Regular readers will disregard the current
downward trend in precious metals prices. They were already warned, repeatedly,
that the supposed “rally” in the precious metals sector this year was a Fake
Rally. It was
a
set-up
to position these markets for a crash, timed to coincide (more or
less) with a manufactured crash of our bubble markets and already-crippled
economies.
However, it was a crash in precious metals
markets (the Crash of ’08) which set the stage for the last, real rally in this
sector (2009 -11). For various reasons, it will likely be a crash which sets
the stage for the Next Rally. Here it is important to note that while the
banking
crime syndicate
can manipulate the price
of gold or silver they cannot affect the value
of these metals. The longer the banksters pervert the prices of precious metals,
the more violent the upward move in gold and silver prices when those prices finally
reflect that value.
Gold and silver have value because these
metals have universal aesthetic appeal. Because of that quality, and because
these metals occur at ideal levels of scarcity/abundance, gold and silver have
always been and will always be the
best money
available to our species.
Gold and silver are eternal stores of value
and thus eternal protectors of wealth. These metals are also presently
undervalued, to an
absurd
degree
, because of the criminal manipulation of these markets, which has
been frequently documented in previous commentaries. The Big Banks and bankers
have also confessed to this manipulation.
As Chairman of the Federal Reserve, Alan Greenspan
confessed
(in official testimony) that Western central banks “stand ready” to manipulate
the price of gold, any time the price begins to rise. The Big Banks have already
confessed to
rigging both the gold fix and the silver fix, but that hasn’t stopped them from
continuing to “fix” the fixes. Numerous other forms of
price
manipulation
remain unexposed.
Such sustained, systemic price manipulation
has, in turn, produced large supply deficits in both the gold and silver
markets. In the case of silver, evidence has emerged suggesting that this
market has had a
sustained
supply deficit
for 30 years. It is these supply deficits which ensure there
must be an upward revaluation in the price of these metals – to restore
equilibrium to these markets. The longer this disequilibrium is maintained, the
longer and stronger will be the upward revaluation in price.
For all of these reasons; many investors in
gold and silver bullion have a difficult time identifying any other asset class
which offers similar security and upside potential, in a time of grave economic
uncertainty.
We hold bullion as our
insurance against currency debasement, economic calamities, and political
strife. However, what do investors do with the remainder of their investment
portfolio?
What
about investors who also want a growth component for their portfolios while
still keeping all of their wealth in the precious metals sector?
[remove bold face when
publishing] The solution to this
conundrum can be identified in one, simple phrase: diversify within the sector.
One of the easiest and most effective means
of engaging in such precious metals diversification is to build a portfolio of
holdings in
gold
and silver mining companies
. While holding (paper) shares in mining
companies is inferior in some respects to holding physical bullion, it also
offers some advantages:
- Leverage
-
Registered savings plans
-
Ease in trading
As an innate aspect of their business
model, the share price of gold and silver mining companies must always
leverage
the price of bullion
over the long term. A simple hypothetical example will
illustrate this principle.
A gold mining company produces gold at a
cost of $500/oz, with the price of gold at $1,000, meaning that the mining
company realizes a profit of $500/oz. The price of gold then rises to
$1,500/oz. For the holder of physical bullion, that person has obtained a 50%
increase in the price of their asset (from $1,000 to $1,500). However, for the
mining company and its shareholders, the increase in price has doubled its
profits margin (from $500 to $1,000 profit per ounce), making the mining
company
100% more profitable.
Leverage decreases with high-margin
producers and increases with low-margin producers. Referring to the example
above, if a second mining company produced gold at a cost of $900/oz, that
company would only realize a $100/oz profit with the price of gold at
$1,000/oz. However, with the price of gold at $1,500/oz the profit margin of
the high-cost producer would increase by a factor of
six rather than just doubling, as with the first hypothetical company.
Naturally, leverage is a sword which cuts
both ways. When gold/silver prices are rising, the miners must outperform
bullion over any length of time. When precious metals prices are falling, the
same leverage operates in reverse, causing the share prices to decline at a
greater rate than the decline in bullion prices.
An attractive aspect to paper investments
is that they are easier to incorporate into registered retirement and savings
plans, and provide investors with maximum flexibility. While it is now possible
to hold physical bullion within some of these plans, strict conditions apply to
such investments.
Along with the leverage, perhaps the most
attractive quality in holding precious metals miners as a means of diversifying
within the sector is the ease in trading these paper instruments. It is
completely impractical to trade physical bullion. Not only is it a physically
cumbersome process, but the large premiums we pay to purchase bullion and the
large discounts we receive when we sell bullion make trading prohibitively
expensive in terms of transaction costs.
