Gold and Silver Sentiment Has Reversed: Should You Buy?

Source: Thinkstock

Source: Thinkstock

In just the last couple of weeks, sentiment in gold and silver and related equities has turned on a dime. I remember just two weeks ago reading an article that argued that the gold price would rise as much as 20 percent in a week. Talk about euphoria! A correction was overdue and now it is here.

We are seeing a fairly sharp drop in the gold price, which briefly traded below $1,300/ounce, and the silver price, which is trading below $20/ounce, as well as related mining companies. In just the last eight trading days, the Market Vectors Gold Miner ETF (NYSEARCA:GDX) is down 15 percent after soaring by nearly 30 percent at the beginning of the year. The Global X Silver Miner ETF (NYSEARCA:SIL) is down 12 percent during the same time frame.

Those investors who thought they missed the boat appear to be getting a second opportunity to get on board and buy gold and gold miners. Further, those who did miss the boat should probably start buying now. Sentiment has quickly reversed and now we are once again hearing claims that there is a bear market in gold and silver. Given several factors, this simply isn’t the case.

  1. There is strong fundamental demand for both gold and silver, especially in India and China.
  2. The global economy is weak, which makes many global stocks and bonds fundamentally unattractive.
  3. The money supplies of virtually every currency are rising despite “taper talk.”
  4. Gold and (especially) silver can barely be produced profitably at current prices.

The fact remains that we are in a multi-year and even a multi-decade bull market in the precious metals, and it is when sentiment becomes weak that investors need to start buying. Recall that when the market was hitting new highs in 2011 everybody was bullish, and that this was a terrible time to buy. Even current bears such as Credit Suisse and Goldman Sachs were publicly bullish of gold whereas now with the price over $400/ounce lower they are bearish. I think this is a positive sign for gold bulls and it is an excellent contrarian indicator.

Thus, I think investors need to start looking at gold, silver, and related equities. For longer term holders, the best gold and silver ETFs are the Sprott Physical Gold Trust (PHYS) and the Sprott Physical Silver Trust (NYSEARCA:PSLV). These funds tax your long term gains as capital gains (15 percent or 20 percent), which make them superior longer term investment options than the more popular SPDR Gold Trust (NYSEARCA:GLD) and the iShares  Silver Trust (NYSEARCA:SLV), which tax your gains at the collectables rate which is 28 percent.

Investors should also consider shares in mining companies. I would avoid the ETFs as I think that these funds hold some poorer quality companies that own unprofitable mines or mines in high risk jurisdictions. Investors who are taking the extra step and buying mining companies rather than just gold and silver should isolate those companies that operate in safe regions, have low production costs and significant production growth. Since the entire complex is selling off, there are opportunities in these higher quality mining stocks.

For gold, I would recommend investors consider a stock such as Agnico Eagle Mines (AEM), which is going to grow its production by about 15 percent over the next two years. It also has relatively low production costs, and its mines are located in Canada, Mexico, and Finland, which are all safe places to mine.

For silver, investors should consider First Majestic Silver, which has very strong production growth in its future as it plans on adding two mines to its five producing ones. It also operates in Mexico, which is a safe place to mine. Finally, the company has low production costs so it is profitable even with silver trading at less tha n$20/ounce. The company will be using these profits to buy back its own inexpensive stock, and this should create a lot of value going forward.

Disclosure: Ben Kramer-Miller is long gold and silver coins as well as shares of First Majestic Silver.

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