Why Most Gold Stocks Are Bad Investments
By Anthony Wile - October 17, 2015

I know this editorial is not going to sit well with many in the hard money industry. Oh, well. Tough to please everybody.

Of course, that's never been the purpose of The Daily Bell or my editorials, to try and please everyone. The purpose of my editorials and what we publish here at The Daily Bell each and every day, 365 days a year, is to inform readers about fundamental, market-based realities – and hopefully help them become better investors in the process.

This is also the analysis that drives many of the portfolio investment decisions we make at High Alert Investment Management, the parent publisher of TheDailyBell.com. This analysis drives Wall Street as well and makes people fortunes. The difference is that we work outside of Wall Street and we're honest about our approach, which recognizes the role of the marketplace in price discovery. Wall Street often likes to sound like Keynes, even while investing like Hayek.

Now, on to the thrust of today's editorial.

The reason I say most gold and silver mining stocks – the vast majority of them – are bad investments is because the companies that issue them are not actually in the business of creating ongoing value from precious metals at all. If they were, the title of this article would be much different.

The reason we own physical gold and silver to begin with, or ought to, is because they bring real, tangible value to our portfolios, which tend to be otherwise dominated by paper-based asset holdings.

Oddly enough, the ultimate "value" of a modern mining firm – and even its share price – lies in fiat currency, and more often than not, US dollars.

This doesn't make any sense. The tangible value provided by retaining physical gold and silver could aptly be thought of as portfolio insurance – protection against a paper money scheme that is accepted only so long as the mass public retains confidence in it. And today that confidence is seriously eroding.

It is incredibly unfortunate that precious metals mining companies do not take advantage of the money metals they mine. This is a strange set of circumstances and it is even stranger that it receives so little attention in the mainstream or alternative media.

For starters, any company that is in the business of digging real value out of the ground only to exchange it for paper currency is doing a disservice to its shareholders.

Now, that's not to say that some portion of the company's production doesn't need to be exchanged to pay for capital goods and services and for other costs incurred in order to place and maintain the mining operation in production.

But any company that takes a tangible, liquid investment like gold and exchanges it for rapidly devaluing paper currency in a system as fragile as the one we live in today should not be viewed as either forward-looking or well managed.

It simply makes no sense. Mining executives reach out and ask investors to finance their ability to build a successful gold or silver mining operation by using free-market rhetoric. They point out how gold and silver retain and accrue value, but then swap the metals they mine once it is above the surface for devaluing fiat paper!

The focus for any metals mining company should be to dig gold and silver out of the ground at a discount to the price of metals in a sustainable way. There's no other reason to be in business. And hopefully that discount widens over time through prudent mining practices for the benefit of shareholders.

It's time to have this discussion. I can purchase physical gold if I want to own gold – and of course I do. And if I want to speculate or trade in the metal, I can purchase my leverage in an ETF. The only real advantage a gold mining company has in this day and age is its ability to produce at a discount and hold and store the precious metal it mines. This gives shareholders the potential for realizing greater returns if the company can continue to lower the cost of extraction against the market price of gold going forward.

A well-managed and efficient company that retained most of its gold and silver would see significant share appreciation – especially against mining companies that continually swap their assets for paper currency. Backed by enough precious metals, the shares in such a company might soon be seen as money themselves, with significant resultant liquidity.

A well-managed company could offer shareholders dividends in physical gold or silver. Additionally, the investor could either take delivery of dividends or potentially leave it on deposit in the same institution where the mining company stores its inventory of honest money. In this sense, the company begins to take the shape of a bullion bank.

The bottom line is this: Any company that says it's a gold or silver company that is investing in precious metals production only to turn it back into paper currency is, to me, a lousy investment.

If you want to speculate on the future rise in the price of gold go buy an ETF and get the leverage you're looking for without all the pitfalls and problems often associated with mining companies.

Show me a real mining company that understands the value of its business and I'll show you a company that cares more about its shareholders than its executives do about their stock options plans.

This isn't the 20th century anymore. I've been involved in gold and silver investing for a long time. I think it's time that the industry recognize there needs to be a paradigm shift.

