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Gold Mining Stocks: 5 Reasons to Buy Gold & 4 Ways to Profit
by Dr. Scott Brown, Education Director, Investment U
Thursday, April 9, 2009: Issue #975
As you know, I’m very bearish on gold. I’ve been in total agreement with Louis Basenese’s 12 Reasons Why You Should Short Gold and his follow-up article, A Clarification on Shorting Gold.
But we’ve been in the minority.
It was early February when Louis originally made those statements, and gold was close to $923 an ounce. Things have changed since then – but not much.
Gold has been on a roller coaster, moving down then up – to just over a $1,000. It has currently pulled back to under $880. The precious metal’s performance, not to mention its disconnection to the markets, has baffled seasoned experts and analysts alike.
For a market in crisis, we haven’t seen gold skyrocket like many would have expected.
Because regardless of the current price of gold moving up or down a few hundred dollars, there are four easy ways you can profit from gold right now. So I’m going to shock many of my bearish brethren and suggest not just why you should invest in gold right now, but how to do it through gold mining stocks called prospect generators.
5 Reasons Why Gold’s still a Buy
There are a number of reasons why I’m bearish on gold. But after eighteen solid reasons from Lou, I don’t feel the need to belabor the point. However, I will say that gold is still on the historically high end of its range and that its value is more dependant upon its commodity position rather than its status as a currency.
But even though I’m bearish, it doesn’t mean that I don’t believe gold shouldn’t part of a diversified portfolio.
As part of our Asset Allocation Model , we hold 5% of our portfolios in precious metals. This can cause more than a bit of “discussion” when readers question why we can recommend buying gold and selling gold at the same time.
Almost two years ago, Alexander Green showed us six reasons why we should be investing in gold. Five of those are as true today as they were then.
- The U.S. dollar is weakening. That makes the precious metal, typically denominated in dollars, cheaper to buy in other currencies. (Euro-denominated investors think gold still looks cheap.) Gold traditionally rallies as the dollar falls.
- Inflation fears. Only a few months ago, Bernanke was openly fretting about the possibility of higher inflation – and saying the Fed’s bias was toward tightening rates. Yet he has cut rates dramatically to lessen the credit crunch resulting from a meltdown in mortgage-based securities. Needless to say, the Fed’s action was inflationary. And gold is an excellent inflation hedge.
- Emergence of China and India. A flourishing middle class in both emerging giants is increasing the demand for gold. (Jewelry fabrication was up more than 50% in India alone last year.) People everywhere want gold watches, gold coins and gold wedding bands.
- Supply constraints. Around the world, discovery rates are falling. Mines are being depleted and mining companies are producing lower grade base metals.
- Geopolitical instability. There are plenty of hotspots around the world today. But gold is viewed as a safe haven during times of political or economic calamity.
And while we’ve seen some slowdown in BRIC nations China and India, it’s worth pointing out that little else has changed since. But most of this is old news. We’ve known about these factors for quite some time.
It’s why I’ve saved the best for last.
Gold Mining Stocks & Gold Prices
It’s no secret that gold mining stocks rise and fall with the performance of gold. The market is pricing in the future profit potential of these companies.
It’s not uncommon to see a gold producer stock plummet in price after a significant price plunge. However, what many don’t realize is that these fluctuations have less bearing on the profit potential than you would think…
Here’s the secret.
Gold has to come down a long way to make producers unprofitable!
The cost of producing gold is about $317 an ounce. The price of gold as I write this is just under $890. That’s a profit margin of around $573 for companies with active mines – about 180% of their costs. Even if gold plummets to $700 an ounce, these companies are still making 120% of their costs.
That’s a subtle difference between profitable and really profitable – and it’s also a huge moat of safety for these companies pumping what really glitters onto the open market.
Of course there’s another way to play gold mining stocks. Though there’s more risk investing in mining companies already producing gold, it can be much more rewarding.
4 Gold Mining Stocks For A Well Diversified Portfolio
At the Investment U Conference, I was talking with commodities and resources expert Rick Rule who offered a fascinating play on gold mining stocks that aren’t the usual mining equities. These unique companies are called prospect generators.
