Transcript of Session #2:
What To Invest In Precious Metals And Mining Shares
Larry here. Welcome to the second session of my gold WAR ROOMS! I’m thrilled you’ve joined me again today.
In today’s session, I’m going to review for you how I pick the best vehicles to trade the precious metals — from how I select ETFs to the very best mining companies I am watching right now.
And of course, discussion of the right investments to use in the precious metals markets would not be complete unless you know which metals investments you should also avoid! So be sure to keep an eye on your inbox.
Right after this session ends, I’ll shoot you an email with important information you will want to keep by your side in the months ahead — what I am calling my “FOUR MUST HAVE LISTS” for the next phase of the great precious metals bull market, including …
— My full list of the best gold and silver ETFs to invest in
— The worst gold and silver ETFs to invest in
— My favorite leveraged gold and silver ETFs. And …
— My list of the top mining shares that are on my radar screens right now
So let’s get started. First, with ETFs in the precious metals markets.
As you probably already know, while ETFs in general are a great investment vehicle, not all ETFs are created equal. Some charge fees that are too high. Many don’t have enough volume to invest in, even from a long-term point of view.
Others don’t track the price of gold or silver all that well. And still others are simply dominated by just a few large institutions, making it very expensive for you to get in or out of, as the bid-ask spreads are not as liquid as they should be.
So how do you know which precious metals ETFs are the best to invest in or trade?
It’s actually very simple. You want …
ETFs that don’t charge fees that are too steep if you’re a long-term investor
You want ETFs that are very actively traded, with good volume and not just institutional volume, but also have good retail investor volume.
You want ETFs that track the price of gold and silver, or mining shares, as closely as possible.
And you largely want, with rare exceptions, domestic U.S.-based ETFs. Not only are they easier to invest in or trade, they’re easier for you to track.
There are many more variables involved, most of which are too complex to cover even in this war room. Suffice it to say that with the next leg up in precious metals and mining shares right around the corner — you want nothing but the best vehicles to invest and trade. Period.
That said, I’ve done all the heavy lifting for you. Not counting inverse or bearish ETFs, which I’ll get to in a few moments, there are currently 23 precious metals ETFs traded on the exchanges.
Of those 23, there are TEN ETFs that have an expense ratio of greater than .60%, my ceiling for the amount an ETF should charge investors, whether they are trading the ETFs on a short-term basis, or investing them for the long haul.
You can see the full list of the 23 precious metals ETFs on this slide. Those ETFs that are too expensive are highlighted in red and they don’t cut it for me, nor should they for you, for either investing or trading.
The next big factor is volume. Without good volume, no ETF is worth its salt in my opinion, for two reasons. Lack of volume means it’s going to be expensive to get in or out of the ETF, as the bid/ask spreads are often wide, and can cost you $1 or $2 a share when executing either a buy or a sell, eating into your profit potential.
Worse, in some cases, the low volume is a sign that the issuer of the ETF may not be seeing the potential fees it wants, and therefore, that ETF may be in danger of disappearing from the exchange, or being delisted from trading, if you will. That’s not good for you, either.
So what kind of volume do you want to see in a precious metals ETF to make that ETF a good vehicle to either invest in or trade? It’s simple. In my experience, you want to see minimum 3-month average daily trading volume of at least 50 or 60 thousand shares. That can change from time to time depending on other market conditions but in general if the ETF does not meet that requirement, it ends up on my no-no list.
For the list of 23 precious metals ETFs on this slide, that eliminated another 8, again, highlighted in red.
End result: There are only 5 precious metals ETFs that I’m willing to put my money on, either for trading or investing, and that you should only use as well.
What about precious metals inverse and leveraged ETFs? It’s largely the same process.
But because there are not that many inverse and leveraged ETFs in the precious metals, it’s infinitely easier to screen them. At the same time, since for most investors I do not advocate options and/or futures, when it comes to leveraged and inverse precious metals ETFs, you do want to maximize the number of vehicles you can trade or invest in, since there are so few to begin with.
That said, here’s a list of all inverse and leveraged ETFs on the precious metals. As you can see, there are only 12 inverse and leveraged ETFs in precious metals, platinum and palladium included. That’s not a lot. And the expense ratios naturally run higher, as high as 1.65%, compared to single leveraged and bullishly oriented ETFs.
I won’t invest or trade in any inverse or leveraged precious metals ETFs if that ETF has an expense ratio of more than 1.0% and average volume of less than roughly 200,000 shares.
That automatically crosses off most of the ETFs in this category, leveraged and inverse. End result, there are only 6 inverse or leveraged ETFs in the precious metals that make it on my list for investing or trading in.
So there you have it. It’s relatively painless when it comes to knowing which are the best precious metals ETFs to trade and invest in. Unleveraged, leveraged and even the inverse precious metals ETFs.
But how do you know which mining share ETFs to invest in? Fortunately, that’s painless too. There are only 19 ETFs related to the precious metals mining business, and 11 of those ETFs simply do not have enough trading volume, period.
That leaves a total of 8 mining ETFs that I like to trade and invest in, with only two of those remaining 11 being leveraged and/or inverse bearish ETFs.
Ok, so there have yet. Your lists of the best ETFS I trade and invest in. ETFs that you can expect to see recommended in my Gold and Silver Trader service.
