This article is part of our Best ETFs for 2012 series, in which we're seeking out the top-performing ETFs for the coming year.
It's time to face the music, Fools. The forces that have propelled gold and silver prices higher over the past decade continue to gather steam.
The United States kicked the can down the road by attempting to bury toxic debts beneath mounds of new debt, and now here we stand with a bloated Federal Reserve and a national debt that has already exploded from $5.6 trillion to more than $15 trillion here in this very young century of ours. Europe is frantically recruiting boots from around the world to help it kick its own can of debt contagion back into the so-called "periphery" nations, though it's anyone's guess where that can will land next. Like a strand of trans-Atlantic telephone cable, the insidious nature of counterparty risk may yet connect Europe's can to the one that remains airborne over U.S. soil.
During times like these, I believe Fools can ill afford to turn a blind eye to the likelihood that gold and silver will continue proving their mettle as reliable safe havens while cans of debt distress are predictably kicked to and fro. As I prepare to navigate my own way through 2012 as an investor, I would not dream of stepping one toe into the new year without my gold and silver exposure firmly intact, and I remind my fellow Fools to view the recent pullback -- particularly among the glaringly undervalued miners of these metals -- as a timely opportunity to initiate or build such exposure. Because I believe silver is poised to deliver a superior percentage increase to even that of gold going forward, I hold a particularly bullish outlook for the stocks of quality silver miners.
A silver bullet for silver exposure
Although I have personally constructed my own silver exposure through a basket of individual stocks, I noted after the launch of the Global X Silver Miners ETF (NYSE: SIL ) last year that "I've gained little advantage over the late-coming Fool who grabs some shares of this top-notch ETF." In order to convey the conviction behind my positive outlook for the vehicle's long-term performance, I issued a bold prediction that my bullish CAPScall on the ETF will outperform the S&P 500 (INDEX: ^GSPC ) by at least 200% within a five-year timeframe. Undeterred by the ETF's lackluster performance during 2011, I reiterated my prediction over the summer, and I am similarly compelled to remind Fools today that the Global X Silver Miners ETF is favorably positioned to deliver outstanding performance during 2012 and beyond.
Thus far, my CAPS pick for this ETF has outperformed the S&P 500 by 47%, even after a tough 2011 for several of the ETF's constituent stocks. The corresponding trajectory of the iShares Silver Trust shows that silver prices have outperformed the miners over the period, so thus far my pick has failed to deliver investors even a bullion-beating performance to compensate them for the operational and geopolitical risks that accompany mining operations. Needless to say, I expect that trend to reverse sharply as market valuations adjust to reflect even a modicum of their looming profitability. To illustrate this point, let's dive into a few of the ETF's major holdings.
Turnaround stories galore
The roll call of silver miners held within this ETF contains a number of names that have been absolutely steamrolled lately for a variety of reasons. Hecla Mining (NYSE: HL ) has had a heck of a time regaining momentum since a large environmental litigation settlement earlier this year preceded an unlucky year at Hecla's Lucky Friday mine in Idaho. Despite these challenges, I believe it would be wrong to underestimate the rebound potential of this 120-year-old mining company with monster silver reserves. I expect Hecla's vanguard move to base dividend payments on the prevailing silver price will go a long way toward reinvigorating an embattled shareholder base.
Coeur d'Alene Mines (NYSE: CDE ) was the turnaround story of 2009 following a very troubled journey to the high volume of steady-state production the company enjoys today. Although the shares have already rebounded substantially since that time, I reiterate that "this is just the beginning of an overdue resurgence for Coeur d'Alene." Silvercorp Metals moved swiftly and convincingly to rebut a set of anonymous allegations, but still the shares have failed to reflect the full recovery of previously assessed value that I believe is warranted now that the allegations have been thoroughly debunked. Silver Standard Resources (Nasdaq: SSRI ) took a necessary haircut when the company downsized its reserves at Pirquitas following delineation drilling, but in the wake of a violent sell-off I see a stock with solid upside potential and little downside risk.
Shares of Pan American Silver (Nasdaq: PAAS ) have languished in limbo while the market awaits word on whether Argentina's Chubut province will overturn a ban on open-pit mining to clear the way for the company's transformative Navidad project. The company is also assessing impacts from Argentina's recent move to require miners to repatriate 100% of sales receipts. In the midst of the market's adjustments to these developments, I believe a very compelling valuation to Pan American's resource base has emerged. The company's current enterprise ratio of $2.16 billion is equivalent to just $9.36 for each of the company's 230.7 million ounces in reserves. If we consider the Navidad project's added trove of an estimated 632.3 million ounces of silver, that measure drops to just $2.50 per ounce of silver. I seem to recall a certain Silver Wheaton (NYSE: SLW ) once traded at an equivalent of about $1 per ounce of silver, and that stock has turned into a legendary 13-bagger. Accordingly, Silver Wheaton is the third-largest equity position within the Global X Silver Miners ETF today, and I expect a further tripling in the share price of this powerhouse silver producer to count among the key components of this vehicle's looming outperformance.
As we prepare to close the book on a tumultuous 2011 for equity investors, and look to the coming year for reliable gains within an unreliable economic landscape, I consider the Global X Silver Miners ETF a terrific one-stop shop for effective exposure to the persistently bullish long-term outlook for silver. Please bookmark this link to track all my Foolish coverage of the miners of silver and gold, and sound off in the comments section below to share your own precious metals investment strategy.
Stay tuned throughout our series on the Best ETFs for 2012 to find out about all of the picks our Foolish contributors have made. Click back to the series intro for links to the entire series.