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Dudley Baker

Dudley Baker

Dudley Pierce Baker is the founder and editor of Common Stock Warrants and its predecessor, Precious Metals Warrants and a 1967 graduate of St. Mary’s…

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How To Use Leverage Wisely

Based on the recent action in the price of gold we have to believe that it has once again broken out to the upside and ready to run. Last week, Richard Russell presented us an excerpt from his service titled, The Box, in which he is using the point and figure method of plotting gold. The basis of the article was that if gold could close at $690 an ounce, it would be a bullish breakout. Well, guess what? It did, it has and no doubt (in our mind) will continue much higher in the coming weeks and months eventually taking out the old highs in the upper $800's. The question always for investors is what do we do? How to maximize our gains and should we use leverage?

Unfortunately, when investors hear the word 'leverage' they immediately think of great risk. If you are using margin to purchase shares or short term call options, we would agree. We personally do not advise using either margin accounts or short term call options to participate in this up move in the natural resource sector. You must remove yourself from the potential volatility of the markets and give yourself time to accomplish your investment objectives without the fear of a margin call or your options expiring.

Larger investors may perhaps have a different investment objective, i.e., preservation of capital and safety. For most investors, however, we are looking for capital gains on our investments to accumulate wealth in this bull market and thus the two classes have some different approaches to assembling their portfolio's. Say, if you are a large investor, you may feel compelled to purchase gold bullion or gold coins and shares in the large cap mining shares. While this is always a great idea, we ask, what does a small investor do with limited financial resources yet a desire to participate in this bull market?

Let's briefly explore a few different approaches which will provide some leverage as well as the opportunity for some serious capital gains. The list gets longer as more and more products have come to market. ETF's on gold and silver, mutual funds on the natural resource sector, common shares of the companies in the commodity and natural resource sector and call options, leaps and long term warrants on those companies. We would always encourage investors regardless of the size of your wallet, to diversify your portfolio. While many of us may be heavily weighed to the commodity and natural resource sector, it is necessary to spread this investment over numerous different shares, leaps or long term warrants.

We feel the potential gains with the ETF's and the mutual funds will be somewhat limited as compared to the gains from the individual company shares and the other alternatives. So, we suggest a portfolio of comprised of mining shares (we prefer the smaller companies with great management, sound financials, good properties and a safe /political/geographical location. While these small companies may possess greater risk they afford us the opportunity to create great wealth. After you have prepared a list of your favorite companies, we then suggest you to consider which of these companies have long term warrants or leaps trading thereon. If a company on your list has a leap trading it may give you up to 2 years of time. If some of the companies have warrants trading some of these may give you 3, 4 or 5 years.

By focusing on the mining shares, leaps and long term warrants investors are wisely using leverage without the fear and risk of short term volatility in the markets. As you may recall from our previous articles, our investments are basically within the commodity and natural resource sectors and the common shares or long term warrants trading on those shares. We are confident we are positioned correctly to not only generate capital gains, but have given ourselves the opportunity to create great wealth.

For subscribers, we provide a table listing all companies with call options and leaps trading on the natural resource shares.

For those readers desiring more information on warrants you may wish to visit www.PreciousMetalsWarrants.com where you will find much more information and education on warrants in our new Learning Center. You may also signup for our free weekly email, The Warrant Report.

 

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