Double Your Profits Owning Junior
Mining Stocks Instead of Physical Gold
by W. Lorimer Wilson, PreciousMetalsWarrants.com & InsiderInsights.com | October 6, 2009
PrintAre you are of the opinion that the U.S. dollar is going to continue to weaken against other currencies? Are you of the opinion that we are going to have significant inflation in the next few years? If so, then we are likely to see gold and silver double or triple in price as a result. If that should happen it is imperative to invest in either the stocks of the companies that mine the gold and silver and/or in the royalty companies that buy the gold and silver from mining companies at predetermined fixed prices. Much better in fact is to, wherever possible, purchase certain of the long-term warrants offered by some of the gold and silver mining and royalty companies as a means of doubling-up on the leverage factor they provide.
We are in the eye of the storm and when the other side of the vortex engulfs us gold and silver will increase considerably, their associated stocks will go up substantially and their warrants, where available, will escalate dramatically. Such mega returns can be realized in the future if one starts today to prepare for that day. All it is going to take is an environment in which some combination of a declining U.S. dollar, rampant inflation (or fear thereof), high interest rates, ongoing financial instability, further economic turmoil and occasional acts of terrorism come together to interact with high gold and silver prices and some trading mania. We are moving in that direction right across the board so it is just a matter of time.
Indeed, just in the past 12 months the Gold/Silver Companies with Warrants Index (GCWI) of 22 such companies (5 large-cap; 3 mid-cap; 2 small-cap; 12 micro or nano-cap) has appreciated by 183.7% from its 52-week lows while the 24+ months duration warrants of those companies (26 in total) in the Precious Metals Warrants Index (PMWII) have gone up 366.2% and will only continue its ascension as gold and silver increase even further in price.
As seen below the GCWI is up 51.6% YTD and the PMWI is up 73.8% YTD. Yes, the Commodity Companies with Warrants Index (CCWI) and Commodity Warrants Index (CWI) are up by even greater amounts (85.5% and 153.7% respectively) but these indices also include other mining companies (8), oil and gas companies (2), merchant banks (3) and 1 mutual fund with one or more warrants each (47 in total). Below are the percentage performances of a variety of categories
Last Week’s % Performance(1)
| Prev. Wk | Prev. Mo | YTD(2) | |
| Gold | 1.2 | 0.9 | 13.4 |
| Silver | 0.7 | -0.5 | 42.8 |
| HUI(3) | -0.7 | -3.5 | 30.5 |
| GDM(4) | -0.7 | -5.1 | 26.2 |
| CDNX(5) | -1.8 | 2.9 | 75.9 |
| TSX | -2.8 | 1.1 | 37.4 |
| S&P 500 | -1.8 | 0.9 | 8.6 |
| CCWI(6) | -1.6 | -7.6 | 85.5 |
| CWI(7) | -3.2 | -7.6 | 153.7 |
| PMWI(8) | -2.2 | -3.1 | 73.8 |
| GCWI(9) | -0.7 | -3.6 | 51.6 |
(1)All calculations are based on U.S. dollar equivalents
(2) Week ending October 2nd, 2009
(3)HUI is the symbol of the AMEX Gold BUGS Index consisting of a Basket of Unhedged Gold Stocks. It is a modified equal dollar-weighted index of 15 large/mid cap gold mining companies that do not hedge their gold beyond 1.5 years.
(4)GDM is the symbol for the NYSE Arca Gold Miners Index. It is a modified market capitalization weighted index of 31 large/mid/small cap gold and silver mining companies.
(5)CDNX is the symbol for the S&P/TSX Venture Composite Index. It consists of 558 micro and nano cap companies of which 44% are engaged in the mining, exploration and/or development of gold and/or silver and other mineral resources and 18% in oil or natural gas pursuits.
(6)CCWI represents the Commodity Companies with Warrants Index. It is an equal dollar-weighted index consisting of 36 commodity-related companies with warrants of at least 24 months duration outstanding trading on the Canadian and U.S. stock exchanges.
