By J.L. Rapholz
Economic Advice
Gold was everyone's favorite candidate in 2009; however don't bet on in this year. Silver, platinum and palladium just might be this year's winners. As the global economy continues to improve, precious metals with industrial applications should improve right along with the economy. By the way, silver, platinum and palladium all outperformed gold in 2009 and they will probably continue to do so this year. Last year gold was up 24%, silver was up 49%, platinum went up 56% and palladium gained a whopping 117%.
Platinum and palladium are already up in the first few weeks of 2010, because of the successful launch of two new exchange-traded funds on January 8th. In both of these funds, the actual metal is taken out of circulation and placed in storage to back the ETFs on dollar for dollar basis. These shares trade just like stocks but track the commodity price of both platinum and palladium. At the time I wrote this addition of "my poor excuse for a market letter," April platinum was trading at $1,554.50 per ounce and palladium could be purchased for $441 per ounce.
MF Global analysts Tom Pawlicki says that platinum will outperform gold and silver because of improving car sales globally and specifically in China. His reasoning is that improving auto sales will boost the demand for both platinum and palladium which are used in automobile catalytic converters, to filter out harmful exhaust gases. He also says that the new ETFs will take a large amount of both platinum and palladium off of the market and will probably push them back into a deficit in 2011. "Platinum is much closer to being in a supply/demand deficit than palladium is," according to Pawlicki. Johnson Mattey, a specialty-metals company, believes that platinum would start 2010 with a surplus of 140,000 ounces and palladium would be in an oversupply of 655,000 ounces.
Industrial applications will also boost silver usage, because of its huge use in technology. Silver is one of the best conductors of electricity; however, it has a low heat load, meaning that it disperses heat rapidly. Therefore, silver requires less room than other metals, such as copper, in manufactured products like laptops, notebooks, cell phones and smart phones - all of which are heavily packed with heat-generating circuitry.
David Morgan, an independent analyst with Silver-Investor.com, says that "more than half of silver's demand comes from industrial use. He also states that, "there are many uses which require small amounts of silver that all add up, such as radio-frequency identification devices in retailers' price tags, water-purification systems and sterilization equipment that's used in medical procedures."
An important measure of silver's market performance is the ratio that is accomplished by dividing the price of an ounce of gold by the price of an ounce of silver. If you get a falling ratio it means that silver is outperforming gold. This gold to silver ratio hit a historical high of 86.8 to 1 at the end of 2008, after that silver fell sharply on lower demand because of the credit crisis that took place. However, in 2009, as the price of commodities jumped on hopes of an economic recovery, that ratio fell to 65-to-1. In general, the gold-silver ratio tends to shrink during an improving economic cycle.
This ratio could fall all the way down to 50, the level that it remained below, during the entire bull market for precious metals from 1970 to 1980. As I write this edition, the ratio is 64 for spot prices.
I have a couple of gold recommendations. I'm not shorting anything at this pointing time. I do not want to short in an environment where the Fed is printing money, unless prices really go crazy. Gold has been up for nine years and is going even higher. I still have a significant position in mining stocks and the gold ETF (exchange traded fund), GLD (SPDR Gold Shares), but I want to move more into gold stocks this year. Gold stocks have lagged the price of the metal itself for the past two years but, I expect that to change in 2010. Over the last two years the price of gold went up 30%, and gold mining stocks fell about 7% on average. In almost all of the gold bull markets of the past, the stocks have outperformed the metal by at least 2-to-1.
It hasn't happened this time around because the mining companies' costs have risen just as fast as the price of gold advanced! In the third quarter of 2009, the average realized price of gold for the companies I follow was $965 an ounce. Their exploration and development costs ran close to the same figure. But, now that is changing, because the price of gold finally broke through $1,000 an ounce and leaped to $1,200 in 2009's fourth quarter. It is near there now, even after backing off about a hundred dollars. The average realized price for my followings is going to increase from $965 an ounce to more than $1,100. A $135 an ounce increase will fall through all the way to the bottom line. Gold stocks that have been underperforming are most likely to start outperforming the market now.
I've had several inquires about market hedging and how it is effecting gold prices. AngloGold Ashanti (NYSE: AU) had some hedged books, but other than that, there are no more hedges of any significance in the gold mining business.
