Letter Re: Why Physical Gold Versus Gold Stocks?

Mr. Editor:

Why on earth do you place such a strong emphasis on gold “in hand” as opposed to gold [mining] stocks? From what I’ve read, gold may soon double or triple [in price], but gold mining stocks like Barrick and Newmont are set to go up 5x to 7x. I think that you’ll be missing the boat as this bull market in [precious] metals continues. I feel sorry for you, pal. – Pete in Tampa

JWR Replies: I recommend buying (and personally holding) physical gold rather than gold stocks for three reasons: safety, safety, and safety:

The first “safety” is protection from a collapse in the dollar. Mining stocks are denominated in dollars, not ounces of gold or silver. So if the dollar is ever wiped out as a currency unit, then I know that I’ll be safe. I’ll have it in my personal possession, safe and sound.

The second “safety” is from mining company management stupidity. Ever since the early 1980s, the major gold mining companies have built up a large backlog of over the counter derivatives–commonly called their “hedge book” of forward sales. (This started when gold prices were chronically weak, back in the late 1980s and early 1990s.) Although many of the hedged position have been eliminated (“unwound”), there are still millions of ounces of gold that have “sold forward” at promised prices below $320 per ounce. In some cases this forward selling will account for more than 50% of their next five years of production. What will happen if gold zooms up to $1,500 per ounce? The miners will be stuck. They will still have to fulfill those forward sales contracts at the promised prices. Presumably they can add extra production shifts, but because of their hedging, their profitability will suffer, even when gold is going sky high. So if you are buying any gold stocks, first do your homework and only buy stocks from companies that have a small hedge boo, or better yet no hedging whatsoever.

The third “safety” is from social turmoil. In a major economic cataclysm (“WTSHTF“) all paper assets will be wiped out–even mining stocks. For that reason, I recommend that individual investors have a core holding of at least one $1,000 face value bag of pre-1965 circulated US 90% “junk” silver coinage per family member. This is for use in barter in the event of major depression. After you have that silver in hand, then you might consider some “paper” gold or silver mining investments.

I realize that all of the foregoing is an ultraconservative approach to precious metals investing. And I also acknowledge that I might miss out on some potential big gains. But I’m just an ultraconservative kinda guy.