Imagine how powerful it would be to have a group of highly trained experts out prospecting for your very own new gold or resources discovery. Imagine having the best geologists and mining engineers on your “A” team, out in the field prospecting for you.
If your crack team hits a big strike, the company share price could unexpectedly shoot up 100% to 1,000% – in a few weeks. These are exactly the situations that Rick uses to get returns of up to $1,000 for each dollar he puts in the deal.
Rick goes out and purchases a few of these “prospect generators,” then he sits back and waits. When a prospect generator has hit pay dirt in the past, Rick has suddenly had a cash gusher on his hands.
If you’re looking for gold mining stock prospect generators, take a look at:
- Esperanza Silver Corporation (CVE: EPZ),
- Riverside Resources Inc. (CVE: RRI),
- Almaden Minerals Ltd. (NYSE: AAU)
- And Cornerstone Capital Resources (CVE: CGP).
All have the potential to be your next cash gusher.
It all starts with education,
Dr. Scott Brown
P.S. One of the big ways I educate myself – and believe me when I say, I still do – is by listening to the Investment U Conference audio files as I drive to work. I’m still finding new insights into the sessions and it transforms my daily “dead” time into some of the best investment education on the market today. To order, go here.
Today’s Investment U Crib Sheet
Successful investing begins by conceding that – to a degree – uncertainty will always be your companion. It doesn’t matter whether we’re talking about gold, stocks, or any other investment.
You can guess what the market is going to do and be right or you can guess and be wrong. No one guesses right consistently. Not even famed investment guru Warren Buffett.
Instead, we follow a wealth-building investment formula that won Dr. Harold Markowitz the Nobel Prize in finance in 1990. His paper promising “portfolio optimization through means variance analysis” demonstrates how to maximize your profits and minimize your risk by properly asset allocating and rebalancing your portfolio.
Following this model and rebalancing annually ensures our portfolios will be well diversified and positioned to profit in any market condition. And yes, investing success can be this straightforward.
Learn more about The Oxford Club’s asset allocation model here.
To put this portfolio into action, and get all of The Oxford Club’s picks, go here.
- Asset Allocation: Why Investors Should Diversify Beyond Stocks
- What’s the “Fair Price” of Gold?
- Market Vectors Gold Miners ETF (NYSE: GDX): Stock of the Day
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5 Responses to “Gold Mining Stocks: 5 Reasons to Buy Gold & 4 Ways to Profit”
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Dr. Brown specializes in teaching stock investing because as he emphasizes "the stock market is where individuals and families have the best shot at succeeding financially!"
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April 9th, 2009 at 10:52 am
what stock exghange is CVE
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April 9th, 2009 at 12:57 pm
Thing is miner stocks follow other stocks..i was into them big time last year. Gold could be up $30.00 and if the equity stocks where down a 100 points gold stocks went down also. I kept saying only cost the miners $300.00 , golds at $900.00 why is their stocks falling??? Stock investers are goofy, they don’t go by fundamentals they just follow the lead cow from sector to sector..just got to be in front of them..follow the early money, then when the herd follows get out n move to the next one. Is strange Gold is staying up like it is..I think the big guys don’t believe in this stock rally all that much..suckin the money off the side lines before they pull the plug.
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April 14th, 2009 at 12:21 pm
Trilliant Exploration is an emerging mineral exploration and development company focused on Ecuadorian Gold. From the international experience of its principals, Trilliant Exploration has developed useful geological models for gold and other mineralization in El Oro Province in Ecuador. With a winning team and good connections in the financial markets, Trilliant Exploration is poised to become a leading mining company in Ecuador. (OTCBB: TTXP) http://www.ttxp.biz.
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July 16th, 2009 at 4:32 pm
I am enjoying your articles very much. I am curious about your opinion on inmvesting in gold mining before they are publicly traded. For instance, I have been offered an opportunity in Continental Gold with operations in Colombia. Would something like this be extremely risky?
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December 14th, 2009 at 8:34 am
VHGI is next gold stock
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