Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
IBM - Investing in AI Machine Intelligence Stocks - 25th May 19
Seasonal Dysfunction: Why Generations of Gold and Silver Investors Are Having Such Difficulty - 25th May 19
Employment - The Good and the Bad of Job Automation - 25th May 19
Gold Mining Mid-Tier Stocks Fundamentals - 25th May 19
Buy This Pick-and-Shovel 5G Stock Before It Takes Off - 25th May 19
China Hang Seng Stocks Index Collapses and Commodities - 24th May 19
Costco Corp. (COST): Finding Opportunity in Five Minutes or Less - 24th May 19
How Free Bets Have Impacted the Online Casino Industry - 24th May 19
This Ultimate Formula Will Help You Avoid Dividend Cutting Stocks - 24th May 19
Benefits of a Lottery Online Account - 24th May 19
Technical Analyst: Gold Price Weakness Should Be Short Term - 24th May 19
Silver Price Looking Weaker than Gold - 24th May 19
Nigel Farage's Brexit Party EU Elections Seats Results Forecast - 24th May 19
Powerful Signal from Gold GDX - 24th May 19
Eye Opening Currency Charts – Why Precious Metals Are Falling - 23rd May 19
Netflix Has 175 Days Left to Pull Off a Miracle… or It’s All Over - 23rd May 19
Capitalism Works, Ravenous Capitalism Doesn’t - 23rd May 19
The Euro Is Bidding Its Time: A Reversal at Hand? - 23rd May 19
Gold Demand Rose 7% in Q1 2019. A Launching Pad Higher for Gold? - 23rd May 19
Global Economic Tensions Translate Into Oil Price Volatility - 22nd May 19
The Coming Pension Crisis Is So Big That It’s a Problem for Everyone - 22nd May 19
Crude Oil, Hot Stocks, and Currencies – Markets III - 22nd May 19
The No.1 Energy Stock for 2019 - 22nd May 19
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

3 Steps to Geographically Diversifying Your Gold Stocks

Commodities / Gold & Silver Stocks May 12, 2010 - 12:54 AM GMT

By: Jeff_Clark

Commodities

Best Financial Markets Analysis ArticleBy Jeff Clark, Senior Editor, Casey’s Gold & Resource Report and author of this new FREE Special Report: ‘When Is the Right Time to Buy Gold?

Jerry’s broker wrinkled his nose in disapproval.


“I don’t like it, Jerry,” he said in a grave tone, as if scolding a misbehaving child. “Why don’t you invest in the gold company I told you about?”

Jerry thought this might happen. His broker was traditional, conventional, and only pushed company products. And the man knew embarrassingly little about gold stocks.

“Because I want to diversify my gold stocks. There’s a lot of gold around the world. And this company is capitalizing on that.”

The broker was shaking his head. “The company I recommend is right here in North America, Jerry. There’s no need to buy one with mines halfway around the world. Besides, we don’t know what the politics are over there.”

Disappointed with the mainstream advice, Jerry left and called another broker. This one specialized in resource stocks.

Jerry explained his reasoning for wanting to buy this particular gold stock. The broker listened patiently, but was so quiet Jerry thought maybe he was cool on the idea.

“Politics in general are somewhat unpredictable there, but less so for mining,” the broker explained. “In fact, they just lowered their tax rate on mining companies. The company he’s recommending is well run, but it’s already a mature producer with a huge market cap, and has no exposure to these other parts of the world you’re looking at.”

Jerry felt comfortable with his original hunch after finishing his discussion with the new broker. He put some of his money into the stock of the younger gold producer, with assets on the other side of the globe.

A year later, Jerry ran into his old broker at a local bar. The man smirked when he spotted Jerry. He was obviously unhappy about losing Jerry’s account and apparently wanted to rub it in.

“You should’ve bought that gold stock I recommended last year,” the broker said smugly. “It’s up 43%.”

“Good for you,” Jerry replied, “But that stock I told you about is up 75%.”

The broker’s smile wilted, and confusion clouded his expression. He spoke tentatively, not sure he wanted to hear the answer. “How’d you know to look at companies there?”

“Lots of reasons,” Jerry replied. “But for starters, there’s lots of gold over there.”

