Gold Shares and Warrants - The Leverage Factor

By: Dudley Baker | Tue, Sep 15, 2009
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Investors the world over are constantly evaluating the leverage, risk and potential rewards of their investment decisions. Whether you are an individual investor or an analyst for a large mutual fund, leverage, risk and the pot of gold at the end of the rainbow are always factors to be considered.

We currently have differing opinions among analysts as to where the gold and silver markets are going in the near term. Should new investments wait until the much anticipated next collapse occurs in the financial markets? Or should we follow the lead of gold and silver and continue to invest as gold appears to be on the verge of a major upward move?

Even those analysts preferring to wait believe that gold and silver will be the next big place to be.

What if they are wrong in the short term?

For us, we believe there is a great probability the time is now and we are positioning ourselves and subscribers with this viewpoint. If we are early, so be it. We will increase our positions on the consolidations. But what if we are correct and the markets blast off?

Thus, as we continue to find values in the markets we add them to our portfolio and/or increase current positions. Our view is that we are 'building inventory', an inventory of shares and warrants to be sold at some point in the future. Will there be corrections along the way? Sure, but we will take the opportunities that the markets give us and do not believe in chasing anything.

Back to Basics:

With few exceptions, most of us writing and those reading the articles on these gold oriented websites are bullish on the precious metals, right? So, let's look at a few very simple ideas on the use of leverage and risk. I'd like to first say, we do not personally use nor do we suggest that an investor use margin accounts. The markets can be quite volatile at times and we do not wish to be thrown off of this bull market by a margin call.

If an investors basic beliefs are that gold will say, double from current levels for a 100% gain, are there other ways to invest other than an outright purchase of gold bullion? Sure, gold coins and the gold ETF must mimic the price of gold.

But what if we wanted to utilize some leverage in an attempt to increase our investment gains?

Below is a list of investment alternatives of which each takes on an additional level of risk and leverage to the price of gold.

Gold Shares -- Producers
Gold Shares -- Junior Mining companies
Gold Shares -- Exploration companies

Investors interested in the precious metals but yet seeking greater safety will stick with the large producing mining companies. At the opposite end of the spectrum will be those investors looking to make a killing by investing in the shares of the exploration companies of which we seem to have an endless supply.

It is commonly known, that gold shares over time will outperform the increase in the price of gold, so investors as a general rule, are looking to own gold shares as their investment of choice. Each investor depending on their level of risk tolerance and their individual beliefs in the strength of this bull market must factor this into their investment philosophy.

Warrants & LEAPS:

Investors looking for even more leverage may wish to consider the use long-term warrants and even LEAPS in their investment decisions. If one or more of your favorite mining shares has LEAPS or long-term warrants trading, why should you not consider them? There is absolutely no reason not to consider them. Simply put, long term warrants will usually out perform the gains in the underlying common shares by 2 to 1 thus providing investors with great leverage.

If you find a LEAP or warrant with more than 2 years of life remaining you can greatly reduce your investment at risk while greatly increasing your potential gains. There are LEAPS on some companies going out 2 years and there are currently many warrants being issued with a 5 year life. The most important factor in considering LEAPS and warrants is the underlying company. Would you want to own shares in this company? If the answer is yes, then evaluate the current leverage of the warrants or LEAPS and decide which is the best investment for you. Sometimes, the warrants may be overvalued and not the best choice, but more often than not, warrants and perhaps LEAPS will provide you with much more bang for your buck with a decrease in your dollars at risk.

Perhaps you will find that there are LEAPS or warrants available on some of the large producing companies, so instead of owning a conservative company, you can spice up your investment with leverage by the use of LEAPS or warrants.

Visitors to our website can now see our free warrant database which will give you all of the warrants currently trading on all of the natural resources companies.

We have intentionally left call options out of our discussions as we believe the use of call options will not give investors sufficient time thus placing you in the role of a speculator as opposed to an investor.

For more information on the use of warrants, we invite you to visit our website and for information on options and LEAPS, visit the CBOE.

For subscribers, we furnish a complete listing of all natural resource shares having call options, LEAPS and warrants in a simple to read table format.

At the end of this bull market we would like to critique ourselves as having made sound investment decisions and employing the use of leverage, always tolerate of the risk, with our goal to maximize our investment returns. So far, so good.

For those readers unfamiliar with our services:

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Dudley Baker

Author: Dudley Baker

Dudley Pierce Baker
Founder/Editor - Guadalajara/Ajijic, Mexico
A Market Data Service for Warrants

Dudley Pierce Baker is the founder and editor of Common Stock Warrants and its predecessor, Precious Metals Warrants and a 1967 graduate of St. Mary’s University in San Antonio, Texas with a major in accounting.

Disclaimer/Disclosure Statement: is not an investment advisor and any reference to specific securities does not constitute a recommendation thereof. The opinions expressed herein are the express personal opinions of Dudley Baker. Neither the information, nor the opinions expressed should be construed as a solicitation to buy any securities mentioned in this Service. Examples given are only intended to make investors aware of the potential rewards of investing in Warrants. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions involving stocks or Warrants.

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