Portfolio allocation for precious metals investors with an interest in warrants, options and leaps.
My previous article, “How to ‘Invest’ with $5,000 to $10,000”, created a lot of interest among investors so we have decided to make this a mini-series of three articles. This current article increases the investment dollars available to be invested in the natural resource sector to the $25,000 to $50,000 range. The final article with be for investors with $100,000 and more and will be posted next week.
As we wrap up this article, we have the U.S. dollar sinking to new lows, gold up $16 to $944 and silver up 35 cents to 18.20. Thus, it is important for investors to be completing their purchases of shares, warrants or leaps.
Investors with only $5,000 to $10,000 were very limited as to how to invest these monies. Now with $25,000 to $50,000, we have greater flexibility and choices about ”how to” deploy these assets.
Consider these broad categories:
Cash (preferably in a currency other than the U.S. Dollar)
Bullion – gold or silver:
Physical holdings – coins or bullion in your position
ETFs – Exchange Traded Funds such as GLD or SLV
Mining shares:
Producers – large cap mining producers, or warrants/leaps
Juniors – smaller development and exploration companies, or warrants/leaps
Painting with a broad brush, we would suggest the following allocation and then we will make a few additional comments:
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Cash
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10%
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Bullion – coins or bars
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20%
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Large-cap mining shares or their long term warrants
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20%
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Junior mining shares or their long term warrants
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50%
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Let’s start with our 50% allocation to the junior mining sector. This group has greatly under performed and we expect a major rally in the coming weeks and months and thus want a significant amount invested in the shares, warrants or leaps of four or five of these companies.
The 10% cash suggested is for future acquisitions and should be held in currencies other than the U.S. dollar.
We recommend an allocation of 20% bullion. We now have a significant percentage in the metals, gold or silver, and you could have some coins, silver bars, such 10 oz or 100 oz as we believe the days of silver below $20 will soon be over.
A holding of 20% of large cap mining shares or their warrants/leaps rounds out our holdings to 100%. As share prices of many of the large cap companies are north of $30 per share, it will be difficult to invest these monies in more than one company unless we chose to use warrants or leaps. If the companies in which you are interested have long-term warrants or leaps trading then you can have far greater choice, and gain the potential of increased leverage at the same time.
If you are unfamiliar with options, leaps and warrants, here is a brief overview:
Options and leaps trade on the Chicago Board Option Exchange (CBOE). They are a contract giving you, the investor, the right, but not the obligation, to purchase the underlying security at a specific price and expiring on a specific date in the future. Call options may have a life of 30 days to one year, while leaps may have a life of up to two years. Your loss is limited to your investment for these contracts and no margin is used. The potential gains are great, if you are correct in your timing and company selection.
Warrants are slightly different in that warrants trade like a stock and are issued by a company usually in an initial public offering or in a financing arrangement. Many sophisticated investors are not aware that there are many warrants trading. While it is very common for warrants to be issued in private placements, particularly in the mining sector, these warrants do not trade and thus cannot be purchased. What is of particular interest is there are numerous warrants trading which have a remaining life of three years or more.
Think about the possibility of a long-term warrant on one of your favorite resource companies with several years of time remaining. We consider long-term warrants to be an investment not speculation.
Warrants will provide you with the opportunity to participate in this bull market with time on your side at a much lower cost than purchasing the common shares and the power of leverage working for you. As with options and leaps, your potential loss with warrants is limited to your cost and there is no margin.
In summary, investors with limited resources to invest can have a stake in this bull market and the opportunity for incredible gains by considering the use of options, leaps and warrants. Actually, I have recently purchased some call options on a large silver company which did not have warrants trading. I am investor first and seek out the best opportunities whether that is acquiring the common shares, options, leaps or warrants.
I have just launched a new service giving subscribers, “A Look Over My Shoulder”, my personal portfolio showcasing my entire portfolio with weekly updates and comments.
For subscribers to our service, we provide a table of all resource companies with options, leaps and warrants which are currently available to assist you with making your investment decisions.
We invite you to visit our website, view and listen to our new video tutorials, spend some time in our learning center and sign up for our free Monday email, The Warrant Report.
Dudley Pierce Baker
Guadalajara/Ajijic, Mexico
Email: info@preciousmetalswarrants.com
