• Volume I, Issue 14

LGR Newsletter

Volume I, Issue 14 (released on June 23, 2014)

Hello all!  I hope everyone has had a good last two weeks.  As previously mentioned, I will be releasing a new Issue of my Newsletter every two to three weeks over the summer until I finish my website and my “buy pitch” article on Las Vegas Sands Corp. (NYSE: LVS).  I probably won’t write a new Issue of my newsletter until after July 4th, so I hope you all have a great holiday!

As a reminder, this Issue is available on my blog: http://liamgarrityrokous.tumblr.com/. I have also been updating my website, and I will publish the link for it in a future Issue of my Newsletter. Until then, feel free to email me with any questions.  I received some great feedback/questions from readers after I released the last Issue of my Newsletter, and discussing them with you really helps me improve. Thank you!

This Issue will contain a Summary of The Market’s Performance (6/09/14 – 6/20/14), a Portfolio Update (6/09/14 – 6/20/14), a Market Update (6/09/14 – 6/20/14), and a write-up on Trading the Precious Metal Industry.


Summary of The Market’s Performance:

(June 09 - June 20)

The past two trading weeks were interesting to say the least, with all three major indexes ending higher. Over the past two weeks (from the market’s close on June 6th to its close on June 20th) the S&P 500, the Dow Jones Industrial Average (DJIA), and the Nasdaq Composite had returns of 0.69%, 0.13%, and 1.08% respectively. All three major indexes closed at new all-time highs on Friday, June 20th, however the Nasdaq Composite did not reach a new all-time intraday high.

It is also important to note that small cap stocks, as measured by the Russell 2000 Small Cap Index, significantly outperformed large cap stocks, and the Russell 2000 Index jumped 1.99% over the two week period. This is important because it shows that investors are comfortable taking on more risk, as reflected by the recent rally in the prices of small cap stocks (small cap stocks are riskier, in general, than large cap stocks). While this is a good sign for the market, one needs to put it into perspective.  Although the large cap index (the S&P 500) made four new all-time highs these past two weeks, the small cap index (the Russell 2000) did not, closing approximately 2% below its all-time intraday high on Friday, June 20th.

To help add some price-related context for securities that I will be talking about later in this Issue, over the past two weeks the spot price of gold rose $62.40/oz (4.98%) and the spot price of silver rose $1.86/oz (9.80%). Additionally, over the past two weeks the stock price of the senior gold miner ETF (NYSE: GDX) jumped 14.05%, and the stock price of the junior gold miner ETF (NYSE: GDXJ) surged 18.13%. On the currency side of things, the US Dollar Index ended the two week period almost completely flat (-0.04% to be exact), and the EUR/USD currency pair declined 0.28% over the same period of time (according to data I found on Investopedia.com).

Portfolio Update:

(June 09 - June 20)

Over the past two weeks my portfolio outperformed the market (S&P 500) by a nice margin, with my portfolio rising 1.18% over the last two weeks while the S&P 500 rose a smaller 0.69%. My outperformance would have been much more significant if three stocks hadn’t dragged my portfolio down. Those three stocks- Michael Kors Holdings Ltd. (NYSE: KORS), Air Lease Corp. (NYSE: AL), and Smith & Wesson Holding Corp. (Nasdaq GS: SWHC)- all declined by more than 6% over the last two weeks.

Smith & Wesson was the only one of those three stocks that declined for a significant reason. SWHC declined 8.71% on Friday, June 20th, after it “released FQ4 EPS and Revenue that beat analysts’ estimates” (Seeking Alpha, Link #1), but also released very weak FQ1 guidance that was significantly below consensus estimates. Unfortunately, SWHC’s terrible performance on Friday hurt another one of my holdings, Sturm Ruger & Co., Inc. (NYSE: RGR), because the two stocks (the only publicly traded US gun makers) typically move in the same direction. Before Friday’s poor performance, SWHC was one of my top performers, with an unrealized gain of approximately 24%, and it has been significantly outperforming RGR so far this year. I actually believe that RGR is the better stock, but regardless both stocks are currently trading at fairly cheap P/E multiples (10.6 for SWHC and 10.8 for RGR) and have lots of upside potential. As a result, I am still bullish on the gun production industry and I decided not to sell any of my shares in SWHC on Friday.

