Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
This Invisible Tech Stock Threatens Amazon with 800,000+ Online Stores - 21st Nov 19
Crude Oil Price Begins To Move Lower - 21st Nov 19
Cracks Spread in the Precious Metals Bullion Banks’ Price Management System - 21st Nov 19
Why Record-High Stock Prices Mean You Should Buy More - 20th Nov 19
This Invisible Company Powers Almost the Entire Finance Industry - 20th Nov 19
Zig-Zagging Gold Is Not Necessarily Bearish Gold - 20th Nov 19
Legal Status of Cannabis Seeds in the UK - 20th Nov 19
The Next Gold Rush Could Be About To Happen Here - 20th Nov 19
China's Grand Plan to Take Over the World - 19th Nov 19
Interest Rates Heading Zero or Negative to Prop Up Debt Bubble - 19th Nov 19
Plethora of Potential Financial Crisis Triggers - 19th Nov 19
Trade News Still Relevant? - 19th Nov 19
Comments on Catena Media Q3 Report 2019 - 19th Nov 19
Venezuela’s Hyperinflation Drags On For A Near Record—36 Months - 18th Nov 19
Intellectual Property as the New Guild System - 18th Nov 19
Gold Mining Stocks Q3’ 2019 Fundamentals - 18th Nov 19
The Best Way To Play The Coming Gold Boom - 18th Nov 19
What ECB’s Tiering Means for Gold - 17th Nov 19
DOJ Asked to Examine New Systemic Risk in Gold & Silver Markets - 17th Nov 19
Dow Jones Stock Market Cycle Update and are we there yet? - 17th Nov 19
When the Crude Oil Price Collapses Below $40 What Happens? PART III - 17th Nov 19
If History Repeats, Gold is Headed to $8,000 - 17th Nov 19
All You Need To Know About Cryptocurrency - 17th Nov 19
What happens To The Global Economy If Oil Collapses Below $40 – Part II - 15th Nov 19
America’s Exceptionalism’s Non-intervention Slide to Conquest, Empire - and Socialism - 15th Nov 19
Five Gold Charts to Contemplate as We Prepare for the New Year - 15th Nov 19
Best Gaming CPU Nov 2019 - Budget, Mid and High End PC System Processors - 15th Nov 19
Lend Money Without A Credit Check — Is That Possible? - 15th Nov 19
Gold and Silver Capitulation Time - 14th Nov 19
The Case for a Silver Price Rally - 14th Nov 19
What Happens To The Global Economy If the Oil Price Collapses Below $40 - 14th Nov 19
7 days of Free FX + Crypto Forecasts -- Join in - 14th Nov 19
How to Use Price Cycles and Profit as a Swing Trader – SPX, Bonds, Gold, Nat Gas - 13th Nov 19
Morrisons Throwing Thousands of Bonus More Points at Big Spend Shoppers - JACKPOT! - 13th Nov 19
What to Do NOW in Case of a Future Banking System Breakdown - 13th Nov 19
Why China is likely to remain the ‘world’s factory’ for some time to come - 13th Nov 19
Gold Price Breaks Down, Waving Good-bye to the 2019 Rally - 12th Nov 19
Fed Can't See the Bubbles Through the Lather - 12th Nov 19
Double 11 Record Sales Signal Strength of Chinese Consumption - 12th Nov 19
Welcome to the Zombie-land Of Oil, Gold and Stocks Investing – Part II - 12th Nov 19
Gold Retest Coming - 12th Nov 19
New Evidence Futures Markets Are Built for Manipulation - 12th Nov 19
Next 5 Year Future Proof Gaming PC Build Spec November 2019 - Ryzen 9 3900x, RTX 2080Ti... - 12th Nov 19

Market Oracle FREE Newsletter

$4 Billion Golden Oppoerunity

Gold and Silver Mining Stocks, Why So Much Risk for that Pittance of a Reward?

Commodities / Gold & Silver Stocks Jan 05, 2011 - 12:01 PM GMT

By: Dr_Jeff_Lewis

Commodities

The “smart money” says if you want to rev up returns, then you must run to producers.  Gold and silver, on their own, just match inflation, and they don't beat it. If only that were true!


Laughing All the Way to the Bank

Throughout gold and silver's record decade romp to $1400 and $31, respectively, we heard a number of people cringe as the silly “gold and silver bugs” took flight for physicals rather than gold and silver mining stocks.  “Why would you want gold when you can own the producer?” analysts and commentators would ask.  “Why wouldn't you want the natural leverage?”  But really, the question gold and silver bugs should have asked back is: “What leverage?”

The leverage, analysts thought, was in exchange-traded funds like GDX, a gold miner fund that encompasses a number of producer stocks.  As gold rises, analysts believed, miner profits would increase at a faster pace than the change in gold, and as such, gold miners would rise faster than gold itself.  From 2006 to the end of 2010, however, this wasn't the case.  In fact, exchange-traded fund “derivatives” essentially broke the idea of rational expectations.

Systemic Dangers of Sector Investing

To the average investor, sector swapping is an excellent investment strategy.  You can buy one whole sector when it's hot, dump it when it's cool, and have exposure to a myriad of companies that produce the same product.  It's brilliant, really, but only for the individual - not for the market.

Since 2006 and the creation of a gold miners ETF, gold and gold miners became interchangeable to investors.  A short term investor might buy either gold or a gold miner intra-day to play a rising gold price, and the idea was that he or she would match the rise in gold.  That was true - until 2008.

Everything changed after the onset of the financial crisis and the “Great Recession.”  Investors sold off gold stocks in mass on temporary deflation fears, sending the GDX exchange-traded fund from a high of $56 to $17 in a matter of months.  Gold, however, fell from $1000 to the low $700s.  It was only at that giant trough that gold stock investors would've beaten physicals, and any purchase outside the last quarter of 2008 should have been in physical, not stocks.

These funds and funds of funds predicate additional risk taking and ruin sound markets.  In bull markets, investors expect the very best of corporate profits, and in bear markets, investors expect the very worst.  This is why, in less than one year, gold mining stocks took a nosedive of 70%.  Expectations went from the top of the chart to the bottom of the chart in a complete binary reversal of forecast prices.

Miners Are for Data Diggers

Mining companies are in large part a fool's game.  Dilution is routine, and sometimes extreme; many “junior miners” have devalued their stock by half or more in a matter of days.  Mining companies are known to take extreme financing measures or engage in contracts that dilute their upside. 

Silver Wheaton, one of the fastest growing “silver mining” companies, is one such financier.  The company has made a proverbial mint giving other miners cash in exchange for silver purchase agreements at less than half silver's current value.  For Wheaton, it's big bucks, but for the actual miners, it's accepted slavery.  Now you know how this company makes so much money by operating few mines of its own.

Physical investors need only very simple analysis: gold and silver are being depleted, currencies are falling, and global inflation is exploding.  That simple analysis, if you can believe it, beat the companies that produce gold and silver over the past five years.  And that analysis will exceed expectations for the next five, as well.

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

    Copyright © 2010 Dr. Jeff Lewis- 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