Betting on “Poor Man’s Gold”

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Your positions in global stock markets could scarcely be stronger. Your current Global Bull Market Alert portfolio includes four out of five of August’s top-performing global stock exchange-traded funds (ETFs) — the Global X/InterBolsa FTSE Colombia 20 ETF (GXG), the MSCI Thailand Investable Market Index Fund (THD), iShares MSCI Chile Investable Mkt Idx (ECH) and the Market Vectors Indonesia ETF (IDX). And every one of these positions hit either 52-week or record highs this past week. Note that I have tightened your stops on a number of these positions.

This week’s Global Bull Market Alert pick relates to a very interesting discussion that I recently had with Michael Chekan of Asset Strategies International in London. Michael’s firm focuses on precious metals like gold and silver, including his well-regarded Perth Mint Certificate Program. As you know, gold is a safe haven that I have recommended in Global Bull Market Alert in the past. In fact, I have a 10%+ holding in the yellow metal for my clients at my investment firm Global Guru Capital. This week’s Global Bull Market Alert pick is yet another precious metal, silver, through the iShares Silver Trust (SLV) — an asset that Michael calls “better than gold.” Here’s why I think silver will continue to rise whether or not global stock markets continue to rally.

While gold has moved up well beyond its previous (nominal) historical peak of $875, silver has yet to surpass its all-time high of $50 an ounce. In fact, “poor man’s gold” still remains below its current cyclical high of $21 an ounce — reached in 2008.

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Although photographic use — once the largest consumer of silver — has continued to lose ground to digital photography, the advent of new industrial and commercial applications, such as solar energy, medical applications, antibacterial textiles, radio frequency identification devices, batteries, and water purification, means that demand for silver is set to explode in the coming years. And physical investment demand for bullion coins like American Eagles and Canadian Maple Leafs — for small investment bars and ETFs — also will continue to grow as Western investors continue to seek safe-haven assets. Yet even as demand is exploding, silver production — mostly a byproduct or co-product of other metals — will remain relatively inelastic.

By historical standards, the gold/silver price ratio also suggests that silver is undervalued. Standing today at 63, the ratio means it takes 63 ounces of silver to purchase one ounce of gold. That long-term ratio has held fairly steadily around 15 or 16. And as Michael Chekan points out, based on historic ratios, silver could triple from here and still be undervalued compared to gold. How is that possible? If silver simply matched its previous highs in inflation-adjusted dollars, it would be trading at more than $130 an ounce. Yet on Friday, silver closed at $19.40.

So why is silver a good trade today? Technically, last week, silver broke out to the upside, rallying to a two-month high, and is now near the cyclical high it last saw in early 2008. Investors are starting to catch on to the silver story.

So buy the iShares Silver Trust (SLV) at market today, and place your stop at $17.40. If you want to play the options, I recommend the January 2011 $20 calls (SLV110122C00020000).

Portfolio Update

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iShares MSCI Chile Investable Mkt Idx (ECH) closed the week at a record high of $70.31, rising 4.36%. As one of the strongest markets in the world in 2010, ECH remains a BUY. Raise your stop to $66.00.

UltraShort Euro ProShares (EUO) fell back slightly this week, as risk appetite returned to global stock markets, and demand for the U.S. dollar as a safe haven weakened. EUO is a temporary HOLD.

iShares JPMorgan USD Emerging Markets Bond (EMB) rose 0.5%. In addition, it paid out a dividend of 44.4 cents per ETF on Sept. 1. A steady riser in the face of a declining U.S. dollar, EMB remains a BUY.

iShares FTSE/Xinhua China 25 Index (FXI) rose slightly last week. With global emerging markets rallying, this weakest performer among global emerging markets is now a HOLD.

Global X/InterBolsa FTSE Colombia 20 ETF (GXG) rose yet another 4.13%, closing near a record high of $41.88. As the single, best-performing equity ETF in the month of August, your bet on Colombia remains a BUY. Raise your stop to $37.00.

Market Vectors Indonesia ETF (IDX) closed at yet another new record high of $78.93. The “Next BRIC” remains a BUY.

Itaú Unibanco Holding S.A. (ITUB) rose 3.45% last week. With credit volumes in Brazil set to keep rising as its central bank lowers reserve requirements, ITUB is back to a BUY. Raise your stop to $20.20.

iShares MSCI Thailand Investable Market Index Fund (THD) jumped yet another 4.88% last week, hitting another record high. The momentum behind this ETF is relentless. THD remains a BUY. Raise your stop to $52.00.

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P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy or on my new blog, NickVardy.com.

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Global stock markets rebounded somewhat this past week, with the MSCI global emerging markets index rising just about 0.5%. World stock markets mostly are gaining in early trading today, after Chinese manufacturing growth picked up and Australia's economy expanded at its fastest pace in three years. But markets are likely to remain volatile ahead of U.S. jobs figures due Friday.

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