But what about actual mining shares? What criteria do I use to recommend buying or trading specific mining shares?
That’s a lot more complicated, for a variety of reasons. As I’ve written about recently, and extensively, this new phase up in the precious metals is going to see a lot of mining companies actually end up biting the dust.
Why? There are a lot of reasons. But chief among them are …
First, there is a whole load of mining companies that simply spent too much money when gold was nearing the $1,900 level — buying up properties by borrowing tons of money. And now that gold prices have tumbled — and interest rates are rising — many of those heavily indebted miners will not make it. Period.
Second, there are other mining companies that believe that gold and silver are now in bear markets, so they are starting to hedge their reserves and production. Dumb decision. As gold and silver move back up, these miners are going to get crushed by their hedges and forward sales.
And third, there are oodles of mining companies that cannot cope with the increased cost of production. It now costs as much as $1,300 to produce a single ounce of gold. Many mining companies and their management teams are not experienced or well enough connected to increase their company’s mining efficiency and hence, mine at a more favorable cost structure.
That said, evaluating mining companies today — for either investing or trading purposes — is entirely different from what it was way back in the year 2000 when the gold bull market first lifted off.
Back then, you could throw a dart at the mining sector to pick your mining companies, and come out okay or even with huge profits. But today, it’s totally different. The factors you should look at carefully are:
— The amount of gold or silver reserves the company has
— The enterprise value per ounce of mineable metal
— The total cost of ownership (TCO) of the mineable reserves
— The total cost to produce an ounce of gold or silver
— Whether the company can cheaply finance the huge capital expenditures that are involved in the mining process
— The expertise of the company’s management
— Whether the company hedges or plans to hedge
— How much debt the company has and at what interest rate
— Where its properties are located
— And more, including the chart and cyclical patterns present in the company’s share price
That’s lot of work to do. And it’s where, again, I do the heavy lifting for you. In short, you want to buy mining shares that …
— Have an enterprise value of less than roughly $750 an ounce of gold reserves (or gold equivalent when it comes to silver)
— Have an enterprise value of less than $100 an ounce of gold resources (or gold equivalent in silver)
You also want companies that have the lowest “total cost of ownership,” or TCO for short.
TCO covers precisely what you would think: The total cost of ownership is a complete and thorough estimate of the cost to produce an ounce of gold or silver when you acquire an interest in the company’s shares.
It’s the ultimate figure with which you want to compare miners. It takes into consideration the company’s current share price, its cash, debt, investments, hedging and liabilities, and the expected development costs needed to build the mines, acquire mining equipment, as well as the operational cash to mine the gold.
It’s all expressed per ounce of mineable gold, or mineable gold equivalent in the case of silver.
Importantly, it is not the cash cost to mine the gold. The cash cost is simply equal to the operating costs (all non-capital costs) divided by the number of ounces produced or expected to be produced.
In other words, the total cost of ownership is the more complete picture, and accounts for virtually every cost the company will incur when mining its reserves.
Thing is, over the past several years, the cost of mining, equipment and capital raising has become very expensive. So today it’s not unusual, for instance, to see a mining company have a total cost of ownership of $1,500, $1,600 or even more per ounce of gold. Even if that company’s cash operating costs to produce an ounce of gold is much lower.
For instance, take Newcrest Mining’s Australian operations. The company has a relatively low cash cost per ounce of gold mined of about A$704 an ounce.
But add in all costs and that rises to a whopping A$1,150 an ounce!
Or consider another Australian miner I like, Kingsgate Mining. It has an enterprise value of a mere A$47 per mineable ounce of gold. But its cash cost to pull that gold out of the ground is A$951 and its total cost, or TCO, is A$1,553 per ounce!
As you can see, estimating a miner’s total cost of ownership really gives you the complete picture of what it takes a particular miner to get gold out of the ground.
That’s why I prefer to use the TCO method. It’s the complete picture.
And it’s also why I like to look at miners that have a TCO of less than roughly $1,200 an ounce. Of course, the lower the TCO, the better.
It’s a lot of work. And bear in mind that the mining shares I consider eligible for trading or investing in — can and will change.
What about companies that don’t have proven gold or silver reserves? Miners that just have resources, not proven mineable, or miners that are merely in the exploration phase and that don’t even have measurable resources?
That’s a whole different story. And here, I take the approach of keeping any decent mining company — no matter how big or small — no matter all my previous caveat — on my radar screen.
Why? Because you simply never know when a company will stumble upon a huge elephant-sized find of gold or silver … or when one of the previously beaten down and dumped on miners will end up a turnaround situation.
Take Seabridge Gold for instance. Back in 2000 it was a 35-cent penny mining stock in a company with a lot of problems. It subsequently soared to over $36 — more than a 10,000 percent increase.
That said, I do eliminate the miners that I think are hopeless, but by and large, I keep this list as broad as possible.
You’ll shortly receive all the tables in this conference session — plus a list of mining companies that I am constantly monitoring — in a separate email, so you can keep them handy.
Be sure to attend the next session of my War Rooms on the new bull market in the precious metals, Session III.
In it, I’ll discuss the methods I use to reduce the risk of investing and trading in precious metals and in mining shares, while at the same time maximizing your profit potential.