(7)CWI represents the Commodity Warrants Index. It is an equal dollar- weighted index consisting of 47 warrants of at least 24 months duration associated with the 36 companies in the CCWI.
(8)PMWI represents the Precious Metals Warrants Index. It is an equal dollar-weighted index comprised of the 26 gold and silver warrants, of at least a 24 months duration, found in the CWI.
(9)GCWI represents the Gold/Silver Companies with Warrants Index. It is an equal dollar-weighted index comprised of the 22 gold and silver mining and royalty companies with warrants in the CCWI.
Sources: preciousmetalswarrants.com (warrant and stocks-with-warrants data), oanda.com (exchange rates) and stockcharts.com (index and commodity prices).
Why Buy Gold and/or Silver Mining and Royalty Stocks instead of Physical Gold and/or Silver?
If gold, for example, were to escalate considerably in price (i.e. to $2,000, $3,000, or even more) in the next few years it would have a significantly positive impact on the profitability of the companies who mine it and the royalty companies that buy it from marginal producers. For example, with gold priced at $1,000/oz., and the cost of production at perhaps $600/oz. the gross profit margin of gold mining companies would be 40.0%. If 2 years from now, however, gold were to increase to $2,000 and the cost of production were to increase by only 20% to $720/oz. then the mining companies’ gross profit margins would have gone up from $400/oz. to $1280/oz. or 220%!
That’s called leverage and historically, in a rising market, the ratio for gold and silver mining/royalty shares vs. physical gold ranges from about 2.5:1 on average for large-cap companies (currently 2.6:1 YTD for HUI companies according to the table above) to as much as 6:1 for smaller gold and silver mining/royalty companies (currently 3.9:1 YTD according to the Gold/Silver Companies with Warrants Index) and even as high as 10:1 in exceptional circumstances for certain truly outstanding performers. All the more reason to do one’s due diligence to find and invest in those gold and silver mining and/or royalty companies with the right mix of capable management, strong financing, major resources and geographically and politically well-located properties and reap the major benefits of such a surge in the future price of gold and silver.
Why Buy the Warrants instead of the Stock of Certain Gold and Silver Mining and Royalty Companies?
For those who are prudent enough to do their homework and buy the right long-term warrants associated with the right gold and silver mining and/or royalty companies at today’s undervalued prices, eventual returns would likely be 1.5 to 3 times greater (currently 1.4:1 YTD for the Precious Metals Warrants Index vs. the Gold/Silver Companies with Warrants Index) on average than had one invested in their associated stocks. For companies whose stock prices end up going through the roof with monster gains that ratio could even be as high as 5:1.
Such major multiples are referred to as leverage-on-leverage or doubling-up on the leverage factor. The catch is, however, that one needs to know whether or not the warrant associated with the stock of interest is the right warrant i.e. has a leverage/time value sufficiently high enough to justify its purchase given the anticipated appreciation in the price of the associated stock. For those who don’t have a clue what a warrant is, which companies have them, which have the best values, exactly how to go about buying them and which on-line brokers are sufficiently knowledgeable and capable of placing American, European, Australian and Asian orders (there are no problems for Canadians placing such orders with their brokers as most such securities are traded on their TSX or TSX Venture exchanges) check out the PreciousMetalsWarrants site below.
Investors who have been around for awhile will remember the slogan “Double your pleasure, double your fun - with Spearmint Gum!” Perhaps today’s slogan should be “Double your knowledge, double your profits – with junior mining company stocks and warrants!”
Copyright © 2009 W. Lorimer Wilson
Editorial Archive
Lorimer Wilson is Director of Marketing and Contributing Editor of www.PreciousMetalsWarrants.com and www.InsidersInsights.com. PreciousMetalsWarrants provides an online subscription database for all warrants trading on junior mining and natural resource companies in the United States and Canada and a free weekly newsletter. InsidersInsights alerts subscribers when corporate insiders of a limited number of junior mining and natural resource companies are buying and selling. Lorimer can be contacted at lorimer.wilson@live.com.
Contact Information
W. Lorimer Wilson | Ajijic, Jalisco, Mexico | Email | Website
