Gold By The Planeload! Precious Metals Update Part II

If you believe that gold and silver prices are due to recover, like I do, then you should look for plays that can surf the wave.

In particular, you want companies unburdened by debt and not locked into large, complex, expensive projects. Does that ring any bells?

Let’s consider royalty companies…

Royalty companies own interests in mine production without taking on operational risks and costs. That is, royalty guys “loan” money upfront to capitalize the mine developers, usually at an early stage. In return, the royalty company lays claim to an ongoing income stream generated in the future by the mining project. It’s a well-understood form of project finance, in many instances.

The precious metal royalty company that I follow is a well-managed player named Silver Wheaton Corp. (SLW). Shares trade in the $26 range, which is above the company’s 3-year low around $17. Dividend yield is 1.5%.

Silver Wheaton is the largest “silver streaming” royalty company in the world. Its profit margin is near 66%, with operating margins north of 70%. Meanwhile, the company is cash-rich — it’s got seven times more cash on hand than debt. Right now, in this very distressed market, Silver Wheaton management is reviewing a long list of sweet deal offers from mining plays that desperately (!) need some of that cash to keep the doors open. And then?

As longtime readers know, silver streaming is NOT mining. It means that the royalty owner (here SLW) agrees with the miner to purchase part of future silver production at a fixed, preset price. Thus, a silver streamer need not “invest” in exploration, development, operations and production.

In other words, a silver streamer’s fate is tied almost entirely to the price of silver. In that sense, there’s significant share price leverage to the underlying price of the metal. If silver prices rise, shares in SLW rise too, usually by a higher percentage.

Don’t Forget to Own the REAL Metal

So are we due for a quick turnaround in the prices of gold and silver and the related fortunes of the metal miners? Or is there another leg down for gold and silver until prices find a lower landing pad? It would be great to have a vision of omniscient, sparkling clarity on this, but that’s not a luxury we enjoy.

Are there any clues in what the big-guy mining companies are doing? In general, good management teams make assumptions about the future prices for gold and silver. That’s how they capitalize, build and run projects.

Some companies assume high prices far into the future and then go deep into debt — see Barrick, from yesterday’s discussion. Also from yesterday, other companies tend to restrain their enthusiasm — Agnico or Goldcorp. But whatever the fundamental assumptions, when metal prices fall significantly, companies and managers go back to the drawing board and figure out which projects make financial sense and which do not.

Looking ahead, the pricing environment is sketchy. Gold and silver have trended bearish for far longer than many (certainly I!) expected. This has altered market psychology to the point where many market makers expect more of the same. So we must let the wheel turn for precious metals.

Fortunately it appears that precious metals have caught a bid lately. Indeed, some of the same folks expecting prices to continue lower are now singing a different tune.

To be sure, markets will do what they do, and it’ll take time for prices and project investments to clarify.

Thus, my final precious metal “idea” is to make sure you have exposure to physical metal. Buy metal and TAKE DELIVERY!

There are plenty of options when it comes to holding physical metal. You can head down to your local coin dealer and pick up some ingots or look for an online retailer that can insure and ship metal right to your door. Regardless of which method you choose, shop around to get the best deal on the lowest markups and good service. And take! Delivery! (If you don’t have it in your possession, it’s NOT yours!)

Right now the nominal prices for precious metals are relatively low, while physical demand in Asia is skyrocketing. I’ve seen video of people rioting in China for the chance to get into a store to buy gold coins and such. Riots in China? Where they send in the army and lock you up in prison for things like that? Overseas, people want gold, and they want it bad. What do they know?

In a sense, the West is selling its paper gold down via financialized reflections of reality like the SPDR Gold Trust ETF (GLD) — indeed, as easy as it is to buy this ETF it’s just as easy to sell. Meanwhile, in the East, people are buying and taking physical delivery of gold and silver by the planeload. Yes… By. The. Planeload. (I have seen this phenomenon — gold to China — with my own eyeballs!)

It’s not just China, either. For example, the government of India has tightly restricted imports of gold to conserve the value of the national currency. Yet gold smuggling into India is rife. I heard a great story about one innovative crew that actually fabricated fake television sets out of gold and then “imported” the TVs under false manifests. All to beat the government restrictions. Clever. Desperate. The Breaking Bad of gold!

So what do these other people and cultures know that we’re not getting here in the U.S. from our government or mainstream media? (That’s a rhetorical question. I hope I don’t have to explain that point to you.) Basically, if you have not bulked up your precious metals holdings, now is the time to get into that play. Buy and… Take! Delivery!

Gold and silver prices have been beaten down hard from their recent highs. Lately, though, prices appear to have found a floor. Yes, things could go lower, but in my view, the downside is limited. The upside is… well…

When market sentiments turn back to precious metals, we’re in for a major squeeze that should send prices up into the stratosphere. It’s a question of time. It’s a question of when, not if.

That’s all for now. Thanks for reading.

Byron King
Original article posted on Daily Resource Hunter

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Byron King

A Harvard-trained geologist and former aide to the United States Chief of Naval Operations, Byron King is our resident gold and mining expert, and we are proud to have him on board as the managing editor of Whiskey & Gunpowder.

This “old rock hound” uses his expertise and connections in global resource industries to bring...

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