Below is some information about my simulated portfolio, and a list of my five best performers, and five worst performers, for the past two weeks:

  • My portfolio’s starting balance (on 1/1/2014): $1,000,000.00
  • My portfolio’s current balance (on 5/16/2014): $1,080,252.73
  • My portfolio’s return to date: 8.03%
  • The S&P 500’s return to date: 6.20%

More measures of risk-adjusted performance will be added shortly!

My Five Best Performers For Past Two Weeks:

1) First Majestic Silver Corp. (AG): +20.21%

2) Franco-Nevada Corp. (FNV): +18.94%

3) Silver Wheaton Corporation (SLW): +18.56%

4)  IAMGOLD Corp. (IAG): +18.36%

5) First Solar Inc. (FSLR): +9.57%

My Five Worst Performers For Past Two Weeks:

1) Air Lease Corp. (AL): -7.63%

2) Smith & Wesson Holding Corp. (SWHC): -6.95%

3) Michael Kors Holdings Ltd. (KORS): -6.07%

4) Whole Foods Market, Inc. (WFM): -4.18%

5) Bed Bath & Beyond, Inc. (BBBY): -2.97%

As I’m sure that you can all see from the numbers above, I had a few stocks that had huge returns over the last two weeks. You can also see (from just looking at the names of the companies) that many of my top performers are in the Silver & Gold industries, which I often refer to as the “Precious Metal (PM) industry” for simplicity’s sake. In fact, four of my top five performers (AG, FNV, SLW, and IAG) for the last two weeks are in the PM industry, and I am happy to say that over the last two weeks all four stocks outperformed the Exchange Traded Funds (ETFs) that serve as the benchmarks I compare their performance against. The two ETFs, which I use as benchmarks for precious metal miners, are Market Vectors Gold Miners (NYSE: GDX) and Market Vectors Junior Gold Miners (NYSE: GDXJ). I, along with almost every other investor that follows the PM industry, look at GDX as a benchmark for “Senior Gold Miner” performance and look at GDXJ as a benchmark for “Junior Gold Miner” performance.

Silver Wheaton Corp. (SLW) and Franco-Nevada Corp. (FNV) are “senior gold miners,” they rank #4 and #5 respectively in GDX list of holdings (by “weight”), and collectively they have a 11.36% “weight” in GDX’s holdings (ETF Channel, Link #2). IAMGOLD Corp. (IAG) and First Majestic Silver Corp. (AG) are also part of GDX’s holdings, however they rank #21 and #27 respectively in GDX’s list of holdings (ranked by “weight”), and when combined together they currently have a 1.86% “weight” in GDX’s holdings (ETF Channel, Link #2). While those “weight” (or % of total assets) numbers may differ depending on what website you look at, and how up to date those websites are, I can say with certainty that all four of those stocks are listed as GDX’s “holdings” and SLW and FNV are two of GDX’s top 10 holdings by weight.

As I mentioned in the “Market Summary” section of this Issue, GDX jumped 14.05% over the last two weeks and each of the four stocks, mentioned above, outperformed GDX (their benchmark) by at least 4% over the last two weeks.While the returns of those four stocks over the last two weeks were impressive, and while the fact that they outperformed their benchmark by 4% over that short period of time is even more impressive, one cannot just look at their performance versus their benchmark in a two-week time frame. To gauge whether or not a stock truly outperforms its industry, investors must compare a stock’s performance to a “benchmark” for the industry (usually an ETF holds varying numbers of shares of each publicly traded company in the industry) over a long period of time. Seeing as I have only been managing my portfolio for about six months now, it is still too early to tell whether or not the stocks I picked are truly going to outperform their peers in their respective industries.