There's no excuse not to recognize the inherent superiority of gold and silver over depreciating debt-based fiat currency. It's time to start offering investors a real choice. Educated and informed by the Internet, investors would soon find their way to a company that retained and stored the valuable product it was in business to mine. As the company gained and stored these assets, its shares would produce real value for its shareholders and provide a reliable means for acquiring precious metals at a discount and storing them securely.

Let a mining company, or several mining companies, begin to pursue this sort of strategy and maybe we can change the headline of this editorial. Junior miners and the mining industry itself have missed a golden opportunity to position themselves intelligently during this last bull run for gold and silver – but it ain't over yet.

The system, while still sputtering along, is just moving closer and closer to the day reality catches up with the "believers." And those will be eye-opening days for most, to be sure.

It's high time a company recognizes the value in keeping its gold – either stored in the ground or in secure vaults. The bigger the inventory of gold or silver, the more value the company acquires and retains. This should be the future of precious metals mining. And once one courageous and innovative company successfully implements such an approach, others will undoubtedly be shamed into doing the same … or disappear as their shareholders vacate.

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  • If you try and raid a gun shop you know what you are going to be confronted with, they know what they sell is also the best thing they can use to protect their assets. They have confidence in their product. If you were thinking of investing in a gun shop yet they told you they did not think that guns were the way to go for the shop’s security and kept a catapult under the counter instead, that would be strange indeed.

  • James Clander

    Excellent article & well timed — I have full on protection of Physical Gold but will soon be looking at investing in Gold Mining shares as an adjunct & after careful selection. I intend to send a link of this article to several mining companies as I believe any PM company that runs with this will be a winner. Let’s hope others take the time to forward as well.

    • Thanks.

      • I think they only way such a mining company, with a significant holding of metals, could prevent itself from being victim of a considerable yo-yo effect on its share value, as the price of the metal fluctuated, would be for the company to price its shares in gold. If you want to buy a share you must then pay with the relevant weight of gold (or a fiat-money equivalent) on the day. That would be an appropriate strategy for metals based businesses.

        Their stock value then, in terms of gold, would only rise in weight/value with the increasing accumulation of the company’s gold reserve. The danger otherwise could be that the value of the mining part of the company could be overwhelmed by the value of the gold reserve it is bundled with and in a falling gold market leave the mining element undervalued and vulnerable.

        • At least for now, given our current monetary system, the value of the metal itself will continue to be “valued” against whatever prevailing fiat money stuff is used for general transactions.

          The market value of said company’s holdings will naturally be reflected against the market value for the commodity itself. And like all mining companies, there will be ups and downs as there is with anything else. An inexpensive hedging “insurance” program can mitigate against large swings and even be utilized to convert any “claims,” which would also likely be insured and paid for in funny money, back into more physical gold and silver.

          The shareholders will determine if the price of their shares is overvalued or undervalued, but at least there will be something of real value sitting in the ground or in vaults on which on can make a “market” assessment.

  • apberusdisvet

    Aside from the fact that most stand alone PM miners are operating at a loss or near break even due to the bankster suppression of PM prices, the key issue of owning PM mining stocks is the probability that mines will be nationalized or expropriated by nations in the next economic implosion with shareholders receiving far less than true value in worthless fiat. The Rule of Law, as it pertains to manipulated and rigged markets world wide, has disappeared. In the US, provisions of the totalitarian NDAA ensure that in a time of crisis, the USG has a right to claim all assets, including your labor, for the benefit of the nation. In such a crisis, whether real or manufactured, the first order of business will be to steal all of the only true money available; namely gold and silver.

    • Another reason the ideal gold and silver company would preferably not be a US registered entity and its gold or silver would be stored in vaults internationally.

  • WoodsWoman

    Another well thought-through editorial that just makes perfect sense. Thanks for these insights… think I’ll send this to a few mining execs I know who could use the wakeup call.

  • Injun Holbrook

    Interesting article. Mining stocks are fool’s gold. They are similar to a casino operation, meaning that most of the stock is held by investor’s who are motivated by a unique delusional trifecta of fear, safety and greed. This so-called “sky is falling” stock syndrome has been and will continue to lure the inexperienced investor who invest in these stocks. In simply terms,they are “promoter’s stocks” and that’s it. The term “Investor’s Depression” rings a bell (pun intended) when this discussion is brought before me. This is a subject that belongs in a new investor’s clinical course described as “A Introduction in Psychiatry and Behavioral Investing” for truly, the students have a anxiety and depression problem.

