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Why I'm keeping the pedal to the metal

By David Levine

In recent weeks, my gold and silver positions - Newmont Mining (NEM) and Pan American Silver (PAAS)– have been performing well, thought there is no guarantee that will continue.

While I wish I could have bought Newmont Mining a bit later, hindsight is 20/20 and I feel like I am in a good position. In my opinion, it seems like people are looking at gold and silver with renewed interest, and realizing that mining stocks are one of the best way to invest, as opposed to the metal itself.

I personally believe there are several advantages to investing in mining stocks. First of all, from a taxation standpoint, mining stocks are treated as stocks, with capital gains rates that are normally associated with similar equities.

Although I'm not qualified to give tax advice, I believe physical gold and silver are taxed as tangibles - like a collectible - and are therefore subject to much higher capital gains rates.

In addition, although dividends represent past performance and are not guaranteed, the mining shares that I own pay cash dividends. In contrast, ETFs like the iShares Silver Trust (SLV) or the SPDR Gold Trust (GLD) don't pay dividends and may have expenses related to management and storage.

Second, the stocks of mining companies have operating leverage that in some cases can lead to a higher stock price. The production costs of mining companies don't change just because the price of the metal changes.

In my opinion, that's why mining company stocks are rising even though their earnings have been lackluster recently. I have no way of knowing for sure, but I believe the higher stock prices reflects the possibility of more consolidation in the industry. That could be a good development for my holdings, since fewer places would relieve some of the competitive pressure.

With the swoon in silver and gold markets last year, the spot price got to a point where many miners were producing below cost - not a sustainable situation. This generally leads to a reversal, where the supply becomes tight enough that the price inevitably rises.

The metals market is showing signs of recovery. India and China have begun buying gold again in earnest; most likely to bolster their balance sheets in the event of a downturn or some type of economic instability. Other investors are simply looking for a "non-correlated asset" to add to their portfolio- to act as insurance as the market rises.

Investors are not sure how long the current bull market in stocks will last. That is one reason, in my opinion, gold prices have risen. I personally believe that Pan American Silver and Newmont Mining will come back into investor favor, regardless of whether the market rises or falls.

A spot gold price of more than $1,600 and a spot silver price over $30 from current levels seems more in line with the current geopolitical and market climate.

If this scenario occurs, mining stocks may rise dramatically as their production costs are far below this level. I don't have a crystal ball, but I believe mergers could very well tighten up supply even further. Consider sticking with the miners. In the short term, these stocks may pull back, but I believe that they may perform well for the rest of the year.

DISCLAIMER: The investments discussed are held in client accounts as of February 28, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
David Levine

David Levine

I am a value-oriented investor and a former financial adviser for Prudential Securities. I left the industry in 2000 and

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