Wednesday, October 23, 2013

Why I Grabbed Gains on Oil Companies & Bought More Gold & Silver Miners

I exited four of my energy positions today, and added two precious metals positions. Here's the skinny on why ...

Watch the Dollar

It sure looks like the US Dollar Index is going lower. It is probably getting hammered by delayed expectations of tapering of the Fed's quantitative easing program, though it may also be reflecting Chinese desire to shift away from dollar-denominated trades to trades in other currencies.

(Updated chart)

Support at 79 needs to hold. If not then we will likely see a test of 78.70, and then, well, it's toes-dangling-over-the-abyss time for the once-mighty greenback.

I think 79 will draw the dollar like a magnet, and after that, we'll see.

For a while, oil was the anti-dollar. In fact, for a while, oil was more the anti-dollar than gold.  But in the very short term, gold has gone back to being the anti-dollar, while oil is joining the dollar in its slide lower. In the last 10 trading days, the dollar is down 1.6%, while oil is down 5.7%.

Why is this? It seems to be simple supply and demand.  

  • The Energy Information Administration reported Wednesday that crude stockpiles rose 5.2 million barrels for the week ended Oct. 18.
  • This was higher than expectations of 3 million barrels. In fact, crude oil inventories have risen more than expected for five weeks in a row, for a total of 24.1 million barrels.
  • The latest supply climb lifts total crude stockpiles to within 20 million barrels of the record highs the market saw earlier in the year.

So, since oil is under pressure, I decided to exit four of my energy positions that were getting whacked today. I sold Rex Energy Corp. (REXX) for a 0.5% gain, PetroChina (PTR) for a 0.3% loss, SPDR S&P Oil & Gas Equipment & Services (XES) for a 1% gain, and Devon Energy (DVN) for a 6.8% gain.

These aren't the big gains I had in mind when I added these positions, but with oil going lower, it seems the wiser choice. And I still have my three strongest energy positions -- EEP, PKD and TAN.

I can always add more energy positions when oil finds new support.

Gold Is The Anti-Dollar Again

Meanwhile, gold looks better and better. It's not giving back much of yesterday's gain.

(Updated chart)

So, I decided to add a gold miner and a silver miner ETF.

First, Primero Mining ...

(Updated chart)

My subscribers at Weiss had the opportunity to make money on Primero a few times. I still like the story. Primero is a miner working in Mexico. It has a market cap of $660 million.  It trades at a slight discount to book value, but probably not for long.  

Primero has been increasing production at its flagship San Dimas mine, which has more than 100 mineralized gold-silver veins. Production at San Dimas rose 9% in 2012, and should hit ~130,000 gold equivalent ounces this year. The company stated that it expects its full-year all-in sustaining costs to average $1,050-$1,150 per ounce. Continued expansion of the mine is projected to bring production up to ~165,000 ounces by 2014.

Primero also own 70% of another project, Cerro del Gallo, in Guanajuato State. Goldcorp owns the remaining 30%. I've been to mines in Guanajuato; that area has a rich mining tradition and the government is mining friendly. Cerro del Gallo should start production in 2015. 2016 will be its first full year of production, and its targeted production is 60,000 ounces a year for the first year.

Primero has a little over 600,000 ounces in reserves and a million and half ounces in resources. The company says it expects to convert 90% of those resources to reserves. The company is spending money on exploration, something that other companies are putting off these days.

The company has $32 million in debt, due by the end of 2015, and it looks payable. Also, Primero received a favorable tax ruling from the Mexican government: Now, Primero no longer has to pay taxes based on the spot price of silver that they sell to Silver Wheaton. Silver Wheaton buys silver produced at San Dimas at a price of $3.90 per ounce. In 2012, Silver Wheaton bought 5.9 million ounces of silver from San Dimas.

When it bought the mine, Primero assumed the obligation to sell Silver Wheaton the first 3.5 million ounces of payable silver produced per year plus 50% of any excess at $4.04 per ounce (plus 1% inflation) until August 5, 2014. 

After that, Primero will sell Silver Wheaton the first 6 million ounces of payable silver produced per year plus 50% of any excess at $4.20 (plus 1% inflation) per ounce.

If you don't like Primero's side of that arrangement, you can always buy Silver Wheaton instead (and I might).

I like Primero, and today's pullback seemed like a good opportunity to add it. 

My other pick was Global X Silver Miners ETF (SIL) ...

(Updated chart)

SIL gives me exposure to a basket of companies across the silver mining industry. It tested its downtrend yesterday and is pulling back today. I think the US dollar is going to fall, silver and gold will rise, and SIL and PPP will rise with them.

To be sure, my entire market thesis could be wrong. Or maybe just a part of it will be wrong.  But when I go shopping in precious metals, I'm buying great companies at big discounts.  It helps me sleep better at night.

These are not official recommendations. I am not your investment adviser. You should not buy something just because some guy on the Internet likes it.  Do what is best for your own investing purposes. And you have at least until tomorrow morning to do your due diligence on anything I mentioned here.

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