The Perfect Tariff Insurance Investment

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Commodities aren’t sexy. At most times, metals and minerals are boring subjects. But these aren’t most times.

With talk (and more than talk) of steel and aluminum tariffs, these boring subjects have become a jet-fueled political debate.

Now, the obvious way to play a political and global economic situation like this is to buy or sell the very resources that will see their prices fluctuate… namely aluminum mining stocks and steel makers. But just because it is the obvious play doesn’t make it the best one. After all, can you KNOW what President Trump will do or how the world will respond?

Instead, think of the bigger picture and how to play it. These tariffs are often being conflated with a trade war on many fronts. Whether it goes that far or not is up for debate. What isn’t debatable is the large uncertainty in global markets.

Central banks the world over are trying to force interest rates in an upward direction. But this very uncertainty has kept them remarkably low.

Now, that’s not to say you should abandon stocks for Treasuries. There’s another option far more appealing to investors like us.

When markets become uncertain or scared, they turn to a second source to stash their wealth beyond fixed income. They bury their money in the ground. In other words, they buy precious metals like gold and silver in bulk. That can send those rare commodity prices sky high.

Take a look at this long-term price chart for gold over the last century:

Notice when those huge rallies and spikes have occurred. The first one was the Great Depression. Then when Nixon took us off the gold standard. The third was the market panics and interest rate bubbles of 1980. And finally, the Great Recession.

I’m not saying we’re going to see a spike like this. Obviously, it doesn’t happen all the time. But if investors really are looking for safety these days, and they really do buy precious metals, there’s an even better way to play it than to own the actual metal.

You see, mining companies offer a great conduit to metal investing. And in some ways, they offer a multiplying effect on any increase in prices.

First of all, metal companies are kind of like enormous metal banks. They own the mines and real estate where all the new metal we’re likely to see in our lifetimes is found. All that metal in the ground is their bank vault.

They are also leveraged in how they make money from that metal. If prices rise faster than their operating costs of pulling it out of the ground, each ounce makes them and their investors more money.

Finally, they offer what metals themselves usually can’t. A mining company, any good one that is, is always looks for new veins. For an investor, that means that if you already own a mining stock when they find a new surplus of minable resources, your stock is nearly guaranteed to rise. Unless we stumble on a new way to use gold or silver as a material, physical metal investors don’t have that added bonus.

There’s one more thing you need to know before you put all your cash in mega mining stock: junior miners often triple or even quadruple the performance of majors when metal prices go up.

Just take a look at these two performance tables from that crazy gold rally between 1978 and 1980:

As you can see, the major gold miners did quite well, making investors a 289.5% return from the end of 1978 to their peaks. But juniors went gangbusters, returning more than 2,300% to investors.

While we might not be in for quite the same size of rally this time, the smart money is still on juniors.

Finding the right ones, however, is tricky part. We’ll discuss what it takes to pinpoint the best individual juniors in future installments. But the easiest and quickest way to begin building your own junior mining portfolio is to get into VanEck Vectors Junior Gold Miners ETF (NYSE:GDXJ).

This fund holds 74 junior mining companies’ stocks – 95% of which have a market cap of less than $5 billion.

While the fund by itself probably won’t grow your wealth by factors of 10x or 15x, it is the perfect foundational investment to take advantage of this soon-to-be hot sector.

Jim Nelson

Editor at Large

 

 

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