Commodity Guru Jim Rogers is Still Bullish on Gold -- Should You Be, Too?
President Barack Obama's first term was very good for precious metals. Silver was up an eye-popping 236% while gold added an impressive 128% gain, both handily beating the S&P 500's 75% return.
Those big gains have more than a few investors concerned about another asset bubble in a long list of bubbles that includes technology, finance and housing in the past 12 years.
But according to legendary investor Jim Rogers, the precious metals crowd has nothing to worry about now that Obama has been reelected.
The billionaire co-founder of the Quantum fund with George Soros is telling the market to expect more of what we've seen in the past four years. The loose monetary policy, further quantitative easing and weak dollar will support the upward trend in gold and silver, according to Rogers.
"Investors should prepare for rising prices and more expansionary monetary policy now that President Barack Obama has won reelection. "If Obama wins, it's going to be more inflation, more money printing, more debt, more spending," Rogers recently told CNBC. The investor also said he plans to sell federal debt and purchase more gold and silver.
So if Jim Rogers is correct, then investors should expect big things from precious metals in the next four years. But with all kinds of precious metals investments to choose from, the landscape can be confusing.
With this in mind, here are my three favorite strategies to benefit from the rising tide in gold and silver, ranked from lowest to highest risk.
Lowest risk: Physical gold and silver
Investing in physical gold and silver has become very popular in the past five years with the release of new exchange-traded products (ETFs) such as SPDR Gold Shares (NYSE: GLD) and iShares Silver Trust (NYSE: SLV). These types of ETFs provide investors with direct exposure to underlying precious metals prices. These instruments have become very popular among investors because they have low expense ratios and reduce company-specific risk related to production volatility, earnings and cash flow.
ETFs like SPDR Gold Shares and iShares Silver Trust have handily outperformed most gold and silver mining stocks in the past few years as investors have bypassed the miners in favor of a more conservative approach to the market. Longer-term, gold and silver prices probably have less upside than miners do, but they also provide more price stability.
Medium risk: Basket of gold miners
The next level of risk up from physical gold and silver is to buy a basket of mining stocks such as Market Vectors Gold Miners (NYSE: GDX), another ETF that holds a basket 30 gold- and silver-mining stocks with operations across the world.
This is another strategy for investors who want to protect their portfolios from company-specific risk, which is incredibly high in the gold-mining industry due to production uncertainty and political troubles in less developed regions of the world. This is a little more aggressive than investing in actual gold and silver but lacks the high risk-reward ratio of an individual miner. With a net expense ratio of .52%, Market Vectors Gold Miners falls below the category average of .63%.
Highest risk: Individual miners
This is definitely the highest risk category in the list of strategies to invest in gold and silver. There is a big difference between investing in a smaller operation valued between $1 billion or $2 billion and a global mining powerhouse such as Freeport-McMoRan Copper and Gold Co. (NYSE: FCX) and Barrick Gold Corp. (NYSE: ABX), each valued at about $35 billion. Barrick Gold CEO Jamie Sokalsky has said that every $100 increase in the price of gold will produce an extra $400 million in cash flow for the world's largest gold company. This is a great example of the incredible leverage mining companies provide to rising precious metals. Bear in mind that bigger mining companies offer more earnings transparency, while small miners have more upside. Either way, of the three strategies, this is your highest risk-reward investment.
Risks to Consider: The biggest risk to gold is a liquidity crunch like the one we saw in the financial crisis of 2008. The trigger for an event like that could be Europe, which continues to struggle with too much debt and shortages of tax revenue. Although the region continues to combat its financial problems, margins calls for big investment banks and intuitional traders would weigh on gold and silver.
Action to Take --> Jim Rogers is bullish on gold and silver, projecting that the next four years will look much like the last four years for precious metals. If this turns out to be true, then keep in mind these investment strategies. All three of them are very effective to capitalize on the trend.
StreetAuthority LLC owns shares of FCX in one or more of its “real money” portfolios.