  • Praetor

    Gold miners, find the gold and shutter the mine entrance, and wait. In all debt banking economics the collapses always lead to a gold rush. The miners should issue gold certificates, redeemable in gold on demand at any gold mining office, its not illegal, so why not. Take Executive Order 6102, it ‘really’ was not about the physical gold circulating around in peoples hand or sitting in a tin can, it was more about the gold certificates notes issued by the feral reserve, this notes were redeemable in physical gold from the feral reserve and their banking buddies, the true hoarder’s of the PM. It was more or less meant to eliminate the debt owed by the feral reserve on those gold certificate notes and as a by product the ordinary sheep would meekly comply and submit their gold coins to feral reserve so they could continue to hoard more gold, if there is no gold in the fort, you can believe its in the feral banks all across the country, just sitting there. If your a Saver and not a Keynesian Nihilist the only why to save is in the PM’s, the banks are negative returns on the fiat notes you hold and you will become a debtor as time slips by. The floating currencies are floating out to sea to be eaten by sharks. Gold miners, find the gold and shutter the entrance, and wait. There be a gold rush coming!!!

  • robertsgt40

    I would never buy a stock period anymore. Its end of the road time for fiat. I’m assuming these are common stock mining cos. I don’t even research it anymore. What’s to keep the company from loading up on debt ( intentional or not) then going belly up? Then have their banker repossess or have a closed shop fire sale? Now the bad guys have the real assets and you have toilet paper equivalent? When the gig is up there will be those will physical assets and those with paper claims to real assets. Just saying

    • It depends on the stock and the management, yes? That’s what you have due diligence for.

      • robertsgt40

        No doubt. I don’t thro dice anymore. At 67 I’m too old to risk losses. I’m parked in metals, silver and lead

  • esqualido

    “It’s time to have this discussion. I can purchase physical gold if I want to own gold. If I want to speculate or trade in the metal, I can purchase my leverage in an ETF. ” Anyone who thinks he is investing in gold with an ETF is a fool. These vehicles are so fraudulent that several brokerage firms have sold them commission-free- and why do you think that is? One of them said “ETF- everything trades free.”

    • The point is neither an ETF nor the vast majority of masquerading gold stocks, generally speaking, are any different from each other. But at least with ETFs, as witnessed during the compressed and dramatic rise of the price of gold in the early fall of 2011, it was quite obvious that investor sentiment for speculation purposes was more interested in the former than the latter. Having said that, neither should be viewed, in our opinion, as anything other than a speculative trade.

    • WoodsWoman

      I understood Mr. Wile to be saying that ETFs were more or less the better of the two existing options, if one’s comparing ETFs and gold stocks … at least as liquid for SPECULATION, which is not akin to value investing. And ETFs certainly have been more responsive to moves in the price of gold over the past several years than the junior mining stocks. So I agree with you that ETFs are fools’ gold, but the paper play gold stocks are equally foolish.

  • OutThere

    I agree whole heartedly with today’s Daily Bell editorial.

    During a three-decade career I have participated in a number of mining ventures both as an investor and as an executive. I have seen first hand the challenges to companies and also ones that investors face who seek relevant analysis and want to profit from the actual bullion created by the mining business.

    Far more money has been raised by mining firms, as a group, and gone permanently back into the ground or used to pay expenses than has ever come out to investors as profits or by increased share values.

    It would be a welcome and novel approach for successful bullion producers to create and stockpile profits by way of retaining earnings held as stored precious metals. For them to also pay dividends in physical bullion or becoming a bullion bank would be welcome and no doubt attract significant investor interest. This would surely differentiate such companies from the legions of other so called mining firms.

    Most people that want to hold precious metals as insurance against the long term declining value of fiat currencies should really stay away from almost all mining stocks and should seek to actually hold physical bullion outside of the paper system. If after owning the physical metal one also wants to trade the paper markets, then they could look into owning shares in an ETF that holds a basket of established mining stocks or possibly trade the shares of existing mining royalty companies.