On the bullish side, gold and silver prices are now close to cost of production, and thus miners are likely to shut in production. Production cuts would likely lead to stabilization of prices. Furthermore, the big trends that have driven gold & silver higher over the past decade remain in place: easy monetary policy on behalf of the world’s leading central banks, and demand for gold on behalf of small investors and the world’s central banks.
While it is true that Fed policy is likely to be a headwind for gold & silver, it should be noted that gold & silver have not responded to the massive easing from the Bank of Japan. While gold and silver may fall farther over the short term, I believe the long-term bull case remains intact.
Unlike Alpha Natural Resources, Inc. (NYSE:ANR) and Arch Coal Inc (NYSE:ACI), NovaGold and Silver Standard Resources actually have a positive net cash position. NovaGold Resources Inc. (USA) (NYSEAMEX:NG) has $315 million in cash, $150 million in debt, and an equity value of $658 million. Silver Standard Resources Inc. (USA) (NASDAQ:SSRI) has $490 million in cash, $180 million in debt, and an equity value of $507 million.
The key takeaway here is that NovaGold and Silver Standard are not in danger of a liquidity squeeze anytime soon. Their liquidity will allow them to better ride out the storm than their leveraged counterparts in the coal sector.
Much like the bear market for financial companies ended in early 2009, the commodity bear market will end sooner or later. I believe the long-term upside for gold & silver is much greater than the upside for coal. I am confident that NovaGold and Silver Standard will be able to ride out the storm if pressures intensify. Given the financial position of Alpha Natural Resources, Inc. (NYSE:ANR) and Arch CoalArch Coal Inc (NYSE:ACI), I cannot say the same thing about them. For these reasons, I am endorsing NovaGold and Silver Standard as speculative buys, and cautioning investors against buying Alpha Natural and Arch Coal.
The article 4 Single-Digit Commodity Plays: 2 to Buy, 2 to Avoid originally appeared on Fool.com and is written by Sammy Pollack.
Sammy Pollack has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Sammy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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