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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