For IAG and AG, I decided to compare their performance against both GDX and GDXJ, because IAG and AG are precious metal mining companies with very small market caps (currently 1.58B and 1.23B respectively) and they should probably be compared against a benchmark that contains companies of a similar size and risk level. With all of that in mind, I have compiled the following sets of performance data, which compares each of the four stocks against their benchmarks (GDX or both GDX and GDXJ) over varying periods of time:

Performance Since Their Purchase Date In My Simulated Portfolio:

(From each security’s closing price the trading day before I opened a position in each stock to each security’s closing price on Friday, June 20th)

1)     SLW: +1.72% (vs. GDX)

2)     FNV: +5.19% (vs. GDX)

3)     IAG: +6.18% (vs. GDX) and +6.63% (vs. GDXJ)

4)     AG: -9.78% (vs. GDX) and -8.45% (vs. GDXJ)


Performance Year-To-Date (YTD):

(From each security’s closing price on December 31, 2013 to each security’s closing price on Friday, June 20th)

1)     SLW: +0.88% (vs. GDX)

2)     FNV: +13.32% (vs. GDX)

3)     IAG: +3.63% (vs. GDX) and -6.99% (vs. GDXJ)

4)     AG: -15.36% (vs. GDX) and -25.98% (vs. GDXJ)

LGR Newsletter Volume I Issue 14 Attachment #1


Performance Over The Last Year:

(From each security’s closing price on June 20, 2013, to each security’s closing price on Friday, June 20, 2014)

1)     SLW: +17.97% (vs. GDX)

2)     FNV: +63.05% (vs. GDX)

3)     IAG: -11.43% (vs. GDX) and -16.88% (vs. GDXJ)

4)     AG: +3.55% (vs. GDX) and -1.90% (vs. GDXJ)

LGR Newsletter Volume I Issue 14 Attachment #2


Performance Over The Last Two Years:

(From each security’s closing price on June 20, 2012, to each security’s closing price on Friday, June 20, 2014)

1)     SLW: +33.07% (vs. GDX)

2)     FNV: +64.83% (vs. GDX)

3)     IAG: -21.23% (vs. GDX) and -15.82% (vs. GDXJ)

4)     AG: +11.48% (vs. GDX) and 16.89% (vs. GDXJ)

LGR Newsletter Volume I Issue 14 Attachment #3


Performance Over The Last Five Years:

(From each security’s closing price on June 19, 2009, to each security’s closing price on Friday, June 20, 2014) =>Did not compare against GDXJ because the first price data point I found for GDXJ was for November 11, 2009

1)     SLW: +220.69% (vs. GDX)

2)     FNV: +160.22% (vs. GDX)

3)     IAG: -22.50% (vs. GDX)

4)     AG: +456.24% (vs. GDX)

DISCLAIMER: I used data from finance.yahoo.com for all of these calculations except for the “Performance Over The Last Five Years” calculation, which I used data from my Tradestation platform to calculate. All of the calculations above are percentage returns compared to their “benchmarks” (either GDX or GDXJ) and they are not total return percentages.  Furthermore, all of the numbers I used are closing prices, and they are not the same closing prices as would be obtained if one adjusted for dividends and splits.

It is important to look at that type of data whenever an investor is trying to make an informed decision about which stocks might be the best ones to buy shares of in a specific industry. As I’m sure you can all tell, from looking at the graphs of the performance of all four stocks compared against each other (and the two ETFs) over time, stocks in the Precious Metal Industry are extremely volatile.  I discuss trading in this industry in greater detail in the Write-Up section of this Issue.


