How to leverage gold and silver without any borrowings

Buying gold and silver on margin in a volatile market is a very quick way to get your position wiped out. The first erratic price movement might destroy your position. But there are other methods of leveraging the rising price of gold without having to borrow money. My apologies to experienced gold traders as what I have to say is going to be obvious to them but newer retail investors in precious metals might like to read on.

In any rising market for precious metals, and with inflation and dollar devaluation inevitable as part of the bail-out of the American financial crisis I do not see how we can be about to experience anything else, there have to be some associated asset classes that do better and some worse than the average performance.

Let me put one idea on the table immediately. It has been observed many times that silver tends to out perform gold in a financial crisis. Where gold might double in value, silver will treble. So there is leverage in exposure to silver.

However, you can go one better with a ‘pure silver play’ producer as shares in major silver producers will out perform the price movement in the metal. This is only logical because the additional price movement in the metal represents marginal profit to the producer and increases its profits by an amount geared above the metal price.

Hence you should stock up now on the large silver producers, companies like Hecla and Pan American Silver. This also works for gold – and companies like Seabridge Gold claim to offer the highest leverage to the gold price – but you will not get the additional leverage of the surging silver price.

For gold leverage you are much better concentrating on the junior gold companies, and perhaps the highest gearing of all will come from a junior silver producer in this bull market.

The good news for buyers today is that these stocks have been shorted down to absurdly low prices over the summer. But last week the biggest one day rise in gold for many years showed how this impacts on junior prices.

My favorite junior leapt 43 per cent, a price increase it has so far retained, while the silver pure plays managed a still excellent 15 per cent price rise. On my website I have declared my own interest in the juniors but there is plenty of expert advice available on www.goldseek.com, www.golddrivers.com and www.silver-investor.com among others.

But the great thing for investors in either pure silver plays or gold and silver juniors is that you can simply establish a long position and wait for the inevitable upside. There are no margin calls – you effectively have an open ended option to sell when prices rise.

You do, of course, have a leveraged risk to the downside – but if that happens and you wait for the inevitable recovery you will have lost nothing. However, I would warn against trying to be too clever and waiting for another pull back in precious metal prices – that might not happen and the main risk now is being out of this market when it goes up.