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Are gold mining stocks too risky?

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July 20, 2012
Kiev, Ukraine

Bruce Lee, one of the most focused and driven human beings to have ever lived, passed away 39 years ago on this day. He went way before his time.

As a kid, I idolized the man. As a teenager I trained in his style. And as an adult, I studied his philosophy. He once wrote:

“A good martial artist does not become tense, but ready… ready for whatever may come.”

These words are quite prescient today; I’ll explain.

A lot of people go through what I call the “Aha moment”. It’s the point at which they realize not everything is what it seems… that the government is not their friend, that the system is stacked against them, that their paper money is a total fraud, that their bank is insolvent, etc.

These realizations can happen quite suddenly, often because of a catalyzing event.

Perhaps they had their bank account frozen by the tax authorities or watched their kids be frisked at an airport. Whatever it is, it can be a powerful event.

In many cases, this discovery of truth can lead to a great deal of anxiety.

When you find out that most of what you were brought up to believe is just smoke and mirrors, it can be an emotional experience.

Bruce Lee’s words are a good reminder that this anxiety… being ’tense’… is actually destructive.  It can cause people to overreact and take irrational steps.

Being ‘ready’ on the other hand comes from measured action. In Lee’s case, it was mastery of his art through disciplined practice.

In the context of what’s happening in the world today, measured action means making a realistic, big picture analysis and creating a real plan to follow.

To give you an example, I spoke to one of our members recently who has a very clear idea of how he expects things to unfold in the coming years.

He has moved abroad, has precious metals secured overseas, is working on a thriving international business, and is currently seeking a second passport.

It’s all part of a plan to be ready for whatever may come, whether amazing opportunity or yet another bonehead move by a government gone wild.

With this idea of opportunity in mind, I want to address a question from a reader who asked:

“Simon, I subscribe to a lot of newsletters that recommend investing in small mineral exploration companies, what they call ‘junior mining stocks.’ I haven’t heard you mention much about this, can you give me your take?”

Not for the faint of heart, that’s for sure.

The big draw behind the juniors is that they can create ‘life changing wealth’. If some little company has a concession in Ghana, and, after years of exploration the geologists discover and validate a huge gold deposit, the stock can go from zero to hero practically overnight.

This can be truly life changing. Most of the time, though, it goes the other way.

The vast majority of these companies fail miserably. Many end up digging worthless holes in the ground. Or the government seizes their concession. Or they run out of cash. Or the officers and directors are a bunch of crooks. Etc.

There are definitely a lot of lowlifes in the industry– stock promoters who would sell their own mothers a worthless warrant, newsletter writers on the take, crooked regulatory officials, etc.

Certainly some people– Doug Casey and Rick Rule among them– have spent their careers in this industry and still ended up with a reputation for integrity and long-term success. But it’s not terribly common.

So like I said, not for the faint of heart.

There are some times when it’s an obvious opportunity, though.

In early 2009 during all the market swoons, Fortuna Silver had a profitable operation generating about $2MM / year in profit. The company also had $55MM in the bank. Yet the stock had been beaten so badly, its market cap was $45MM!

In other words, you could buy a profitable company for less than the cash it had in the bank… essentially a purchase price of NEGATIVE $10 million. Spectacular deal.

For the most part, though, the industry is too risky for me. I try to follow the two rules of investing– #1, don’t lose money. #2, don’t forget rule #1.

As such, I’m much more keen to invest in my partner Tim Staermose’s 4th Pillar trading system. Tim’s portfolio has never been in the red. Ever.

I’m also attracted to private deals; the potential financial rewards are just as explosive as resource exploration companies, but I can actually insert myself onto the board and/or influence the company’s operations. This makes the risk much lower in my book.

Have a great weekend.

Our goal is simple: To help you achieve personal liberty and financial prosperity no matter what happens.

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About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

Comments on this entry are closed.

  • SuitBoi

    A good source of information is David Morgan of silver-investor.com

  • disqus_TLcMqwnySr

    Right on. A diversified ‘shotgun’ approach to investing in juniors can still leave a portfolio in ruin even if it catches the moonshots.

    One of the best ways to explore any industry or niche is to seek out the experts who know what they’re talking about and have practical experience. Ivory tower thought experiments alone are not sufficient.

    For investing junior precious metal mining companies, I’ve found that Gene Arensberg is the best at the game. His Got Gold Report service has an exemplary track record.

  • Gtgcorp

    In the spirit of the article – Brude Lee said ““A good martial artist does not become tense, but ready… ready for whatever may come.” Readers may want to take the time to do due diligence on a Canadian junior producer named Barkerville Gold (V.BGM).

    They have announced a gold discovery that IF proven accurate will be as large as the entire Timmins Camp – a prolific mining area in Ontario for the last 100 years.

    The announcement has been made but the company must file the supporting N43-101 geological report by August 13. 

    There is much controversy over whether it is possible for a relatively unknown junior mining company to have discovered the motherlode ore body that created the Canadian gold rush of the mid-1800′s (10.6Moz grading >5g/t – open pit).

    The stock price is basically unchanged from the time of announcement as investors await this proof of discovery.

    This ongoing debate will be answered by August with the publishing of the report, peer analysis of same and BCSC securities regulator approval.

    In the sense of being ready for whatever may come — do your due diligence now – before August 13.

    If this discovery is NOT proven it will be the type of scam mentioned in the article BUT if it IS proven to be accurate than Barkerville will become one of the greatest gold discoveries EVER in Canada (a safe and friendly mining county with a history of huge gold mines).

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