Gold and Silver Outperform in January, Is There More Upside in 2012?

With January wrapping up, I’ve looked at some of the sectors in the market to see their relative performance. The January flow of money is interesting to note, as this can indicate where the big funds are placing their bets for the rest of the year. As the clock ticked over into the New Year, the results are that silver and gold have been the big winners in January.

Silver was up approximately 20% and gold up just over 11% for the month of January. In fact, if we looked at the entire precious metals sector, like platinum and palladium, they’ve all had great a great month. Is this more to go for these precious metals? I would say yes, although I wouldn’t rush out and buy precious metals tomorrow, as there are always some consolidation gains before moving up.

With the Federal Reserve stating that they are going to leave rates at these low levels until well into 2014, we’re looking at more monetary stimulus worldwide being implemented over the next couple of years. This will inevitably create inflation and a lack of trust in the faith of paper currencies. This added liquidity will also be pushed into commodities, as it has historically. Just look over the last 10 years and you will see gold and silver prices rising along with additional liquidity (money printing).

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This creates value in gold and silver mining companies. Both big-cap and small precious metals miners can offer some value for the investor. Barrick Gold Corporation (NYSE/ABX) and Goldcorp Inc. (NYSE/GG) are huge, diversified precious metals mining firms that have a variety of gold and silver mines. This diversification protects the investor from any problems at one specific mine and the scale of production allows a better ability to predict the flow of revenue from gold and silver sales.

Small- and mid-cap precious metals miners can offer the additional upside of being potentially bought out by the bigger gold and silver miners. Firms like Nevsun Resources Ltd. (AMEX/NSU), which has properties bearing gold, along with copper and zinc, start to look attractive to bigger gold firms that need more precious metals reserves. Plus they pay out a small dividend, which is an additional bonus. Getting paid to wait while the price of gold continues to go up is a nice bonus.

In the silver space, an interesting company is Silvercorp Metals Inc. (NYSE/SVM). This is a company with $1.00 of cash per share, forward price-earnings ratio of 12, and revenue that continues to grow. Profit margins are a healthy 38% and the company has no debt. With prices of gold and silver, as well as other precious metals, continuing to move up, you should look at the miners that have a solid resource base, relatively low level of debt, and a consistent history of hitting their targets.

One area that management can’t control is the actual price of gold and silver. But, thanks to the statements by central bankers and politicians around the world, they’ve essentially laid out the roadmap for the next several years. With more monetary stimulus—meaning more money printing—we will get more inflation. This is a hugely bullish sign for precious metals.

Gold and silver will continue to go up as long as central bankers keep the money tap open.


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