This week, I (Chris) have been showing you why you can’t afford to ignore what’s going on with gold and silver right now.
Gold is up 28% so far this year. Silver is up 30%.
And if history is judge, these metals will be among the best-performing investments in 2020 and beyond.
In previous bull markets, gold has shot up 168%… 169%… 356%… and 401%.
As impressive as those gains are… silver has outstripped them. In the past four bull markets of the modern era, silver surged 344%… 377%… 453%… and 900%.
But as I promised I’d get into this week… there’s a way to turbocharge those gains.
For instance, so far this year… the turbocharged version of gold is up 42% versus 28% for physical gold.
And the turbocharged version of silver is up 42% versus a gain of 30% for physical silver.
Gold and silver miners are the companies that haul these metals out of the ground for a profit.
And they go nuts in precious metals bull markets. First, let’s look at gold miners…
As you can see, gold miners have outperformed gold bullion by as much as six times over past bull markets.
The story is similar for silver. Over the past two silver bull markets, silver miners returned more than double what the physical metal did.
Those blue bars on both charts represent the average precious metals mining stock. Individual stocks have done even better.
The last precious metals bull market ran from 2008 to 2011. Over that time, the three top-performing gold mining stocks rose as much as 14,000%… 20,250%… and 23,673%.
And the three best-performing silver stocks were up 1,759%… 2,077%… and 2,138%.
Those are the type of returns that could really move the needle on your wealth.
For instance, a grubstake of just $1,000 in the third-best-performing gold stock would have netted you $141,000.
A $10,000 grubstake would have made you a millionaire.
It’s something legendary speculator and Legacy Research cofounder Doug Casey reminds his readers.
As he put it in an interview in his home in Aspen, Colorado, last October…
Mining is one of the worst businesses in the world. Even if you get lucky and find a deposit, you have to spend much more money developing it, to show that it may be economic.
Let me emphasize the “may be economic.” And if it seems to be, after tens or hundreds of millions in drilling and engineering, then you build the mine. Which may cost billions. And your troubles have just started…
The problem is all of this investment is upfront – cashflow is always years in the future, if it ever comes. An additional danger is that most of the governments in the world are bankrupt today… they’re greedy to charge taxes, royalties, fees, and various shakedowns.
So, given how crappy the mining business is…
It has to do with something called leverage.
You typically think of leverage as using borrowed cash to amplify your returns. (Leverage works in the opposite direction, too. It also amplifies your losses.)
But that’s not what leverage means for mining companies. It’s got nothing to do with using borrowed cash to ramp up returns.
Instead, rising gold and silver prices exponentially boost the profitability of the companies that mine these metals.
When the gold price goes up (or down) by 1%… gold mining stocks tend to go up (or down) by more than 1%. Sometimes a lot more…
Gold and silver mining companies have fixed costs.
Their processing costs… smelting costs… and transportation costs are locked in over the short term.
But the prices for gold and silver – which govern mining companies’ revenues – are not fixed. They move around. Sometimes drastically.
And in a precious metals bull market… like the one we’re in today… they move UP.
That acts like a shot of adrenaline for earnings (what’s left when you subtract costs from revenues). I’ll give you an example…
Say a mining company is digging gold out of the ground at a cost of $900 an ounce. And say the gold price is $1,000 an ounce. That company earns a profit of $100 an ounce.
But now let’s say the gold price climbs to $1,500. The company’s costs are the same. But its revenues shoot up. And it now books a profit of $600 an ounce.
The price of gold rose 50%. But the company’s earnings shot up 500%.
And rising earnings fuel bull markets.
Gold stocks are stocks.
In a liquidity squeeze, like we saw in March and April when the overall stock market was tumbling, gold stocks sold off along with everything else.
But then they soared to new highs. They’ve jumped 120% since bottoming in mid-March.
I do expect plenty more air pockets (sudden drops) ahead.
So this is a speculation, not an investment. You’ll need to keep your positions small and buckle up for a bumpy ride.
But if our investment case is right… and we’re in the early stage of a powerful bull market in gold and silver… miners are a great way to add extra “oomph” to your portfolio.
It’s no coincidence that the last bull market in gold and silver followed the 2008 global financial crisis.
And if you had any doubt that the coronavirus pandemic is a real crisis, you may have missed today’s news.
The Bureau of Economic Analysis announced that U.S. GDP plunged at an annual rate of 32.9% in the second quarter.
This is the kind of number that makes your head spin. Previously, GDP had never shrunk by more than 10% in any quarter since the government began keeping track after World War II.
And historical data from economists Nathan Balke and Robert Gordon shows it was the worst quarter since at least 1875.
That includes the Great Depression.
Things look bleak. But this type of environment is perfect for investing in precious metals…
As longtime readers are sick of hearing me bang on about, investors seek them out in crises as “disaster insurance.”
Here’s how our commodities investing expert and globetrotting geologist, Dave Forest, explained it in a recent mailbag edition of the Cut…
It’s hard to imagine any gold-linked investment being a bad decision as we weather another big stock market collapse.
In general, all gold-linked investments did very well in the wake of the 2008 crash. They initially dove with everything else, but they recovered those losses in a matter of months – and then went on to significant gains.
If you’re looking for a convenient way to gain exposure to gold mining stocks, consider the VanEck Vectors Gold Miners ETF (GDX). It’s an exchange-traded fund (ETF) that holds a basket of major gold miners.
Silver miners are even more volatile than gold miners. But that means when gold miners go up… silver miners tend to shoot up even higher.
If you want convenient exposure to silver mining stocks, the biggest silver miner ETF is Global X Silver Miners ETF (SIL).
If history is judge… these miners will be great speculations as the bull market gathers steam.
Regards,
Chris Lowe
July 30, 2020
Bray, Ireland