Market Update (major events, news stories, economic data reports):

(June 09 - June 20)

This section of my newsletter will only contain a brief synopsis on some domestic economic data and a brief report about Janet Yellen’s most recent press conference, because I hope to write about economics and the US Dollar in great depth in a later Issue of my newsletter. I am not worried about pushing back my analysis on the US Dollar into a later Issue, because I do not see any significant trading opportunities with the US Dollar in the near future (mainly because I don’t trade Forex). However, I do see an impending investing opportunity for gold and gold mining companies. The performance of the US Dollar has a significant impact on the long-term performance of stocks in the S&P 500, and on the price of gold, so I definitely think that it is important to discuss.

Domestic Economic Data:

I am including all of these economic data reports because they can have a significant impact on the US Dollar, and I will be analyzing the US Dollar in greater depth in a future Issue of my newsletter. I only included economic data reports that received the highest level of significance on Forex Factory, which means they have historically had the greatest impact on currency markets. The results are shown in RED if they were significantly below the average analyst forecast, and they are shown in GREEN if they were significantly above the average analyst forecast. Forex Factory automatically does this, so I just made the readings red or green (or black for no surprise reading) based on its existing labels.

The United States of America:

(Currency: US Dollar: USD)

Thursday, June 12th:

  • Core Retail Sales (m/m): 0.1% (Actual) vs. 0.4% (Forecast)
  • Retail Sales (m/m): 0.3% (Actual) vs. 0.5% (Forecast)
  • Unemployment Claims: 317k (Actual) vs. 306k (Forecast)

Friday, June 13th:

  • PPI (m/m): -0.2% (Actual) vs. 0.1% (Forecast)
  • Prelim UoM Consumer Sentiment: 81.2 (Actual) vs. 83.2 (Forecast)

Tuesday, June 17th:

  • Building Permits: 0.99M (Actual) vs. 1.07M (Forecast)
  • Core CPI (m/m): 0.3% (Actual) vs. 0.2% (Forecast)

Wednesday, June 18th:

  • FOMC Economic Projections
  • FOMC Statement
  • FOMC Press Conference

Thursday, June 19th:

  • Unemployment Claims: 312K (Actual) vs. 316K (Forecast)
  • Philly Fed Manufacturing Index: 17.8 (Actual) vs. 14.3 (Forecast)

***If you need a refresher on what any of these terms/data points mean I would recommend taking a look at the last Issue of my Newsletter (Volume I, Issue 13), or you can find all of the definitions onwww.forexfactory.com***

A lot of this data was negative, but despite that fact the US Dollar remained fairly strong throughout the entire two-week period (as measured by the US Dollar Index). By far the most volatile day for the US Dollar Index (in the last two weeks) was the day that the FOMC released its economic projections and that Janet Yellen held a press conference- June 18th. The US Dollar Index spiked higher during the day, but ended much lower than its intra-day high.

The Liquidity Pump Is Getting “Noisy”:

In its most recent statement, the Federal Open Market Committee (FOMC) declared that “growth is bouncing back and the job market is improving,” and announced that it would continue “...to reduce the monthly pace of asset purchases” from $45 billion per month to $35 billion per month" (Bloomberg, Link #3). This “tapering” of bond purchases keeps it on track to end this year, and that was not an unexpected action by the Fed.

Janet Yellen held a press conference, shortly after the FOMC released its statement, and was quoted as saying “economic activity is rebounding in the current quarter and will continue to expand at a moderate pace” (Bloomberg, Link #3).  “Rebounding” is a very significant word when it comes to the quarterly GDP Growth Rate, because “United States GDP shrank at an annual rate of 1.0 percent in the first quarter of 2014, according to the second estimate released by the Commerce Department. It is the worst performance in three years and comes lower than a preliminary estimated 0.1 percent expansion, due to a sharper fall in private inventory investment and a bigger trade deficit” (Trading Economics, Link #4).

