MoneyWeek roundup: Should you succumb to the to the silver sylph?

On Wednesday, Dominic Frisby took a look at silver “Like the sylph that winks at you from behind a tree, cajoles you with seductive promises and then leads you up the garden path, silver is the metal that promises riches beyond your wildest dreams – and rarely delivers”.

Indeed, silver bulls can come up with any number of reasons why you should buy. For instance, “there’s not enough silver to meet demand. Quick! Buy silver”. Similarly, “funding for exploration has dried up. Where’s the new silver going to come from? Quick! Buy silver”.

While these are both solid reasons, the metal currently “languishes around $20 an ounce, like a drunken gunslinger in a hammock remembering former glory days, unwilling to move”. Even the argument that “silver is gold on steroids”, doesn’t seem to be true, as it has lagged both gold and gold mining shares this year.

The technical signals seemed mixed. At the moment “the gold-silver ratio (that is, the price of gold divided by the price of silver) is in a clear upward trend”. This means that “gold is outperforming silver, and the trend suggests it will continue to do so”.

However, “based on recent price action, there is a trade to be had in silver”. He notes that there is a possible line of support around $18-$19. If this holds, “$26 is a reasonable short-term target”. Of course, “you can manipulate the same chart to suit whichever bias you are hoping to confirm”.

However, there are some strong fundamental factors. Last summer Dominic wrote “about how the total absence of funding for lead and zinc pointed to significant shortfalls in the years ahead”.

The good news is that, “this story has not changed significantly. What’s more, “given that silver occurs with lead and zinc, this absence of investment is also bullish for silver in the longer term”. While he’s “not sure the conditions are quite ready for a mammoth silver spike”, there is a chance of “some gentle appreciation”.

To take advantage of this “you can buy and store physical silver online with a company such as Goldcore, BullionVault or Goldmoney without incurring VAT”. A riskier option would be silver miners. One company he likes is First Majestic (TSE:FR; NYSE:AG) “the stand-out pure play”. Impact (TSX.V:IPT) is also “a dependable small cap producer”. Finally Santa Cruz, (TSX.V:SCZ) is a potential takeover target because of its “quality assets”.

If you’re interested in mining shares more generally, you might want to take a look at Simon Popple’s Metals and Miners newsletter.  Simon  is especially keen on gold miners at the moment.

 Profit from China’s war on pollution

On Thursday, I looked at the growing problem of pollution in China.  Until now, “most Chinese were happy to accept more pollution in return for faster growth”. After all, “the political system left them with little choice”.

However, “there have been increasing protests about conditions”. Slowing growth also means that, “people will have more time to get angry about the downsides of the country’s economic transformation”. Obviously a mass revolt is the last thing the communist leadership wants, which is why last week, premier Li Keqiang declared a “war on pollution.

China admits that the problem “may take over a decade to solve”. However, “it has already started to tackle the problem, with a major program announced last year”. This means “there will be tougher standards and bigger penalties for polluters who break them”. It also means “there will be more spending on anti-pollution infrastructure, such as ‘scrubbers’ for power plants”. The government is likely to follow through, since “even the most corrupt government official can’t relish the idea of waking up in a penthouse swathed in smog, or of sending their child out to school with a gas mask in their school bag”.

While we will be covering this in the near future, “there’s one quite obvious play that we’ve covered a few times recently – and you don’t have to invest in Chinese stocks to benefit from it”. Beijing “plans to spend a lot more on nuclear power to reduce reliance on coal”. This will boost on uranium prices, which will also “benefit from increased Indian interest and Japan restarting its nuclear power plants”.

We’re therefore tipping uranium miner Cameco (NYSE: CCJ), which has large reserves.

Follow China into Africa

While China is trying to get to grips with pollution, Bengt Saelesminde, who publishes The Right Side, notes that, “Chinese executives are swarming across Africa in a quest for commodities and key minerals”.

Unfortunately, “Africa is a notoriously difficult for the average investor to come to grips with”. After all, “you certainly wouldn’t want to start looking for a stock broker in Botswana, Ghana, or Ivory Coast”. This means that if you want to buy into Africa, you have to do so through an investment fund. After a search around he has found the Africa Opportunities Fund (AIM: AOF), which he calls “a great little fund”.

While it’s had a “great little run” already, more than tripling in five years, it still trades at a discount of 6% to its net asset value.  Bengt is also enthusiastic about the management, and likes the fact that it doesn’t “just invest in the big regional markets like South Africa and maybe Nigeria”.

What’s more, it offers “a wonderful diversity” that is “driven out of specific investment opportunities, rather than slavishly sticking to the main markets”. Overall, Bengt likes “the range of this fund’s holdings, and I like the themes the manager has brought together”.

Of course, this fund isn’t just about capital growth. Indeed, according to the management “the top ten holdings are yielding an average of 5.1%”. Given the high multiples that many global markets command, this is “a great income stream”. Additionally, “the average price/earnings ratio of the top holdings comes in at 11.5 times; again, not bad for companies still very much in the growth phase”.

Further evidence that the firms in the portfolio are high-quality is that they display a return on equity of 18.1%. While the portfolio is very concentrated, he thinks that such a strategy “tends to pay off, big time”. In his view “it’s certainly one to consider for the long run”.

Why the independence referendum is flawed

Our editor-in-chief Merryn Somerset Webb thinks that there is a big flaw in the Scottish referendum question. While the question “Do you agree that Scotland should be an independent country?” seems “very simple” it “gives no information at all about what that would mean”.

For instance, the SNP ““can’t tell us what currency Scotland would have” or “whether it will be in the EU or not”. Indeed, the party admits that negotiations are unlikely to finish before the next Scottish election in 2016, and the SNP currently trail far behind Labour.

This means that, “Scottish residents are being asked to make a decision about their future and their children’s future based on “blind trust” in a political party that may not even be in power when the time comes”. In contrast, the Quebec independence referendum of 1980, “did not ask for any final decision”. In contrast, “it simply asked for a mandate to negotiate for sovereignty with any deal being put to the electorate again for a final decision.”

“Better isn’t it?” asks Merryn. Overall, she thinks that, “Scotland needs to start again”.

Unsurprisingly this topic has generated enormous passions on both sides. User ‘WillieH’ thinks that “the SNP won the right to choose the question and Westminster has agreed they can do so”. However, ‘Val’ takes Merryn’s side, saying that, “the whole issue of our Country ripping itself apart for no good reason is depressing”. In Val’s view, the only people who stand to gain from Scottish independence are “the EU, France and Germany”.

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Have a great weekend!

The MoneyWeek team
Merryn Somerset Webb
John Stepek
Matthew Partridge
Ed Bowsher
David Stevenson