Silver Is A Potential 10-Bagger From Here [Goldcorp Inc. (USA)(NYSE:GG), Barrick Gold Corp.(TSE:ABX), Newmont Mining Corp(NYSE:NEM)]

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September 29, 2014 3:15pm NYSE:PHYS NYSE:PSLV

silver pricesI attended a conference hosted by Eric Sprott in Toronto last week. Attendees got to pick Sprott Inc.’s brain trust, and there are some mighty big brains in that trust. We heard from Rick Rule, Peter Grosskopf and

many others, including Eric Sprott himself. If you don’t know him, Mr. Sprott has been ferreting out the best stocks in Canada for decades.

One of the speakers was John Embry, whom I always enjoy. Mr. Embry is Chief Investment Strategist at Sprott Asset Management and Sprott Gold and Precious Minerals Fund. He’s spent 45 years studying gold and silver. And the way the metals have behaved for the past three years had him in quite a grumpy mood.

Mr. Embry says that he doesn’t know if he’s seen worse sentiment in precious metals and mining shares than there is right now.

But that, to him, spells opportunity.

“This is the finest opportunity I’ve seen in my career in this sector,” he said. “Fortunes will be made.”

He especially thinks fortunes will be made in silver miners. “Silver is a potential 10-bagger from here,” he said. Investors should be looking for a well-capitalized silver company that has “had the stuffing beaten out of it.”

One of the conference participants piped up to say that of the 45 silver stocks he follows, the average all-in cost was $22 per ounce. Mr. Embry agreed that recent prices of silver, under $18 per ounce, are simply “unsustainable.”

He added: “When this blows up, I expect to see gold and silver prices that are unimaginable to the average person today.

“But until that happens, I look like a dope,” he said with a smile.

“Patience, they say, is the mark of a great investor,” he added. “But boy, is my patience getting tried.”

Sprott’s New Mining Fund

One point of the conference was to highlight Sprott’s funds. In precious metals alone, the company has a physical gold fund, the Sprott Physical Gold Trust ETF (NYSE: PHYS); a physical silver fund, the Sprott Physical Silver Trust ETF (NYSE: PSLV); and a platinum and palladium fund, the Sprott Physical Platinum and Palladium Trust ETF (NYSE: SPPP). These are all fine, well-respected funds.

But what was news to me is that Sprott rolled out a new gold miners ETF just a few months ago. It’s the Sprott Gold Miners ETF (NYSE: SGDM). And it sets itself apart from the Big Bad Voodoo Daddy of gold mining ETFs, the Market Vectors Gold Miners (NYSE: GDX), in a very interesting way.

See, the Market Vectors picks its components by market cap. That’s why Goldcorp Inc. (USA)(NYSE:GG), Barrick Gold Corp.(TSE:ABX) and Newmont Mining Corp(NYSE:NEM) are the top three holdings of the ETF. I like Goldcorp a lot; Barrick and Newmont not so much. At recent gold prices, those two are bleeding red like a couple of hemophiliacs in a razor blade factory.

So how does the Sprott Gold Miners ETF set itself apart? It gives more weight to gold stocks with high quarterly revenue growth and stronger relative balance sheets.

That means that the Sprott ETF’s biggest holding is Franco-Nevada Corporation(NYSE:FNV). That’s a gold-focused royalty and stream company that is growing both revenues and earnings.

In the Market Vectors ETF, Franco-Nevada is weighted just 4.5%. In the Sprott Gold Miners ETF, it’s 16.3%.

In the Market Vectors, Barrick is weighted 12.8%. In the Sprott, it’s just 5.2%.

See the difference? To be fair, the expense ratio for the Sprott ETF is 0.57% versus 0.53% for the Market Vectors ETF, but that’s small enough that it may not make a difference.

Sprott’s ETF has been trading only since late July; not long enough for a proper comparison. But if the methodology works, it could outperform quite a bit.

One more thing: Sprott’s Gold Miners ETF has average volume of 52,900 shares per day. That is swamped by the 30.9 million shares that the Market Vectors ETF trades every day.

That’s (probably) because the Sprott ETF is so new. One reason Sprott invited people like me to its conference is to get the word out.

I can say I like the idea of a gold miners fund that underweights Barrick and Newmont and overweights Franco-Nevada. Gold & Resource Trader subscribers know I like Franco-Nevada. We’ve taken gains on it twice recently, and we’ll probably buy it again.

If you think the Sprott ETF might be something you’re interested in, make sure you use a limit order on your entry price.

Good investing,

by Sean Brodrick, Resource Strategist

Investment U provides cutting-edge research and strategic financial recommendations for all levels of investors through its morning publication Investment U Daily and its related publications.

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