The only part of Ms. Yellen’s speech that moved financial markets was the fact that she “…downplayed concerns about asset-price bubbles and incipient inflation” (Bloomberg, Link #3). Some investors had begun to worry that the Fed might consider raising interest rates earlier than expected, because “the consumer price index… rose 2.1 percent in May” (Bloomberg, Link #3) and signified that the annual Inflation Rate in the U.S. might be beginning to increase beyond the Fed’s 2% target. Ms. Yellen referred to the recent increase in the Consumer Price Index (CPI) as “noisy” and said that “...consumer prices ‘are moving back gradually over time toward our 2 percent objective’” (Bloomberg, Link #3). Ms. Yellen’s statements were interpreted as extremely dovish, because she denied that the Inflation Rate was rising too fast and that interest rates would rise sooner than expected. In fact, the only thing she did say was that interest rates would remain low “…for a ‘considerable time’ after the buying ends" (Bloomberg, Link #3). Ms. Yellen declined to give a specific timetable for when we can expect to see interest rates rise and, by not doing so, allowed investors to speculate that it could be even longer than previously thought. In essence, Ms. Yellen said that while the “Liquidity Pump” (i.e. the Fed’s current “easy money” monetary stimulus policy) was causing some “noise,” there is nothing to be concerned about and “easy money” is here to stay.

***For those of you who may not know, a “dovish” monetary policy advisor is one who is in favor of a low interest rate (“easy money”) environment, while a “hawkish” monetary policy adviser is one who is in favor of a “tighter” money environment. That’s the very simple definition/explanation for a commonly used term***


Write-Up On Trading the Precious Metal Industry: An Overview

There are four main precious metals that investors care about: gold, silver, platinum, and palladium (some people don’t include palladium in the list at all, and some believe titanium should be included). By far, the two easiest precious metals to invest in are gold and silver, and those are the only two precious metals that I want to focus on in this Issue. Investopedia describes the five main ways to invest in precious metals as; Commodity ETFs, Common Stocks and Mutual Funds, Futures and Options, Physical Bullion, and Certificates (Investopedia, Link #5). I currently do not trade futures or options, and I am unable to purchase physical bullion or certificates (I don’t have enough money or enough I’m willing to set aside in that manner anyways), so I am going to talk about how one can trade commodity ETFs and common stocks. More specifically, I am going to talk about the commodity ETF that I own in my simulated portfolio, and about the common stocks (related to precious metals) that I own in my simulated portfolio. To provide some clarification, a “commodity ETF” is an exchange-traded fund (ETF) that is very liquid and tracks the price of a commodity (usually they try to exactly replicate the exact percentage return of the physical commodity), and the term “common stocks” relates to precious metal “miner” stocks.

Commodity ETFs:

The one commodity ETF that I own shares of in my simulated portfolio is SPDR Gold Trust Shares (NYSE + BATS: GLD). Yahoo Finance provides the following “Fund Summary” for GLD:The investment seeks to replicate the performance, net of expenses, of the price of gold bullion. The trust holds gold, and is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemption of baskets. The gold held by the trust will only be sold on an as-needed basis to pay trust expenses, in the event the trust terminates and liquidates its assets, or as otherwise required by law or regulation” (Yahoo Finance, Link #6). A share of GLD costs approximately 1/10 the spot price of an ounce of gold, which makes it a much more affordable way to invest in gold, and many investors choose to own shares of GLD instead of buying physical gold because its percentage returns are almost exactly the same as those of physical gold. While GLD is a great instrument to use to invest in gold, if I was given the choice (and I had enough money) I would buy physical gold, because it always trades at a premium to GLD and its return will be slightly better in the long-term as a result.

Common Stocks – Related To Precious Metals:

All common stocks, related to precious metals, are members of the Basic Materials sector. I own six stocks in my simulated portfolio that are in the Basic Materials sector; Companhia Vale do Rio Doce (NYSE + BATS: VALE), Freeport McMoran Copper&Gold (NYSE + BATS: FCX), Silver Wheaton Corp. (NYSE + BATS: SLW), Franco-Nevada Corp. (NYSE + BATS: FNV), First Majestic Silver Corp. (NYSE + BATS: AG), and IAMGOLD Corp. (NYSE + BATS: IAG). Collectively, those six stocks make up 11.41% of my portfolio as of Friday, June 20th.