I like some of the large gold stocks as well as the small and intermediate miners and one particular standout at this point, NovaGold Resources (NYSE-Amex, TSX: NG), phone 1-866-669-6227, website www.novagold.net. However, an even better bet today which includes a piece of Nova is a new ETF that came out last November: Market Vectors Junior Gold Miners (GDXJ), website www.vaneck.com, phone 1-800-826-1223, it includes 55 small and intermediate gold mining companies and the largest position in any company is kept under 5% of the total. I truly believe that (GDXJ) is the place to be in 2010 because you can get a lot of exposure for around $22 a share.
A lot of the small companies included in (GDXJ) have lost money. Some even have negative cash flows. However, as the price of gold rises, investors get interested in the more speculative areas of the market, and bigger mining companies will start buying up the little guys and that's how money is going to be made in owning (GDXJ). This is also a safer way to play smaller gold stocks. The expense ratio is 60 basis points. Market capitalizations of the companies in the ETF range from $200 million to $5 billion. There is also a mix of silver miners here.
If you're interested in the bigger mining names like Hecla Mining (NYSE: HL) or Silver Standard Resources (Nasdaq: SSRI; TSX: SSO), you can buy shares in the GDX (Market Vectors Gold Miners), but you definitely want a position in the juniors this year! As this bull market matures, it enters different phases. The final phase is the crazy phase, when gold hits new highs and investors gravitate to the smaller names!
By all means limit your exposure to the South African gold miners. (GDXJ) holds 62% in Canadian Mines, 21% are U.S. based miners, 12% are Australian and only 1.9% are South African. There in nothing wrong with South African Gold. The problem here is political stability or perhaps better put, the lack of it!
I also like the silver exposure in (GDXJ). Silver typically does well in the later stages of a bull market in precious metals. Actually, silver has done better than gold. But, it is still undervalued relative to gold. Silver, Platinum and Palladium did well last year because a lot of people were anticipating an improvement in the economy, and these precious metals have industrial exposure.
My second pick today, is Newmont Mining (NYSE: NEM, $44), phone 303-863-7414, website www.newmont.com:
Newmont is one of the larger gold mining stocks and is based in the United States. It hasn't done very well price wise because its gold production has been falling off. They aren't alone with this problem; the entire gold industry is suffering from falling product of some degree or another. With each passing year it's getting hard to find new gold veins and bring them into production. There are also environmental issues holding new production back. However, declining production is pushing up the price of the yellow metal. This year (2010), appears to be a turn around year for Newmont! They are bringing the largest gold mine in Australia into production. This new mine is projected to produce a million ounces of gold per year for the next 24 years. They will also see the benefit of higher gold prices. Newmont has also been cutting their costs of production. They are expected to earn a little more than $3.00 per share this year, but most analysts think this figure is far too conservative. During the third quarter of 2009, Newmont earned 79 cents and the street had them pegged at 55 cents. It's the policy of the new CEO, Mr. Richard O'Brien, to keep earnings expectations on the low side of things. Newmont is expected to do very well in this current quarter, if gold remains in the $1,100 area. They could very well earn $4.00 per share in 2010. If you put a P/E of 15 to 20 on Newmont that would bring the stock price in at $60 to $80. You'd probably be safe in expecting a $70 target if the price of gold holds in at around $1,100 per ounce.
Looking forward to 2011, if the price of gold goes to even newer highs, you could look for Newmont to earn $5 or $6 dollars per share. If this happens, Newmont will probably break the $100 per share price. Newmont is at the same price level it was trading for back in 1993. The gold per ounce price is up three times since 1993. If you take all of this information into perspective - you're looking at a very inexpensive gold mining stock!
Editor's Note: J.L. Rapholz is editor of Economic Advice, 3910 N.E. 26th Ave., Lighthouse Point, FL 33064, 1 year, 12 issues, $99. E-mail with Updates. Economic Advice has been rated in the top two percentile of all market letters specializing in precious metals and energy by Select Information Exchange. Rapholz is the only guy who writes about precious metals that has successfully launched two publicly traded mining companies. For more information visit www.economicadviceinc.com.
