The stock market can seemingly do no wrong for the time being. Since the election, the broad-based S&P 500 has hit more than a dozen all-time highs, and the aggregate valuation of its components crossed the $20 trillion mark. Meanwhile, the iconic Dow Jones Industrial Average topped the elusive 20,000-point mark.
When the stock market is toppling milestones one after another, investors tend to become less averse to risk and are far more willing to dip their toes into higher-growth investments. When this happens, precious metals and mining stocks run the risk of being left in the dust.
Now that's a lot of reasons to own gold and silver stocks
It was just two months ago that the U.S. dollar index hit a 14-year high! Generally, the U.S. dollar and gold and silver, the two precious metals most commonly purchased by investors, tend to move in opposite directions. The dollar is usually strengthening when the U.S. economy is improving and uncertainty is waning, which is often bad news for gold and silver. On the flipside, a falling dollar implies potential weakness and uncertainty in the U.S. economy, which gold and silver feed off of.
However, the dollar may not be the best measure to determine the direction gold or silver head next. Instead, investors might be wise to turn their attention to the bond market.
I've long opined that opportunity cost is the driving force behind physical gold and silver prices. Opportunity cost is the cost of giving up a near-guaranteed return in one asset for the opportunity to earn more with a different asset. Bonds are an example of an interest-bearing asset that offers a fairly guaranteed return. Gold and silver, on the other hand, have no guaranteed return, or yield. In order to convince investors to pass up the guaranteed return of bonds in favor of precious metal ownership, the yields on bonds have to be pretty low.
Last year, the aggregate value of government bonds with a negative yield being held around the globe nearly topped the $12 trillion mark. That's right -- people were actually paying for the right to own government bonds! A majority of these bonds were located in Japan, which had willingly adopted a negative interest rate policy to coerce investment in equities. As of Dec. 31, 2016, according to Fitch Ratings, there was still $9.1 trillion in negative-yielding government bonds being held globally by investors. Even though we've seen a global rebound in yields, the opportunity cost of owning gold and silver remains attractively low. You could rightly suggest that these negative-yielding bonds offers 9.1 trillion reasons why gold and silver stocks belong in your portfolio.
Companies to keep in mind
You may also be asking, "Why does he keep saying buy gold and silver stocks and not physical gold and silver?"
There are a few reasons. For starters, buying actual gold and silver stocks allows you the opportunity to receive a dividend if a company becomes profitable enough, which is not something you'll ever get with physical gold and silver. Secondly, investing in companies allows you to take advantage of managerial maneuvering, such as innovation and cost-cutting. Finally, you'll get a far better fundamental understanding from buying actual companies than physical metals because you'll have balance sheets and earnings reports you can dive into.
With this in mind, here are a few intriguing ways to consider investing in gold and silver stocks.
One of the easiest ways to invest in gold and silver stocks is to consider royalty and streaming companies like Royal Gold (NASDAQ:RGLD) and Silver Wheaton (NYSE:WPM). Royalty companies don't handle the costly day-to-day mining activities. Instead, they provide large sums of upfront cash to mining companies in order to develop new mines or expand existing ones. In return, companies like Royal Gold and Silver Wheaton receive long-term or life-of-mine contracts that allow them to receive a percentage of gold, silver, or some other byproduct, at a well-below market rate.
Silver Wheaton's third-quarter results showed that it paid an average cash cost of $4.51 per ounce for silver and $390 per ounce for gold that it received. This implies a $13.50 per ounce margin for silver and a better than $830 per ounce margin for gold based on current prices. Streaming companies feel the most immediate impact of gold and silver price increases and declines, and are thus the most likely to pay dividends, and raise their dividends, if precious-metal prices continue climbing.
Individual mining companies are another option. Barrick Gold (NYSE:GOLD), one of the largest gold miners in the world, could be worth considering on the basis of its low all-in sustaining costs (AISC), or the costs to keep all of its operations (mining and administrative) running. Barrick Gold wound up lowering its AISC guidance three separate times over the past year, and just this past week ultimately reported a full-year AISC of just $730 an ounce. The company's guidance was equally stellar, with the midpoint of its 2017 AISC at just $745 an ounce (and Barrick is notoriously conservative with its guidance).
Barrick also sliced more than $2 billion off of its debt total to $7.9 billion in 2016, and it's on track to further reduce its debt to $5 billion by 2018. With low costs, ample mine expansion opportunities, and an improving balance sheet, Barrick is looking like a real winner in the mining sector.
Finally, for those of you who don't have the time to devote to individual stock research, may I suggest an electronic-traded fund (ETF) geared toward precious metals. For instance, the VanEck Vectors Gold Miners ETF (NYSEMKT:GDX) has a reasonable net expense ratio of 0.52%, but it'll give you exposure to 52 separate holdings with $11.9 billion in net assets. This way if a mining company runs into production issues, your investment doesn't get wiped out. ETFs are a smart way to diversify your risk just like a professional money manager.
With 9.1 trillion reasons to buy gold and silver stocks, what more evidence could you need?