The four stocks that I will focus on for the rest of this Write-Up are SLW, FNV, AG, and IAG, because those four stocks are actually related to precious metals specifically (whereas VALE produces/sells industrial metals and FCX explores for, and acquires, mineral assets – mostly copper – and oil/natural gas). Those four stocks are all known as “gold miner stocks” and they are all, as mentioned in the “Portfolio” section of this Issue, members of the Senior Gold Miner ETF, GDX. Below I give some more information about the risks related to these types of stocks.

Gold Miner Stocks:

Gold miner stocks as a whole (measured by GDX and GDXJ) are extremely leveraged to the price of gold (or silver) and they will often move in an exaggerated fashion compared to the price of the metal they mine. As you can see from the chart below, while gold miners will outperform gold while the commodity is in a bull market they will significantly underperform the commodities they mine when those commodities enter a bear market.

LGR Newsletter Volume I Issue 14 Attachment #4

Two simple reasons why this is the case:

One – Gold miners will often take on debt to finance the expansion of their mining production while gold is in a bull market, because they believe that they will be able to easily re-pay the debt with the higher prices they can sell the precious metals for. While this strategy works at first, it only continues to work if the price of precious metals continues to climb. If the price of precious metals stalls or, even worse, declines then the gold miners will be left “holding the bag” with a large amount of debt and no cost efficient way to pay it off. Obviously the interest rate that these companies need to pay on their debt is also a major factor in this scenario.

Two – Even if gold miners do not take on debt to finance the expansion of their mining production, they still will do whatever it takes to ramp up production, especially when these publicly traded mining companies see their competitors outperforming them by ramping up production. Doing “whatever it takes” to raise money to ramp up production could mean financing it through equity (if they don’t do it through debt), which could mean another public offering of shares in the company (i.e. share dilution). Even if the gold miners don’t finance their expansions through debt or equity, they will need to use their reserves of cash (those are probably not very large to begin with) and it is likely that their cost of production will rise. In that case, when the price of the metal that they mine stagnates or begins to decline, the company’s cost of production will begin to get closer and closer to the price the company gets for selling the metal. In this circumstance, while the company’s revenue will probably be growing (due to higher levels of production) the company’s profit margins will begin to shrink.

I’ll explain the likely outcome of these scenarios very clearly: low profit (or profitless) companies with high levels of debt, decreasing (or nonexistent) margins, rising costs, and all-around terrible fundamentals. Why would anyone in the world want to buy shares of a company like that? Well, I will give you all some more specifics about each of the precious metal miners, mentioned previously, and afterwards I think you will understand why I bought shares of them specifically, even if you don’t agree with my decision to invest in the space to begin with.

The “Gold Miner” Stocks In My Simulated Portfolio:

All the “gold miner” stocks that I own in my simulated portfolio fall into the Basic Materials sector. It is my opinion that although they are members of the Basic Materials, they are much more volatile than many other types of companies in the Basic Materials sector (in the long-term at least). The primary reason that I believe this is the case is that, on any given day, precious metal mining companies can easily move more than 1.5% in either direction. This makes it extremely difficult to be comfortable holding onto them if the market appears to be in a downtrend (as it has been for pretty much the last two and a half years). Even the biggest gold bulls are forced to pause when they take a look at GDX’s price chart for the last 5 years, and see the absolute annihilation that can occur in a bear market. However, investing in precious metal miners is not for the faint of heart, and I believe that the recent huge decline in price that gold miners experienced (approximately 70% from GDX’s peak in 2011 to its recent low) offers a phenomenal buying opportunity if people pick the right stocks to own.

