Digging Deep: Time For Precious Metals Miners? (GLD, GDX, GDXJ, PLTM, PSAU, KGC, PAAS, ABX, PLG)

This morning, the market crackled with news that billionaire investor George Soros had bumped up his holdings of the SPDR Gold Trust (NYSE:GLD) 0.5 percent in the 4th quarter of 2010.

Color me unimpressed.

Don’t get me wrong: When you hold—as Soros does—4,721,808 shares of GLD, any slight percentage change in your holdings translates into potentially huge moves for the vehicle. And since GLD, with more than $52 billion in assets under management, dominates the gold ETP scene, what happens in GLD tends to greatly influence the rest of the gold market.

But this is a nonstory. Amid European economic uncertainty and a tightening Chinese economy, Soros decides to hold onto his gold—well, it doesn’t take an investing genius to make that call.

What I find far more interesting is his growing love affair with North American miners.

As Bloomberg reported earlier today, 13-F filings show that Soros hurled himself head-first into Canadian metals producers, increasing his position in Kinross Gold Corp (NYSE:KGC) and snatching up new shares of Pan American Silver Corp (Nasdaq:PAAS). (The love wasn’t indiscriminate, however; Soros cut his holdings in range-trading Barrick Gold (NYSE: ABX), the world’s biggest gold miner.)

The biggest surprise, however, is Soros’ newfound optimism in Vancouver-based Platinum Group Metals Ltd (NYSE:PLG); Soros increased his holdings from 1.5 million shares as of Sept. 30 to a whopping 12.7 million shares as of Dec. 31, worth $34 million.

Given that the fundamentals for gold—and precious metals in general—have never been stronger, miners make a heck of a lot of sense. We’re certainly seeing record highs in gold, palladium and platinum prices (silver excepted only because of the Hunt Brothers scandal in 1980). Miner equities offer leverage on those rising prices, since a rising commodity price generally translates into higher company profits and thus a higher share price.

This is clearest when you compare gold’s relatively mild recent performance to that of gold miners (here since Aug. 1, 2010):


When gold prices rose, both majors and minor gold producers—proxied by the Market Vectors Gold Miners ETF (NYSE:GDX) and the Market Vectors Junior Gold Miners ETF (NYSE:GDXJ), respectively—outperformed bullion. And when gold prices began to fall, so too did miners outperform—just to the downside. Year-to-date, GLD has lost 4.16 percent, while GDX has dropped 8.15 percent and GDXJ has lost 6.44 percent.

But is Platinum Group Ltd. specifically worth the optimism?

Well, Platinum Group appears to be making smart management decisions—not the least of which includes focusing its E&P efforts on South Africa and Canada, rather than Zimbabwe. Zimbabwe may have the world’s second-largest platinum deposits after South Africa, but it also currently suffers continued economic woes, not to mention political violence and unrest, making substantial investment in the country a risky proposition.

In comparison, South Africa and Canada remain much more stable. The South African rand, which remains strong against the U.S. dollar, hasn’t reflected the 24 percent rise in the price of platinum over the past year; should its currency weaken, the platinum price could end up playing “catch-up,” and South Africa’s mines would become more attractive. Meanwhile, discoveries of large new platinum and palladium deposits in Canada have renewed interest in production closer to home.

But I’m not much for stock-picking—I prefer taking a holistic approach to the space. And investors can learn a lot from Soros’ choice of Platinum Group when picking miner ETFs.

For starters, think outside the gold miner box. Since the gold market labors under different demand drivers than other precious metals—as I covered yesterday, it’s the difference between safe-haven investing and industrial demand—diversifying your portfolio into silver and platinum group miners alongside gold producers affords your portfolio some protection, should gold in particular go haywire.

What’s more, when looking for PGM miner funds, try to find those holding positions deep in Canada and South Africa, as these countries currently offer the most stable supply streams. For example, the First Trust ISE Global Platinum Index Fund (NYSE:PLTM) follows this maxim, with 33.85 percent of its holdings in South Africa and 23.01 percent in Canada. (It also has some small exposure—3.77 percent—to Platinum Group.) Meanwhile, PowerShares’ Gold and Precious Metals Portfolio (NYSE:PSAU) maintains the same high allocation to those two countries, but switches the proportions, placing 45.35 percent in Canada and 18.55 percent in South Africa.

So while Soros’ GLD holdings offer few surprises, I do think there’s something worth mining out of this latest 13-F filing—a newfound appreciation of precious metals miners.

Written By Lara Crigger From Hard Assets Investor 

HardAssetsInvestor.com (HAI) is a research-oriented Web site devoted to sharing ideas about hard assets investing. The site has been developed as an educational resource for both individual and institutional investors interested in learning more about commodity equities, commodity futures and gold (the three major components of the hard assets marketplace). The site will focus on hard assets investing without endorsing or recommending any particular investment product.


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