Load Up On Gold and Silver as Bernanke Dives Off the Deep End
I first thought U.S. Federal Reserve Chairman Ben Bernanke was being deceitful when he denied the existence of inflation - but now I'm beginning to think he's simply delusional.
Of course, following the market turbulence of the past few months, the picture has changed somewhat. While growth in China and other emerging markets remains quite rapid, it appears to be slowing a bit. That has dented demand for industrial commodities. Prices have dropped as a result. Copper, for example, has fallen to about $6,900 per metric ton, from more than $10,000. However, unless the emerging market economies go into a full-blown recession - and I don't expect they will - I would anticipate some recovery here.
So far the only thing the Fed's loose monetary policy has succeeded at doing is pushing gold and silver prices steadily higher.
Gold has risen by more than 30% this year, and silver at one point in April was trading 300% higher than it was a year earlier.
These metals have stumbled lately, but with over-expansive monetary policy still intact, they are likely to experience a strong rebound.
Remember, it's not just Bernanke: The European Central Bank (ECB) also has stopped raising interest rates because of the Eurozone's problems. And the Bank of England (BOE) has indicated that it may well drop rates from their current 0.5% level - even though British inflation remains around 5%.
The undeniable result will be a renewed surge in gold and silver prices, meaning the present pullback is an outstanding buying opportunity.
If gold matches its 1980 peak adjusted for inflation, it will hit $2,500 an ounce. If it matches its 1980 peak adjusted for the world economy's growth since then, it will hit $5,000 an ounce. Similarly, if silver were to match its 1980 peak adjusted for inflation, it could climb as high as $150 an ounce.
These are not unrealistic targets. As in the late 1970s, the world's monetary authorities are determinedly trashing the value of paper money and forcing rational investors to look for an alternative.
Panning for Profit
For investors, the simplest way into the metals remains the two large exchange-traded funds (ETFs): The SPDR Gold Trust (NYSE: GLD) and the iShares Silver Trust (NYSE: SLV).
There is a modest amount of slippage between these ETFs and the metals themselves, so their prices are running about 2% behind the metals, but their convenience and liquidity make them the best choice for retail investors.
However, gold and silver mining companies this year have substantially underperformed the metals. The Market Vectors ETF Trust (NYSE: GDX), which tracks gold miners, is about 15% below its Jan. 1 level even while gold itself is up about 15%.
Indeed, miners currently are very cheap compared to the metals themselves. This is especially true of silver. So, gold and silver investors should make sure a substantial part of their portfolio is devoted to the miners, as well as the precious metals themselves.
As far as gold miners are concerned, I would recommend Barrick Gold Corp. (NYSE: ABX), which is currently selling on a price/earnings (P/E) ratio of 12 and Yamana Gold (NYSE: AUY), with a P/E of about 16.
A good silver miner to look at would be Silvercorp Metals (NYSE: SVM) - a rapidly growing Chinese silver miner that trades at roughly 16-times earnings.