I keep saying “gold miners” even though some of the best companies in the space don’t mine gold (they mine silver) and some of them don’t even mine at all. How can that be possible, and why are they all unanimously referred to as “gold miners”? Well, there’s no easy explanation for that and I’m not even 100% sure myself, but what I can say is that companies that mine precious metals will typically focus on one metal in particular and will convert all of the other byproduct metals they mine into “equivalent ounces” of that one metal they specialize in. Even if precious metal miners specialize in silver, they will still be part of the “gold miner” category because they will most likely mine at least a little bit of gold. As a result, there are numerous precious metal mining companies that specialize in mining silver, but are still part of the “gold miner” ETFs. How can some “mining” companies not even mine at all? Well, included in the “gold miner” ETF are companies with “streaming/royalty” business models. To help illustrate how those business models work, I will now go into more detail on the companies I own in my simulated portfolio.

Silver Wheaton Corp. (SLW):

Company Description – From Company’s Website: “Silver Wheaton is the largest precious metal streaming company in the world. The company has entered into a number of [precious metal streaming agreements] where, in exchange for an upfront payment, it has the right to purchase, at a low fixed cost, all or a portion of the silver and/or gold production from several high-quality mines located in politically stable regions around the globe” (Silver Wheaton, Link #7).

More Information: The management team of any streaming/royalty-based company is the real driving force of the company’s success, because the management team finds and negotiates all of the company’s deals. SLW “…has an experienced management team with a strong track record of success, and is well positioned for further growth” (Silver Wheaton, Link #7). SLW’s management team has successfully negotiated 25 streaming agreements that are active right now, and the recent decline in the prices of precious metals gives SLW a great opportunity to negotiate even better deals with cash starved mining companies. “The operating costs that Silver Wheaton pays for future production are pre-determined in the agreements, typically between US$4 to US$6 per ounce of silver and US$400 per ounce of gold produced, with a small inflationary adjustment in most contracts…Fixed costs reduce [shareholders’] downside risk while at the same time providing the upside to increases in the precious metals price. As well, other than the initial upfront cash payment, Silver Wheaton typically does not contribute to future capital expenditures or exploration costs invested by the mine; yet it benefits from the production and exploration growth that results from these expenditures. This business model often translates into significant value creation for Silver Wheaton shareholders” (Silver Wheaton, Link #8). A key sentence in that text from SLW’s website that everyone should take note of is; “other than the initial upfront cash payment, Silver Wheaton typically does not contribute to future capital expenditures or exploration costs invested by the mine; yet it benefits from the production and exploration growth that results from these expenditures” (Silver Wheaton, Link #8). SLW makes a one-time upfront payment to the miners it decides to finance and then reaps the rewards of any expansion of production that occurs at that mine. If that particular mine expands its production, SLW is able to buy even more silver/gold (at the low pre-determined price) than before. This provides an opportunity for HUGE upside potential. Why? Well, SLW’s management team aren’t new to this and when they negotiate streaming agreements the term “for the life of the mine/project” are almost always included in them, and when the miners that SLW finances ramp up their production (I mentioned above why this is a necessity) SLW can still purchase all the extra silver/gold that that miner produces at the same fixed, extremely low, cost. This allows SLW to have HUGE OPERATING MARGINS, and allows SLW to significantly separate itself from any other “miner.”

Franco-Nevada Corp. (FNV):

Company Description – From Company’s Website: “Franco-Nevada Corporation is a gold-focused royalty and streaming company. We do not operate mines, develop properties or conduct exploration. Instead, we own and continue to grow a large, diversified portfolio of royalties and streams that for Franco-Nevada:

LGR Newsletter Volume I Issue 14 FNV Picture

Royalties and streams expose Franco-Nevada to the exploration and price optionality inherent with geologically favourable properties” (Franco-Nevada, Link #9).

More Information: I don’t really need to say much more about FNV, because I’ve already described in-depth above (in the SLW information) how the precious metal streaming business model works and how profitable it can be. FNV is basically the same type of deal as SLW, except that it focuses on gold rather than silver. Silver allows for higher margin streaming agreements, so SLW has much higher margins than FNV does, but FNV has an absolutely phenomenal track record when it comes to providing value for shareholders, while also maintaining a much lower level of risk. I think the numbers speak for themselves (see the price performance information I provided in the “Portfolio” section of this Issue).