Gold Around the Globe

The keyword is geographical diversification. And while no single investment variable can guarantee profits, geographical diversification does add a layer of safety and enhanced profit potential that investing solely in companies located in one country or region cannot offer. Jerry’s broker, like many in the U.S. who don’t know much about the gold industry, are uncomfortable investing in smaller producers or in faraway regions. And yet, most of the gold is currently being dug up in Africa, South America, China, and Oceania. North America accounts for only 16.3% of total gold production.

Further, of the 15 largest gold deposits in the world, only five are in the U.S., Canada, or Mexico. Many countries where gold has been traditionally mined, such as South Africa and the U.S., are experiencing production declines, while other areas, like South America and China, are just now starting to rev up.

First Step to Geographical Diversification: Make sure you have global exposure. If you’re only investing in companies that have deposits where you have cell phone coverage, you’re greatly limiting your profit potential. Don’t ignore a region just because it’s an unfamiliar culture or doesn’t speak your language.

“Can We Tax That?”

Don’t get me started on politicians and NGO’s [Non-Governmental Organizations] monkey-wrenching the free market’s wheels. Hey, I want mining companies to keep cyanide out of the drinking water and for local communities to see some economic benefits as much as the next guy. In point of fact, most modern mining efforts run clean operations and provide good-paying jobs to local residents. But more often than not, greed is the motivation behind the politics – governments want revenue, and mining companies can be an easy target.

As gold and silver mining stock investors, it is imperative we understand and monitor the politics of any region where our companies operate. And not just the federal or provincial authorities; we must be alert to local community sentiment towards mining as well. Just because federal or state regulations are supportive doesn’t prevent a local group from agitating against a development.

And laws affecting miners can change at any time, and suddenly, making the political climate tricky to judge and planning for mining companies and investors difficult. Would it be safe for me to assume, for example, that your tax planning of 10 years ago has had to be modified? The same applies with mining.

A stable political jurisdiction today can be tomorrow’s iffy hot bed of discontent. For example, the U.S. is consistently rated one of the lowest-risk countries in Resource Stocks’ yearly World Risk Survey. Yet, Washington politicians have drafted a bill that, if passed, would adversely affect mining in the U.S. While nothing is imminent, and we don’t expect it would pass in its current form, we can’t say that mining in the U.S. will never have any risk, and it is something we have to keep an eye on at all times.

On the other hand, eight of the world’s 10 highest-risk jurisdictions are in Africa, where Randgold has all of its operations. However, they mostly operate in countries where the politics are more stable, reducing their political risk to a tolerable and more predictable level. The lesson: we cannot make assumptions about politics and mining based on geography.

So what’s the solution?

►Second Step to Geographical Diversification: Don’t be overexposed to any single government. In today’s political climate, and for the foreseeable future, there is no such thing as a 100% risk-free country. Politicians and political whims come and go, so risk will always be fluid. And we think gold mining could become an increasingly attractive target as the gold price rises and international economies struggle. Of course, there are areas we’d simply avoid. Of the 15 largest gold deposits mentioned above, we wouldn’t consider investing in six of them solely because of the host country’s politics. We want diversification but not at the expense of unnecessary risk.

The One-Company Rule

Okay, perfect politics is a fairytale, so is there a way to minimize a downdraft in your portfolio if a government makes a negative move against one of your company’s mines, or mining in general? There is.

Third Step to Geographical Diversification: Own a sufficient number of companies. Having several eggs in many baskets will prevent your portfolio from suffering a Humpty Dumpty event if the government where your mining stocks are concentrated decides to follow, for example, Venezuela’s lead. Country risk can be offset with the right mix of stocks. That’s why we don’t just buy Barrick and say, “We’re diversified!”

So... is your gold stock portfolio globalized? Do you have too much exposure to any one government? And do you own enough gold stocks so that bad news with any one company doesn’t sink your portfolio?

The easiest way to diversify, of course, is to buy a mutual fund (see the table below for our top picks). But we think the mining stocks with the greatest profit potential are those newer producers with operations in regions seeing increasing production and greater exploration prospects.

“Buy low, sell high” is easier said than done. Is there a particularly good time to buy gold? Are there patterns in gold’s market fluctuations? Find out everything you need to know in our FREE Special Report How Do I Know When to Buy?Click here to read it right now.

© 2010 Copyright Casey Research - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules