Why Bargain Stocks Still Abound in Gold and Silver

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Two years ago, you could scarcely have given these stocks away.

Today, they are breathing new life as the smart money continues to make the smart move into gold and silver miners and explorers.

A sterling performance by silver
Silver, in particular, has led a phenomenal charge of late. While closing back in on the $20 mark, silver has improved its price ratio to gold from 67:1 just over two months ago, to a more reasonable (though still-elevated) 63:1 today. Although in the big picture silver is merely trending back toward a more "normal" price relationship with gold, in the near term silver's extremely tight physical supply may be prompting the metal to jump out of character and attempt to lead gold into the next upward leg. Indeed, well-known metals trader Dan Norcini noted that silver broke out to a new all-time high Wednesday as priced in euros.

My top stock pick for 2010 -- Silver Wheaton (NYSE: SLW  ) -- has surged nearly 60% year-to-date. If I am correct about this stock eventually reaching $100 per share as this bull market proceeds, then I will have called a 38-bagger from the stock's unthinkable low of $2.51 back in 2008. For Fools who selected their gold and silver vehicles carefully -- and stood strong through the monster correction of 2008 -- this precious-metals bull market has already yielded some exciting returns.

Could gilded bargains truly remain?
After all these years of rising precious metal prices and the associated hoopla, it would be all-too-easy to presume that these mining stocks must be fully valued by now. Fools who do their homework, meanwhile, can still locate remarkable bargains within the sector that provide a precious moat of protection from the inherent volatility of the sector.

My favorite example among the best-known names remains Yamana Gold (NYSE: AUY  ) . Although the stock has regained a portion of its former glory since the late-2008 trough (surging more than 200% within two years), it has never recovered from a spate of downward revisions to production targets that I believe alienated some of the old Yamana faithful even as stagnant share prices have thrown valuation to the wind. Last month, I suggested that Yamana was trading at approximately one-third of fair value given the enormous value of its proven buried treasure. If you believe that gold (and in this case, copper prices) share a glowing outlook, then Yamana warrants careful consideration.

Three sources of enduring value
If you're wondering how a well-known miner like Yamana can retain a substantial discount to fair value even here in the 10th year of a much-touted precious metals bull market, I have a few thoughts for you to consider.

  • The 2008 correction that mercilessly annihilated the dollar-denominated prices of gold and silver tore the shares of miners to shreds. The same leverage to underlying metal prices that draws investors to mining shares in an upswing is, of course, a razor-sharp pendulum that can cut both ways. Even though the major stock indices notched declines of a similar scale some months later, I believe that many investors resolved to avoid the sector after observing that brutal gut check.
  • Despite what you might have concluded from the amount of attention gold and silver have received over the years, the miners have remained decidedly off the radar of most investors. Money managers have typically sought some bullion exposure through the popular SPDR Gold Trust (NYSE: GLD  ) ... against this Fool's advice. But only recently have the miners begun to be perceived as legitimate vehicles for gold and silver exposure.
  • Most investors, furthermore, don't possess sufficient knowledge of this sector. From honing an ability to interpret exploration drill results or mine feasibility studies, to developing procedures by which to assign actual or relative valuations to ore-bearing assets, I submit that the proportion of investors equipped to tackle this sector remains surprisingly small. I suspect that this will change as continued strength from these metals launches share prices into continued strong returns, and I encourage Fools to capitalize on this condition by building their knowledge of the sector in advance of increasing and truly widespread public interest.

Thanks to these and other factors, the precious-metals miners and explorers as a group have remained noteworthy laggards to gold and silver bullion in recent years. I view this underperformance as a fleeting phenomenon, and fully expect an upward repricing event to strike the sector during this next phase of the bull market.

I believe the potential for particularly epic returns awaits among the junior miners and explorers that have eluded much of the spotlight to date. As a starting point for further research, I urge Fools to spend some time getting to know the holdings of the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ  ) and the Global X Silver Miners ETF (NYSE: SIL  ) . From companies I've highlighted on my Motley Fool CAPS blog for years, to ship-shape competitors like Endeavour Silver (AMEX: EXK  ) , junior silver producers in Mexico are a great place to get started. On the gold side, Northgate Minerals (AMEX: NXG  ) is a strong favorite among discerning Fools.

Where will you strike undervalued gold or silver? Please share your own precious bargains in the comments section below.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Endeavour Silver, Northgate Minerals, Silver Wheaton, and Yamana Gold. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (32)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 10, 2010, at 7:09 PM, Ruleoflaw wrote:

    Silver Wheaton continues to make diversity unpopular. Maybe AUY will catch up.

  • Report this Comment On September 13, 2010, at 7:58 AM, doring2000 wrote:

    On August 25, 2009 I bought my first junior gold explorer shares ever, despite the CAPS rating of 1 star only and despite some "educated" negative comments of fool members. As of today, 54 weeks later, the junior explorer has become a junior gold producer. This company is now registered on the AMEX under GORO, has increased its value by 200% and has payed twice a dividend of 3 cents per share within 2 months of commercial production.

    Unfortunately the fools still believe that GORO will be an underperformer and haven't changed their 1 star rating since.

    So why did I buy shares of Gold Resource Corp in the first place? It was the presentation on their website, a very clear description of the situation and the goals of the management who own about half the stock themselves. They promised to pay about one third of cash flow as dividends. Within 30 years of investing I had never heard anything like this.

    Today there are still reviews on the internet that predict a strong performance of GORO in the years to come.

    I just hope that other fools too, despite the 1 star CAPS rating, will detect the potential of this great small company.

    When I compare the websites and the past performance of AUY and GORO, I can not believe that AUY will have the potential to do as well as GORO.

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