With the gold and silver prices looking stronger by the day and with every prospect of spot gold at last breaching the $1000 a troy ounce that has proved so elusive after two attempts in the last twelve months, it is time to consider the miners of these metals as a way to buy into the gold action for some big profits.

Precious metal and base metal miners have been beaten down since the recession took hold, one of the reasons has been the drying up of credit, another the ever-rising cost involved in production.

Many newcomers to the mining sector do not realise just how many miners of base metals also produce gold, silver and platinum group metals (PGMs) as by-products.

Meaning that if you want to find out how to invest in gold by buying miners in the expectation that their stock prices will eventually catch up with the price of the metal and lead to big profits you will have to get to grips with some extensive research.

There are miners that produce gold or silver as their primary product and it is these that beginners should take a careful look at in the first instance.

Get this right and your experience will stand you in good stead when the rest of the mining sector is poised to take off as global economies recover.

The mining sector is broadly speaking divided into two divisions, the largest producers are known as majors or senior miners while smaller producers and/or development and exploration companies are called juniors.

The usual investment criteria apply to both groups, that is they should have management with a good track record, low debt, and reasonable production costs.

These three factors are critical in the current uncertain economical climate.

For example it is not helpful for a company sitting on excellent properties containing vast reserves of gold or silver if their production costs are higher than average and they have a high level of debt to service and soon to be renogiated.

Many gold and silver miners have their operations, or at least some of them, in politically unstable parts of the world, making this another very important consideration to take into account.

Another factor to assess is a companies hedging situation. The mining industry has a problem with the fluctuating price of its products.

As a way of evening out the highs and lows in an uncertain economic climate the practise of selling forward a percentage of their production has been as an insurance against production costs being greater than the market price they obtain for the metal.

This is known as hedging.

This poses real problems for management as investment in their business has to be in place long before any sellable product comes out of the ground, not really any different from the forward planning farmers have to make.

It is therefore important to realise when evaluating the investment prospects for any mining company that if the ratio of hedging to market sales is high the business has better odds of surviving if the price of their product falls through the floor but will miss out on adding substantially to their bottom line if, as in the case of gold and silver, prices stay firm or rise.

Those miners with a small or no forward hedging book take a greater risk but will cash in if gold and silver continue their advance.

Both gold and silver global production has fallen every year for about a decade, South Africa, once the largest gold producer has fallen to second behind China.

Exploration and development of new mines has suffered enormously in the last twelve months as the credit crunch has begun to bite and base metals prices have come down 50% or more from their earlier highs.

Many base metal mines have cut back on production or even closed down. This has had a further effect of lowering production of gold and silver from those mines where the two metals are a by-product.

There are a number of established gold and silver majors with cash, or access to it, who are on the look out to absorb or participate in the operations of promising juniors as output falls and prices rise.

Many juniors already have a major funding their operations for a chunk of their equity. Clearly such a junior that has confidence expressed in it by the management of a seasoned major is worth a very close look.

A more complex factor in assessing a major, or for that matter a junior, miner is leverage, that is the cost of extraction compared to the price of the metal it produces to give an expectation of its effect on the price of the stock.

On the assumption that the market price has taken these factors into account (does the current S&P 500’s rapid rise truly effect the longer term outlook for the economy?

We think not, so be very careful when figuring this out as those scalpers and sort term traders are taking a growing interest in the gold and silver sector!) then if the price of gold or silver rises the price of high cost producers shares will gain more in percentage terms than a low cost producers shares.

To sum up, investing in a well researched major producer of gold and silver that meets the criteria expressed above can result in a an investment that can make a more than acceptable return for those confident in the future of gold and silver.

Speculating in a well researched junior miner can be a pathway to tenfold profits or more if it hits pay dirt in the form of a major taking a slice of the action. Our take on this is to spread our gambling money around a few juniors that have caught our attention. This has paid off in the past and we expect that to continue despite a less than one in six hit rate.

These are the gold and silver miners we like and are invested in: -

Argentex Mining Corp (AGXM)
Coeur D’Alene Mines (CDE)
Market Vectors Gold Miners (GDX) for spread.
Goldcorp Inc. (GG)
Hecla Mining Co. (HL)
Novagold Resources Inc. (NG)
US Gold Corp. (GG)

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• Downward Pressure On Silver And Gold Spot Prices

The continuing rise in equity markets and the current slowdown in inflation are putting downward pressure on silver and gold spot prices despite the general long-term optimism for both metals remaining in place.

Demand for both metals has weakened as US consumer prices have fallen undermining the metals safe haven status.

We note that there are some learned minds that treat many of the statistics that emanate from the US government with more than a pinch of salt!

Gold bugs will take heart that India has returned to buying mode, importing 10 tonnes of gold in the first two weeks of this April compared to the April 2008 total of 24 tonnes.

Opinion among both fundamental and technical analysts remains divided. On the one hand if gold breaks down below support at around $850 an ounce, then $800 an ounce will be the next stop.

The other point of view is that further falls will herald a solid buying opportunity and that Indian demand will become substantial by late summer.

Our view is that we have entered ‘no mans land’ and believe that both metals will bounce back strongly when soaring inflation becomes evident, but that may well be anything from six months to three years in arriving.

In the meantime the bad economic news, to which we have become accustomed, is now being interpreted as being good news, as it is not quite as bad as the last month or quarter!

So the equity indexes continue to rise although many sectors are still as much as 40%-50% off their highs.

Seen in that light it comes as no surprise that bargain hunters are raising their heads above the parapet.

Whether that means the lows are behind us remains to be seen and we have no idea of the outcome. That this is a bear market rally is clearly a possibility, in which case as equity markets hit new lows so silver and gold should prosper within a shorter time scale than when the inflationary scenario plays out.

Whatever the future holds, we expect silver to outperform gold. If economies are picking up as our leaders are telling us, then silver will benefit from its much greater industrial use than gold.

The gold silver ratio has risen above 71, historically very high, indicating that in the near term silver will rise faster than gold but may not have quite so much downside percentage wise.

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• A Way To Buy Into Gold Through Miners