First Majestic Silver Corp. (AG):

Company Description – From Company’s Website: As you can probably guess from its ticker symbol, First Majestic Silver Corp. is all about silver. Unlike the first two companies I described (see above), AG is actually a mining company. First Majestic describes itself as "...a mining company focused on silver production in México... aggressively pursuing the development of its existing mineral property assets" (First Majestic, Link #10). All of AG's mining operations are based in Mexico, a region known for being very politically stable (only when it comes to mining that is!), and "The Company presently owns and operates five producing silver mines; the La Parrilla Silver Mine, the San Martin Silver Mine, the La Encantada Silver Mine, the La Guitarra Silver Mine, and the Del Toro Silver Mine. Production from these five mines is anticipated to be between 12.70 to 13.35 million ounces of pure silver or 14.85 to 15.60 million ounces of silver equivalents in 2014" (First Majestic, Link #10).

More Information: AG is "...one of the silver industry's purest and highest margin producers" (First Majestic, Link #10), and it remains the one of the best plays on the price of silver moving forward. I do have to say though that AG is a FAR MORE RISKY stock to own than SLW or FNV, but if you are bullish on silver prices moving forward (as I am) it is a great stock to own.


Company Description – From Company’s Website: IAMGOLD Corp. is a small cap gold mining company. The shares of IAG that I own in my simulated portfolio make up a very small percentage of my portfolio, and I think of IAG as a VERY speculative stock to own. "IAMGOLD is a leading mid-tier gold mining company producing approximately one million ounces annually from five gold mines (including current joint ventures) on three continents" (IAMGOLD, Link #11).

More Information: The key aspect that I like about IAG is that "IAG's Niobec mine is North America's only source of pyrochlore, the primary niobium ore and one of only three major producers of niobium in the world" (SeekingAlpha, Link #12). On Tuesday, June 03, 2014, IAG's "...shares popped 15% higher an hour or so ago, apparently based on rumors regarding a Niobec project sale; IAG has held much of the gains even after the company said it had no news pending and its did not know why shares rose" (SeekingAlpha, Link #12). There is no doubt in my mind that if either the price of gold rises, or IAG sells its Niobec mine, IAG's share price will appreciate significantly. This is a VERY SPECULATIVE play and it is a calculated risk I decided to take, because it has huge upside potential.

Final Thoughts:

I believe that gold is about to experience a multi-year bull market, and all of the four stocks above are great stocks to own to take advantage of the huge upside potential that a multi-year gold bull market has to offer. I will analyze the current gold market in the next Issue of my newsletter (hopefully!), and give a prediction related to gold, but I just wanted to write about the different ways to invest in precious metals first so that you all know what securities exist that act as a great means of investing in a gold bull market.  Anyone looking to invest in any gold miners needs to do their own due diligence, because in this industry what you don't know really can kill you (or your portfolio's performance at least!).

DISCLAIMER: Shares of precious metal mining stocks are some of the only things that I trade when it comes to using real money. I do not have enough money to structure a real portfolio the same way as I structure my simulated portfolio, because I have extremely high account fees for my Tradestation platform, so I trade shares of precious metal miners because I follow them very closely and they offer the chance for a very high return. If I had enough money to structure my real portfolio in the same manner as I structure my simulated portfolio I would, but unfortunately I don’t. With real money, I am a short-term “swing trader” and I trade shares of GDX, GDXJ, and NUGT (extremely risky!). In the interest of full disclosure, I sold all of my shares on Friday, June 20th, because I believe that they will all dip in the next week or so. After that dips ends I will re-buy, which is basically the idea of how “swing trading” works.

If you have any questions about this Issue of my Financial Newsletter please fill out the form below. I also appreciate receiving any comments you might have about what you just read, and I encourage you to send me ideas for topics that you would like to see me write about in the future. Thank you for reading! 

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