Investor Beware - Mining Stocks or Bullion?
APRIL 19, 2011

Here at we are often asked our take on silver and gold mining stocks. 

The debate over bullion versus mining stocks is an age-old one, and although both camps typically agree both silver and gold are great long-term investments, the argument on how to best invest is always a lively one.

In the video below, Michael Maloney discusses his own study of mining stocks and how their performance compares with that of physical gold and silver bullion over time.

Bullish arguments about gaining leverage to the appreciating prices of silver and gold make a great case as to why one might speculate and purchase mining company shares. 

While we completely understand people’s interest in the mining sector there are some important distinctions investors should understand between owning physical bullion versus shares of companies that bring gold and silver to market from the ground up.

In this article we will dissect some of the distinctions between these two investment vehicles as well as explain some of the scams and cons to look our for within the mining investment sector.

Longterm Performance Figures

The BGMI, or Barron’s Gold Mining Index, is one of the few indexes that tracks gold mining stocks going back seven decades.

Since the link between the U.S. dollar and gold was severed in 1971, physical gold has vastly outperformed gold miners, increasing over 35 times in price while the BGMI has gone up less than half of that.  


At times mining stocks may go up in price faster and farther than physical gold, but they also tend to drop further and faster.

Over the long haul, we believe physical bullion to be a more reliable investment.

Should I seek a safe haven or should I leverage some speculative risk?

Unlike safe haven assets such as silver and gold bullion, mining shares introduce risk in the sense that they have, and many times do, go to zero.

Any stocks, especially mining stocks, are inherently risky.

A mine can have labor disputes, permitting and licensing problems; it can be shut down by environmental agencies (like the EPA).  Mines can have structural failures from collapsing (think Chile 2010) and or flooding (think Australia today).  There is also the threat of mismanagement-theft-corruption (think Bre-X gold mine fraud).

Many mines are located in countries that have histories of economic problems, military coups, and nationalization of their resource companies. Physical gold and silver, on the other hand, cannot go bankrupt.

Only a few of the largest and best-positioned miners have actually managed to be profitable in recent years; many have folded due to increased production costs—largely caused by rising energy costs—and the fact that the low-hanging fruit of easily accessible deposits have been largely depleted.

According to the United States Geological Survey, at current rates of production, the two metals the earth will run out of first are silver and gold. Gold reserves will be exhausted in 31 years, silver in only 26 years.

Another factor putting a damper on most mining stocks—and on gold and silver supplies—is the long lead time typically required to get new mines up and running. Historically, it takes an average mine five to seven years before a newly discovered lode is brought into production. In countries with stringent environmental regulations, such as the United States, it can be all but impossible to develop a new mine.

Yeah but this is the great gold and silver bull market of the 21st Century?

Shouldn't a rising silver and gold price make the profits of silver and gold mining companies rise as a result, consequently won't their share prices in turn do the same? 

What about all those potential 10, 20 and even 100 price multiple junior mining share picks I keep reading about online?

Caution! Holes in the Ground with Liars on Top!

The classical pump and dump scheme - whether it's oil-wells, diamond, gold and or silver mines, the ability to manipulate an investor using their greed against them is a tride-and-true tactic which scam artists bank upon.  

Hype and dump scams have been around as long as people have been digging holes in the ground.  Here is how they typically work today:

This con usually starts with a thinly traded company which no one has heard of.  The individuals looking to benefit from this ruse will acquire the company shares at a very cheap price, typically pennies a share. 

They then market the stock as the next big thing, be it by old-school boiler room telephone operations, electronic press releases, internet videos, newsletters, emails, etc. -> "This silver discovery may be the highest grade exploration in... and you are going to want get in on the ground floor, the company's share price may more than triple shortly."

When new investors flood in, the unscrupulous promoters simply sell their cheaply purchased shares at there newly bloated prices leaving the new investors holding a bag of worthless stock shares.

Finally, what about the threat of large scale currency resets or arbitrated currency pegging? 

Which investment vehicle would you prefer to hold in the instance of a bank holiday? 

The  threat of a possible worldwide, round-robin currency devaluation is very real. It is not hard for us to imagine a time, not too far off in the future, where sovereign and institutional banking debts reach crisis crescendos, so much so that bank holidays may be declared globally. 

Imagine a period of time when brokerage and banking accounts are frozen, ATM's are not functioning, communications may even be disrupted. 

A Brenton Woods-type II scenario would most probably come about with central bankers from around the world gathering and agreeing upon on a round-robin of currency debasements based upon debt to GDP levels, etc. 

In such a scenario almost every fiat currency will lose against real monies like physical gold and silver bullion. 

At the same time, equities or stock shares will simply stand frozen in their brokerage accounts getting devalued in their respective currencies.  In such a scenario physical gold and silver bullion could multiple many times in price while shares of mining stocks and other traded companies are debased in value.

Bullion vs. Mining Stocks? -> Our Bottom Line

For us the risk/reward ratio of mining shares stands second to the low risk - high reward ratio and potential gains for silver and gold bullion either in our hands and or stored in private 3rd party segregated vault storage facilities.

We will simply continue to put our gold and silver money where our hands can access it, as we patiently wait for what we believe will be the greatest wealth transfer in history.


For Those of You Out There Who do Choose to Speculate in Mining Stocks 

We Highly Encourage You to Seek Professional, Trusted Advice:    



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