Will 140% Return on Warrants of Gold and Silver Miners Repeat in 2010?
By: Lorimer Wilson
A comparison of the returns of the various gold investment alternatives achieved in 2009 clearly shows that gold bugs were misguided in focusing on gold bullion alone. Why? Because gold was NOT where the major profits were realized – not by a long shot!
Gold Bullion up 24%
While gold bullion was ‘only’ up 24%* (and silver up 49.3%*) it did nothing more than match the performance of the S&P 500 and the Reuters/Jefferies CRB indices at 23.5%* for both. Why all the hype regarding gold bullion over the past few months when most other commodities and their related stocks and long-term warrants did so much better?
HUI up 42%
A basket of large-cap gold and silver stocks, as represented by the HUI, was up 42.2%* in (the Gold Miners Index and its ETF proxy were up 36.4%*).
S&P/TSX up 52%
An investment in Canada’s heavily commodity based S&P/TSX a year ago would have generated a 52.3%* return in U.S. dollars.
Commodity Companies Index (CCI) up 126%
Those investors who invested in a basket of stocks consisting of all 36 companies involved in commodities that have long-term (i.e. 24 months duration) warrants trading, as included in my proprietary CCI consisting of
a) 29 companies involved in the mining, developing or exploring of gold and/or silver ( 22), uranium (1), cobalt (1), molybdenum (1), lead (1), coal (2) and iron ore (1)
b) 3 companies involved in buying secondary gold or silver production, i.e. royalty streamers
c) 2 companies involved in oil and gas production and exploration and
d) 2 merchant banks involved in financing commodity-related projects,
would have experienced an impressive gain of 125.8%* in 2009.
Commodity Company Warrants Index (CCWI) up 242% in 2009
The very, very few in the know who invested in the basket of 47 long-term warrants associated with the above commodity categories (6 companies offer two or three long-term warrant hence the larger number) that trade on the Canadian or U.S. stock exchanges, as per my proprietary CCWI, experienced an amazing increase of 242.3%* in 2009. Yes, that is correct: 242.3%!!
For those many who are not familiar with warrants they give the holder the right, but not the obligation, to purchase the common shares of the company at a specific price within a specific time period after which, if not exercised, they expire worthless although they can be traded throughout the period just as with the associated stock.
In previous articles I have gone on and on about the leverage advantage (i.e. enhanced returns) of warrants and here is a perfect case in point. The warrants in the CCWI generated twice the returns of their associated stock in the CCI with the same degree of risk. That’s the major advantage of warrants vis-a-vis their associated stocks. I will address the specific leverage the warrants achieved in next week’s article.
Gold and Silver Companies Index (GSCI) up 85%
To be totally objective in this analysis, however, the average increase in the stock of the 22 companies with long term warrants trading that were exclusively involved in the mining, developing or exploring of gold and/or silver or in royalty operations were up, according to my proprietary GSCI, an impressive +84.5%* for the year.
Precious Metals Warrants Index (PMWI) up 140%
It gets even better! The long-term warrants of the 22 companies involved in the mining, developing or exploring of gold and/or silver or in royalty operations appreciated, according to my proprietary PMWI, by 139.7%*.
Royalty Company Stock up 93%
Had you had just invested in the stock of the 3 companies with long-term warrants that buy the secondary gold and silver production from base metal miners at fixed prices you would have had a 92.6%* return in 2009.
Royalty Company Warrants up 213%
And best yet the long term warrants of these 3 companies were up 213.0%* in 2009. How’s that for enhanced returns!
Where Should You Invest in 2010?
As you will recall I recently wrote an article entitled “Gold:Silver Ratio Screams Buy all Things Silver!” whose conclusions, coupled with the conclusions in this article, strongly suggest that the buy of this decade will be the warrants of gold and silver mining companies and, more particularly, the warrants of gold and silver royalty companies and specifically the warrants of silver royalty companies.
Don’t follow the herd when it comes to investing in gold (and silver) in 2010. Remember, gold was ‘only’ up 24%* in 2009 and the HUI ‘only’ 42%* yet the long-term warrants of the gold and silver mining companies were up 140%* and the long-term warrants of the gold and silver royalty companies were up 213%*. If the current bull market in commodities continues in 2010 it behoves you to seriously consider investing some money accordingly. The next time you read an article hyping gold consider the better returns available invest in the alternatives to gold bullion.
(*All performance return calculations in this article have been on the basis of realizing profits in U.S. dollar terms. Posting criteria does not permit me to name the companies in the GSCI/PMWI or CCI/CCWI so please visit my site and look under the “Warrants/LEAPS/Options” section for articles on “GSCI/PMWI Constituent Companies” and “CCI/CCWI Constituent Companies” for such lists.)