Conversely, trading shares in mining
companies has now been made both cheap and convenient, with discount brokerage
services available, along with online trading platforms so that we can directly
do our own buying and selling of shares in these mining companies. True, it is
also possible to trade “paper gold” and “paper silver”, but such funds offer
zero leverage since (naturally) they track the price of bullion.
It is also true that investing in precious
metals miners adds an element of risk which is not present when investing in
bullion. The rebuttal to this issue is to note that by
holding
a basket
of such companies we can significantly reduce the level of risk,
and (if we have engaged in proper due diligence) we should be able to absorb
some losses from our losers while still making enough profits from our winners
to more than match any parallel return we could get from holding bullion alone.
Of further note, even after the muted
“rally” for these mining companies, valuations remain at historic lows –
especially with respect to the junior miners. When we have a
real rally for these mining companies,
the gains in value in these share prices will totally dwarf any possible gains
with our bullion holdings.
Here a point of clarification is necessary.
Many readers have been conditioned to shun “paper assets”. It’s why we have
moved much of our wealth into the security of gold and silver, in the first
place. However, there is an enormous difference between holding the shares of a
company versus holding the paper assets favored by the bankers: bonds,
derivatives, and (of course) our paper fiat currencies.
The shares of a company represent a legal
interest in the physical assets of that company. In other words, such shares
are backed by hard assets. On the other hand; bonds, derivatives, and our
worthless paper currencies are backed by nothing. It is not only possible that
those paper assets will go to zero, it is the normal fate of such assets,
throughout the history of our markets and economies.
Governments which borrow large quantities
of money every year
must
eventually default
on their bonds, rendering them worthless. This is
nothing more than a proposition of simple arithmetic and compounding interest.
Our governments are already hopelessly insolvent.
Derivatives
are nothing but reckless bets, placed in a rigged casino, operated exclusively
by the banking crime syndicate. And on the rare occasions where the crime
syndicate loses a bet despite rigging the casino, it simply refuses to pay.
As many readers know by now, our paper
currencies are nothing but fraudulent confetti, having been debauched to
worthlessness
via the serial money-printing crimes of Western central banks. Every paper fiat
currency ever created has gone to zero – or simply been removed from
circulation before such a collapse could occur.
Precious metals mining companies are legitimate
investments, backed by the hard assets of those companies, and their primary
hard asset is gold and/or silver. However, not all mining companies are created
equal.
Knowledgeable investors know they must shun
the senior mining companies, for several reasons. At the top of the list is
that it is impossible to make money holding these entities. They are among the
biggest serial under-performers in the entire realm of equities. In large part
this is due to the fact that the management of most of these “mining” companies
are
bankers.
They don’t find their own gold (and silver)
and build their own mines. They buy out other companies (at top dollar),
general junior miners, after those mining companies have found and developed
their ore deposits, and proved-up large resources of metal. Then the senior
mining companies hire a mining engineering company to build their mine. And
then these “mining” companies (and their shareholders) wonder why these
banker-operated enterprises have so much difficulty turning a profit.
The appropriate vehicles for investment are
the
junior
mining companies
, along with a select number of mid-caps. It is beyond the
scope of this piece to explain to investors the list of criteria involved in
choosing these companies for one’s portfolio, however, for novices to the
mining sector there is an easy way to become acquainted with these companies:
junior miner ETFs.
There are now several, quality options
available to investors to get their introduction to precious metals junior
miners, generally Canadian junior mining companies. These companies (unlike the
senior miners) are good corporate citizens, welcomed with open arms into almost
every jurisdiction on the planet. It is these junior miners which find the
world’s gold and silver, do most of the exploration work as these mineral
deposits are drilled out, and ultimately reap most of the market cap upside.
And they manage to do this (with rare exceptions) in an environmentally
responsible manner.
These mining companies are also remarkable
survivors, having endured levels of price manipulation far worse than what we
have seen with bullion prices themselves. While they will likely be faced with
another shock to the sector (just like we will see with bullion prices) now is
the time for investors to start positioning themselves in these companies.
Even with the muted advance in bullion
prices, junior mining companies have come back to life after five extremely
difficult years, and are once again able to finance and advance their
operations.
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Jeff Nielson is co-founder and managing partner of Bullion Bulls Canada; a website which provides precious metals commentary, economic analysis, and mining information to readers and investors. Jeff originally came to the precious metals sector as an investor around the middle of last decade, but with a background in economics and law, he soon decided this was where he wanted to make the focus of his career. His website is www.bullionbullscanada.com.
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The views and opinions expressed in this material are those of the author as of the publication date, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.