent

It appears better-than-expected earnings have created a micro-bubble, that could present some excellent short opportunities – particularly in the technology and basic materials stocks. In two weeks, earnings will taper off, and I expect reality to start setting in.

The ECRI, for instance, is pointing to a recession. Alan Greenspan’s calling for a double dip, and I’m try to free up capital and move into dividend stocks after my shorts blew up in my face today. I want to short at the top, and I think we’ll have that opportunity in the next two weeks – no matter what sector you’re in.