Miners: The Paper Precious Metals Investment - Jeff Nielson

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November 22, 2016

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? 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:

  1. Leverage
  2. Registered savings plans
  3. 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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