I've been treasure hunting in the Yukon and northern British Columbia again, a part of the world that is as beautiful as it is dangerous—for investors.
The Canadian Rockies are not the tallest mountains in the world, but they are very dramatic, rearing up thousands of feet over never-resting ocean, unstoppable grinding glaciers, and the always-changing parade of colors in the valleys below. They force air masses sliding off the sea up to cooler altitudes, frequently creating extensive cloud cover, and rain when it's too warm for snow.
For the same reason, however, when the rising or setting sun pierces the great caverns made by burning clouds above and glowing U-shaped valleys below, the color show is as dazzling as it gets. The photographer in me loves it, especially when I'm in a chopper, flying through crystal-clear air while double rainbows play hide-and-seek with me. But that's not why I'm here: I'm looking for treasure.
Treasure Hunt
That's literally true, in that most companies I invest in are explorers looking for gold, silver, and other metals. The hunt is a matter of geoscience, using the latest technologies, like XRF guns, to assay samples right in the field. It's also an art in which some geologists' intuition about how mineralization twists, turns, plunges, thickens, pinches out, breaks off, and reappears is simply better than others'.
It's also true that luck plays a huge role in every discovery. Mother Nature likes to hide her treasures well, plant false clues, and bury them deep—that's what makes the literal treasure hunt so exciting, difficult, and, ultimately, when successful, profitable.
It's also metaphorically true in that there are thousands of mineral exploration companies, most of which have nothing and will never discover anything. Most of the money these companies raise in the market will be poured into the ground, and even if management is honest and competent, the odds are long against it ever doing any good. This makes identifying companies likely to make a significant, economic discovery before they do so extremely difficult—and hence enormously profitable.
When a venture goes from having nothing at all to having a mineral deposit with proven and probable mining reserves of calculable value, the ratio of added value is theoretically infinite: anything divided by zero approaches infinity. In practice, it's not infinite, and it takes time and money to prove up mining reserves.
But when an exploration company announces rich enough drill results, share prices go through the roof. Pennies turn into dollars. Dollars turn into fortunes.
It's very exciting. I love being part of the discovery process, especially when the mine gets built, creating new jobs, training, and other opportunities—usually for people who desperately need them—not to mention the metals our civilization depends upon.
Speculation Requires Risk
One must never forget the part that stock promoters don't like to talk about: the outcome of most exploration projects is binary—and the odds of failure vastly outweigh the odds of success.
I'm not going to lie to you: Even when you're backing the most serially successful people in the business, with good prospects and plenty of money to go after them with gusto, there's no guarantee that every one of their projects will pan out.
So how do legendary investors like Doug Casey hit home runs speculating on early-stage exploration companies?
They do it by adopting a "large basket" approach, speculating many of the best early-stage penny-stock picks. Many of these stocks will go nowhere, make marginal gains, or become complete write-offs, but many will double, triple, or yield higher multiples. The occasional 1,000%-plus gain—what we call a "ten-bagger"—pays for all the rest, and then some.
Though rare, 5,000% and even 10,000% gains are possible speculating in this way—but you have to be willing to take some losses along the way, if you're going to reach for something so far out on the bell curve.
Lower-Risk Speculations
Mind you, not all exploration companies start from scratch. Sometimes a known discovery that didn't quite make the economic threshold in previous years can be turned into a profitable mine with new technology or by combining fragments of a deposit from previous owners into one project with economies of scale, or simply due to higher metals prices.
Sometimes a new geological interpretation applied to an old discovery of little consequence turns it into a major discovery with very robust economics. It's even true that better management can sometimes turn an existing, money-losing mine into a highly profitable operation.
And, of course, you can place a bet on a team that has already made a discovery, proved it up, and is now building a mine, because proof on the bottom line usually results in a rerating that moves share prices up.
In short, there are many ways to speculate on the process of discovering mineral resources, developing them, and exploiting them. Generally, the higher the risk, the greater the reward when successful. The more certain the value-adding proposition (as when a mine is already under construction or is in operation but being expanded), the less spectacular the likely gains.
This is a good thing: it presents investors with a variety of risk-reward scenarios to choose from.
Remember, shares in various types of natural resource companies tend to move in sync with price movements in the underlying commodities. If gold, silver, or copper jumps 2%, associated stocks will often jump 5%, or more. This makes it possible to achieve leveraged gains on mineral commodity price movements (even if the companies in question remain essentially unchanged).
Buy Low, Sell High
The reverse is true as well: when metals and minerals prices drop, share prices in companies that produce them drop even faster, as has been happening for the last two years in the resource sector.
This would be a disaster if we were talking about pet rocks, bell-bottom jeans, or cars with enormous tail fins, but we're not; we're talking about things without which life as we know it would be impossible.
No Metals = Stone Age
Even if some genocidal world government were to kill nine out of every ten people living, those left could not live above a subsistence level without the use of metals. It's that simple. And that non-negotiable—regardless of what some environmental extremists may fantasize.
With the population of our planet getting larger every day and not likely to stop growing for decades, nothing short of global nuclear war or a similar catastrophe can stop demand for metals and other minerals from rising. (And if that happens, we'll have more important things to worry about than stock prices.)
This is, without question, one of the surest long-term bets you can make.
That means that times like the present—when metals prices "correct"—should be seen as buying opportunities. Buy low, sell high.
This is not news to longtime readers, but it's remarkable how hard it is for even those who understand this simple, fundamental formula for speculation to actually implement it.
When prices are low, there's never any shortage of investors who bought at higher levels warning of what a disaster the given investment is. It's very hard to step up to the plate with hard-earned cash when one is not certain if the bottom of a market is still ahead or already behind. This is why we don't bother trying to time the market, but focus instead on buying value when we see it.
And it's why I pull on my boots whenever opportunity presents itself, and hop in a Jeep, a helicopter, on a horse, or whatever conveyance is needed to go check out an opportunity for our readers. I'm making my list, checking it twice (verifying what management reports on the ground in question), and buying the best of the best resource stocks I can find while they are on sale.
Right now is the best time to join, in fact… because even top-quality mining companies with proven reserves are currently selling for pennies on the dollar.
And as there's no way metals prices can stay depressed indefinitely, all you need is some patience to watch the best of the best miners succeed. Click here to learn more about the once-in-a-generation opportunity we're facing at this moment.
It's my own treasure hunt—and I invite you to join the effort.
Ocean, mountain, light, and snow—in the Yukon, the gold sometimes is at rainbow's end.
