How to Lose Money: Invest in Gold Stocks
“How to make a million? Start with $2 million - and invest in gold stocks!” - The Maxims of Wall Street (revised for gold bugs).
What is by far the most dangerous and high-risk sector of the market? Gold stocks!
Recently, I spoke at a gold bug convention, and after my talk, I was surrounded by several doctors, lawyers and other professionals who confessed that they had lost 70% of their portfolios.
“How is that possible?” I asked. “The stock market is at an all-time high!”
“We listened to the doom-and-gloom talks from speakers at this conference five years ago,” they admitted. “We sold out of the stock market and bought mining companies promoted here at this conference.”
It was a double whammy. As the Dow hit new highs, the penny mining stocks collapsed. It reminded me of an old financial book I have on my shelf, Wiped Out. How I Lost a Fortune in the Stock Market While the Averages Were Making New Highs. How? By investing in the wrong stocks!
I asked them why they were still at the same conference.
They answered, “We are doubling down.”
After that conversation, I decided to look into the mining sector. It turns out that penny mining stocks are a disaster over the long term. As investment banker Jeff Phillips once said, “Most penny stocks are like burning matches. If you hold them long enough, you get burned.”
But that’s not all. I also learned that major mining companies are big-time losers too. Since the year 2000, the price of gold itself has risen fourfold, but the miners themselves are extremely volatile and have gone nowhere over the past 17 years. Look at the long-term chart for Barrick Gold (NYSE: ABX), Newmont Mining (NYSE: NEM) and Goldcorp (NYSE: GG). They look terrible.
Sometimes they offer excellent short-term speculations, but if you keep them too long, you are bound to lose - just like playing craps or blackjack in Las Vegas.
I was the moderator of a financial panel at this conference and asked the experts, “Can you name a single large mining company that has made money for investors over the past 15 to 20 years?”
They couldn’t think of one. Moreover, none of them pay a sizable dividend like other more traditional, publicly traded companies like IBM, Microsoft, AT&T or Pfizer.
Adrian Day, an expert in mining companies, finally mentioned Franco-Nevada Corp. (NYSE: FNV). But, as he himself pointed out, Franco-Nevada Corp. is an investment firm that finances mining companies and is not a mining company per se. It has only 29 employees! Moreover, CEO David Harquail recently told an audience at the BMO Capital Markets mining conference that there’s no growth left in gold mining investment projects, and the company is gradually shifting to energy plays.
Gold vs. Stocks: No Contest!
Look at the Philadelphia Gold and Silver Index on the chart below. It’s been a disaster. Since January 1, 2001, the index has returned a total of 63.3%, while the SPDR S&P 500 ETF Trust has returned 104.5%. We should also count dividends - the S&P 500 pays more than 2% a year, while the Philadelphia Gold and Silver Index’s annual dividend is miniscule. In sum, over the past 16 years, the S&P 500 more than doubled the return of the Philadelphia Gold and Silver Index with considerably less volatility.
Why do gold stocks, both large and small, underperform? According to Dan Oliver, an expert with Myrmikan Capital in New York, almost all miners are excessively leveraged and overcapitalized with too much in debt and call options. They do very well during the boom phase, but during the inevitable crash, the debt financing becomes unpayable, and the gold equities collapse.
For these reasons, gold stocks, as a sector, are terrible investments and definitely not a good long-term way to build wealth. They are useful only as a short-term speculation.
The lesson is important: Investors beware! Most investors should avoid gold stocks like the plague. Gold and silver coins can be good investments over the long haul, but don’t be talked into buying gold stocks for the long term.
And think twice about attending a gold bug or “natural resource” investment conference loaded with doomsayers. Go ONLY if you are a high-risk speculator who can withstand a barrage of Armageddon scenarios. If you are an easily scared investor, it may be the most expensive conference you ever attend.
We present both sides at my own conference. And we’ve decided to do a major debate at this year's FreedomFest on the topic "Should You Invest in Gold Stocks?” The conference will run July 19-22 in Las Vegas. For more information, click here.
It will be the most rewarding conference you will ever attend - because you will hear BOTH sides of the debate. That way, you can get a more balanced approach to precious metals, real estate and stocks. I’ll be speaking at the conference along with other investment gurus, including Alexander Green, Mark Mobius, Donald G. Smith, Louis Navellier, Keith Fitz-Gerald, Rob Arnott, Nicholas Vardy, Adrian Day, Doug Casey, Peter Schiff, Jim Rogers and many others. Let the debates begin!
Good investing, AEIOU,
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