|
With the gold bull market charging firmly ahead perhaps it is
time to reflect upon what is actually happening from the perspective of the
junior mining sector.
The first chart below is of the TSX Venture Index showing a
great uptrend and looking very strong. The second chart shows us the TSX
Venture Index relative to Gold. Wow, what a difference.
In effect, the TSX Venture Index is actually putting in a
miserable performance relative to the price of gold.
We are firm believers this trend will soon change and the TSX
Venture Index will be leading the way higher with gold lagging.
The catalyst for this trend change is beyond our scope but we
are confident it will happen and probably when we least expect it.
 
Investors new to precious metals as well as the more seasoned
investors and professionals will be looking for ways to maximize their gains
as the junior sector catches on fire and enters a mania phase before
capitulating in a few years.
In addition to buying the common shares of your favor juniors,
several other investment vehicles are available to investors which offer the
opportunity to increase your leverage. Leverage in this sense is not a dirty
word and should be considered by investors as an essential addition to your
portfolio.
The Dirty Little Secret Boils Down To Time
A few favorites of investors are options, LEAPS, and warrants.
All of these investment vehicles have appeal to investors and are very
similar, except for issue of time. Options, will normally have anywhere from
30 days to 180 days of life, LEAPS can at times have 1 or 2 years of life and
warrants can have a life of 5 years or more.
As we all know from the experience of last September - October,
a meltdown in the markets can be disastrous to our portfolios. Holder of call
options no doubt lost their entire investment, while many holders of LEAPS
and warrants weathered this storm and their positions in some cases are now
in the money.
You maybe familiar with options but perhaps not with LEAPS or
warrants, so allow us a few minutes to brief you.
Options:
A call option is a contract that gives its owner the right, but not the
obligation, to buy a specified number of shares at a predetermined price
within a set period of time. Most call options have a life of 30, 60, 90 or
180 days. Call options place you in the position of being a trader looking
for short term gains with high risk associated therewith. Investors have to
be correct on the direction of the markets, your individual stock choice as
well as the timing of your entry and exit strategy. This is not so easy to do
for the average investor. Also, there are very few call options on stocks of
mining companies and we are in a world where investors demand more and more
choices.
There has been an incredible amount of information, education
and marketing to get the investors attention for options in recent years. For
those professionals who can manage risk and have a short term horizon this
can be profitable and exciting. However, the industry statistics are that
most investors, 80%-90% will lose their investment dollars.
LEAPS:
A leap which stands for Long Term Equity Anticipation Securities is also an
option as defined above but these have a longer life of perhaps up to 2
years. Leaps will give you much more time but unfortunately there are very
few leaps on the mining stocks.
Options and leaps are actually created or written by investors
who write an option and keep the premium (the amount you paid) as income. The
underlying company receives nothing.
Warrants:
A warrant is a security giving the holder the right, but not the obligation
to acquire the underlying security at a predetermined price and for a
specified time. Sounds a lot like call options and leaps, right? Well, yes
and no. Warrants are actually issued by the underlying company, normally in
connection with a financing arrangement and are sometimes called a
"kicker" or "equity kicker". Most warrants will never
trade but are held by mutual funds or other private investors whom have
provided the financing.
There are however, many warrants that do trade freely on either
the U.S. Exchanges or the Canadian Exchanges. These warrants trade similar to
their underlying stocks and will fluctuate up and down with the price of the
stocks and can be purchased through your brokerage firm.
Warrants have a longer life than call options and most LEAPS
which is why our subscribers are partial to them. Warrants are usually issued
by the company for at least 2 years and sometimes up to 5 years. If an
investor is more conservative and investment oriented as opposed to speculating,
then warrants may make more sense. Timing seems to always be the issue
doesn't it?
History: Warrants actually
originated back in the 1920's according to some of my sources and in the
1950's thru the 1970's, there was a service by Sidney Fried, The RHM Warrant
Survey. The service was only available in hard copy and was one of the few
sources of information on warrants.
In "The Speculative Merits of Common Stock Warrants",
by Sidney Fried and written in 1949, he states:
"...Common stock warrants turn in the most spectacular
performance of any group of securities....the speculative potentialities of
common stock warrants are enormous....With potential profits and potential
losses so great it is a source of wonder that so little understanding of the
nature of common stock warrants exists not only among the investing 'public',
who might be forgiven this sin, but even among the many 'professionals' of
the business upon whom the 'public' depends for information and
guidance."
Sidney Fried's observation in 1949 is the same as today, in
that, most investors and analysts do not take the time to understand the
potential leverage which warrants can bring to your portfolio. For those
readers interested in knowing more of the benefits of purchasing warrants we
invite you to visit our website.
Whether your investment choice is either of the above, it is all
about increasing your leverage. In layman's language this means generating a
greater gain than the anticipated gain on the common shares.
If you would like to know more about warrants, we encourage you
to visit our website for an in-depth discussion
of warrants, many examples, how to trade warrants and much more.
For those readers unfamiliar with our services:
- PreciousMetalsWarrants.com
provides an online database for all warrants trading on the natural
resource companies in the United States and Canada.
- InsidersInsights.com
tracks the buying and selling of corporate insiders with a focus on the
junior mining and natural resource sectors. Buy and Sell Alerts are
issued as deemed relevant based upon our analysis.
We encourage all readers to sign up for our free weekly email.
Dudley Baker
PreciousMetalsWarrants
Also
by Dudley Baker
Dudley Baker is
the owner/editor of Precious Metals Warrants, a market data service which
provides you with the details on all mining & energy companies with
warrants trading on the U. S. and Canadian Exchanges.
| 
