Precious metals was one of the few asset classes that performed well last week
as a plethora of concerns stalled stocks earthquakes, tsunamis, a government
shutdown, Portugals bailout request, and surging oil prices. Mainly, the rise in
gold and silver is being driven by an increase in inflation expectations which
have returned to their early March peaks. Long-term interest rates are already
increasing to reflect this. Theres a currency component at work too as the U.S.
dollar continues its downfall. Some of this is due to the malignant neglect of
the currency at the hands of the Federal Reserve. With the European Central Bank
joining monetary authorities in places like China and Brazil and embarking on an
anti-inflation rate hiking campaign, only the Fed and the Bank of Japan are left
sitting still. Investors are moving cash out of the dollar and into foreign
denominated assets like Brazilian bonds or Indian equities, further
precipitating the greenbacks fall. Finally, there is the looming fight over the
U.S. Treasury debt ceiling set to be reached by the end of May. The fight over
the fiscal 2011 budget shows that Democrats and Republicans remain far apart on
critical spending issues. A failure to raise the debt ceiling would ignite
financial panic and result in a de facto debt default by the U.S. government.
Bad news. While members of both political parties seem to understand the risks
of inaction, the market is already pricing in trouble. U.S. credit default swaps
are up nearly 12%. Global X Silver Miners (NYSE: SIL) So what are investors to
do? Both major gold and silver commodity ETFs iShares Silver Trust (NYSE: SLV )
and the Gold SPDR (NYSE: GLD ) initiated technical breakouts earlier in the
week and gapped up on Friday. Meanwhile, precious metal mining ETFs, including
the Market Vector Gold Miners (NYSE: GDX ) and the Global X Silver Miners (NYSE:
SIL ), are just now breaking through overhead resistance from prior highs. The
Market Vector Junior Gold Miners (NYSE: GDXJ ), which invests in smaller mining
companies, also looks attractive. On a relative basis, precious metal mining
stocks have lagged the year-to-date performance of precious metal commodities
but theyre quickly making up for lost time. ROI - Investment Tools - Long-Term
Comparison Its worth remembering that over the long-term, commodity stocks (and
the ETFs tied to them) outperform commodities because they reflect the value of
human ingenuity. Thats the idea expressed by Soc Gen strategist Dylan Grice. And
its because higher prices for gold and silver will only encourage people to work
harder to find new sources of ore and extract them from the earth. As a result,
gold and silver prices although subject to large price swings have largely
flat lined when taking inflation into account. Stocks, on the other hand, have
massively outperformed as shown in the chart above. A combination of short-term
strength and long-term bona fides makes a strong case for ETFs like SIL and GDX.
I recommended SIL to my newsletter subscribers earlier this week and still
think its attractive at current levels. Disclosure: Anthony has recommended SIL
to his newsletter subscribers. Be sure to check out Anthonys new investment
advisory service, The Edge . A two-week free trial has been extended
to Investorplace readers. Click the link above to sign up.
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