News Analysis date published New: 
Wednesday, October 3, 2012 - 11:30
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Wednesday, October 3, 2012 - 16:13
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Wednesday, October 3, 2012 - 11:30

How To Protect Yourself From The Market's Biggest Threat

Wednesday, October 03, 2012 11:30 AM

The time has come to protect yourself.

On Sept. 13, Federal Reserve Chairman Ben Bernanke pledged to unleash a third wave of quantitative easing (QE3) to combat the economic slowdown.

According to the Federal Reserve, the central bank intends to purchase $40 billion worth of mortgage-backed bonds per month for an undetermined amount of time. At that rate, it will only take a year for the Fed's already bloated balance sheet to expand by another half-trillion dollars as it gobbles up bonds to keep borrowing rates artificially low.

But the program may go further than that. Unlike the first two monetary injections, this third round is open-ended -- there is no fixed dosage limit or expiration date. Asset purchases will continue indefinitely until the job market is back in gear.

Only time will tell whether or not this strategy pays off and jump-starts the economy. Even if the plan works wonders, it will still come at a cost... You can't just create more money out of thin air without devaluing it. Investors know this. Sooner or later, one of the market's biggest threats -- inflation -- is bound to kick in.

Simply put, your dollars probably won't buy as much in 2014 or 2015 as they do today. And that's why just like QE1 and QE2, the launch of QE3 has encouraged droves of investors to stockpile part of their wealth in gold and other hard assets like oil, timber, copper, and real estate... anything but depreciating greenbacks.

For example, silver futures jumped nearly 5% on the day of the announcement. Palladium touched $690 per ounce after moving higher for the ninth consecutive day -- the longest winning streak since 2004.

Tin, zinc, nickel, sugar, grains, gasoline... everything rose across the board on the Fed's announcement. We've given back some of those gains since then, but periodic profit taking is to be expected. And remember, this is just the post-announcement bounce -- the first dollar hasn't even been spent yet.

These tremors in the trading pits have been felt in the equities markets as well. But some stocks have responded much more enthusiastically than others. As is often the case, junior explorers have been the biggest beneficiaries of this rally.

Take the copper sector, for example.

During the past month, Orocobre Ltd. (OTC: OROCF), which has a tiny market cap below $250 million, has been blown forward to an 18.3% gain. Industry leader Freeport McMoran (NYSE: FCX) has sailed just 8.8%

It's the same for the gold sector.

Heavyweight Barrick Gold (NYSE: ABX) has turned in an 8.9% return during the past month. Not bad, until you stack it up next to smaller miners such as Novagold (NYSE: NG), which is up 20%, or Centerra Gold (OTC: CAGDF), whose stock has jumped 38.9%.

For the most part, junior explorers had fallen the hardest during the financial crisis and were the most attractively priced per ounce of metal in the ground.

With QE3 officially underway, investing in hard assets like gold and silver (and the companies that mine for the metals) is the best solution to safeguard against the erosive impact of inflation on your purchasing power.

One potential idea I like is Endeavour Silver (NYSE: EXK). Endeavour is still small, but growing rapidly. The company has aspirations of joining the upper-echelon of senior producers. Management has outlined a goal of reaching 10 million ounces in annual silver production -- and the firm is well on the way.

It has delivered seven straight years of rising silver production -- with output expanding more than 600% during that time.

As they say, past performance doesn't necessarily indicate future returns. But aside from the QE3 tailwinds, there are several other reasons why Endeavour is poised to reward investors.

For starters, silver production is expected to rise 32% this year to crack five million ounces. Gold output is forecast to increase by 54% to 34,000 ounces. And looking ahead, the company has four new projects underway and tens of thousands of prospective acres to explore.

But rising volume is only part of the picture. The company is also capturing fatter profits per ounce.

Endeavor's cash costs are moving in the opposite direction of its peer group. Since 2007, the average cash costs to mine an ounce of silver across the industry have risen to $6.83 from $2.59. Meanwhile, Endeavor's costs have fallen to just $5.08 last year, from $9.38 in 2007.

With a realized silver price of $35.61, the company pocketed $30.53 in gross profits for every ounce sold -- for a juicy margin of 86%.

Risks to Consider: Now, it's important to remember that with just three mines in operation, any hiccup in mining operations could be costly. Endeavour produces few base metal byproducts like lead or zinc, which leaves the firm wholly dependent on precious metals prices.

Action to Take --> Nevertheless, the stock has already climbed 7% since QE3 was announced. And with rising production and stronger silver prices, I see good things happening on the bottom line.

[Note: There is a nuclear energy crisis that will hit the U.S. in 2013. In total, 31 million U.S. citizens will be affected. And as the country scrambles to react, a small group of stocks could shoot up by 100% or more. To learn more about this looming crisis, and how to profit from it, click here.]

Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of FCX, NG in one or more of its “real money” portfolios.