The Only Sector of the Economy with Improving Fundamentals

“Ahead of the Street” Column, by Mitchell Clark, B. Comm.

My enthusiasm for mining investments continues to grow and, every time the spot price of gold has an up day, the business model for gold producers just gets better. And, it isn’t just the big producers that are seeing good demand for their equity; smaller producers are now enjoying renewed enthusiasm from institutional investors. Trading volume in a lot of small- and medium-sized gold miners is going up and this is the surest sign that funds are flowing to this sector.

Realistically, if you look at the entire landscape for domestic stocks, there isn’t a lot of growth available from the underlying businesses. While big companies are able to leverage their costs to produce better earnings, top-line growth is mediocre at best. Even at the nimblest small technology company, business growth is struggling along with the rest of the economy. There really is only one sector of the equity landscape that has businesses with improving fundamentals — that’s gold and silver producers.

Similar to my previous and continuing enthusiasm for select U.S.- listed Chinese stocks, miners now hold most of my attention. Gold and silver is the best place to be over the next two years. According to a report by Bloomberg, hedge-fund star George Soros increased his hedge fund’s holdings in the SPDR Gold Trust by over 150% in the most recent fourth quarter of 2009. Soros says that gold is going to be a bubble market and that he wants to play this bubble to the fullest extent possible.

I would say that there are only about two handfuls of companies that I would consider owning in the gold and silver mining business. Some are large producers; several are medium-sized producers and explorers; while a few more are speculative juniors. From my perspective, the investing landscape is quite small in the gold sector, even though there are thousands of junior mining companies exploring all over the world. With gold miners, you want companies that have a lot of cash, great properties with increasing reserve estimates, and some evidence that management has a track record of success in the business.

I would say that investors can also consider a precious metal fund or ETF. It’s easy to make a targeted investment with these kinds of securities and you can get out whenever you wish.Speculating in gold and other precious metals has always been an endeavor that’s appealed to a small portion of investors. There’s still a stigma attached to speculating in commodities and it’s likely due to the fact that a lot of individual investors are intimidated by futures markets and leverage. But, you don’t need to be a futures trader to invest in this sector.

Sure, investment risk is high with mining stocks. It has been and always will be. But what other sector of the stock market isn’t high risk in this economy? I can’t think of one.