Jeff Clark, Senior Precious Metals Analyst, GoldSilver
FEB 10, 2017
Have you seen the movie “Gold”? Naturally I had to see it. But not just because of the topic; it’s loosely based on a true story of what happened to a gold mining company in the 1990s.
It’s a fun romp through a series of events I’ve read a lot about. I even know someone who had invested in the stock.
Spoiler Alert: If you don’t know the story the movie is based on, or haven’t see the film yet, this review gives it away.
The movie is worth seeing from a theatrical perspective, and Mathew McConaughey, who plays the mining company CEO, is great. But it’s also worth seeing as an investor. It has some definite lessons for anyone thinking about buying gold stocks, and even gold itself.
The movie is based on the true story of Bre-X Minerals, a Canadian exploration firm in the 1990s. A small group of geologists discover gold in Indonesia, and in a short period of time the find grows into what was billed as the world’s largest gold deposit. The project was called Busang, and analysts estimated it held as much as 30 million ounces at the time. It was a monster ore body deep in the jungles of Borneo.
Even more amazing was what happened to the stock. When it first went public, it traded at 30¢ per share. As the discovery grew and grew, the stock soared, reaching as high as $250 per share. Yes, that’s over an 83,000% return. A mere $1,000 investment would’ve soared to over $830,000. $10,000 became $8.3 million.
Bre-X became the talk of the mining world, and the stock became an investment darling. Thousands of investors—from big banks to Mom and Pops—bought it. Many in the hometown of the CEO put their life savings into it.
And then the worst of all news hit. In a stunning report from an independent driller, it was discovered the site had no gold. None.
Turns out the on-site geologist, Michael de Guzman, was “salting” the samples. In other words, he was dropping gold nuggets into the drill core bags before they went to the lab. The assays were always positive, and no matter where the company drilled it always found gold.
The Busang project was a complete and total fraud.
Naturally the stock was obliterated. Eventually it was delisted. Every investor who hadn’t sold before the fraud was discovered lost everything. It was a humiliating and financially devastating event for every shareholder. It also gave the mining industry a huge black eye.
I read a book on the story, and remember asking myself if I would’ve caught the fraud had I visited the project. I’ve been to many mine sites, and analysts that had toured Busang came away with glowing reports. It gives me a shudder when I think about how easily everyone was fooled.
But there are a couple important investing lessons we can all learn from this true story, starting with the most obvious…
Gold Stocks Are MUCH More Risky Than Gold
If you buy physical gold and keep it under your direct control, you have a tangible asset that requires no other entity to be made good. Gold stocks, on the other hand, are speculations. The difference in risk is enormous.
Investing in an exploration company is the most risky of mining stocks, and most of these don’t amount to much. Roughly only 1 in 2,000 exploration companies discover an economic ore body.
Of course some do find gold, and it’s the explosive potential that can happen when a discovery is made that attracts investors (including me). But you must have the financial breadth and emotional fortitude to play this game. Here’s a good example what I’m talking about, which is rather embarrassing to admit…
Yours truly sank 5 grand into what was an exciting new gold producer in 2014, Rubicon Minerals (RBYCD). We thought it was one of the best up-and-coming companies. But the amount of gold that came out of the mill was dramatically less than what had been projected, primarily due to the complexity of the metallurgy. Not only was the company forced to stop production, it became clear it might never produce any gold. You can check out what happened to the stock in the last half of 2015… the proceeds of my sale amount to about a lousy $100. Yep, I pretty much lost my entire investment—and this was on a producer!
Invest in gold stocks long enough and sooner or later this’ll happen to you. Rubicon wasn’t a fraud, but even smart people can be tricked by Mother Nature. So if you’re going to invest in gold stocks, you can’t buy just one or two.
(I would be remiss if I didn’t give you a good example, too… check out what recently happened to Aurion Resources, a stock I bought at 30¢).
The best advice I can give those of you that might want to buy gold stocks is this: invest in only the very best management teams. It’s no guarantee of success, but it is clearly the #1 factor in your due diligence. In fact, we used to say that we’d rather invest in a mediocre project with top management than a top project with mediocre management. That’s because a great project can be screwed up by bad people, and even a mediocre project can work with great people.
In the movie Gold, the CEO stole from his wife’s purse and drank to excess. The fraudster de Guzman—the one salting the samples—in real life had not one but FOUR different wives and families. No one apparently knew till after his death, which I’m sure made for an interesting funeral, but these are obviously the kind of people one shouldn’t be investing in.
Better yet, just avoid all the risks that come with gold stocks by just buying physical gold and silver. The wealth transfer Mike sees coming is based on precious metals—not their stocks. You don’t need them to participate in the upcoming shift, and in fact might not participate at all if you invest in the wrong ones. If I’d bought gold instead of Rubicon Minerals, I’d still have four ounces of bullion.
There’s another big lesson from the movie…
You Must Someday Sell
There’s a scene in the movie where Mathew McConaughey’s character tells a co-worker to sell some stock as it’s rising and put some money away. Of course the guy never does and loses everything when the company goes bust. If he’d sold even a little bit of his grossly overvalued shares he would’ve been set for life.
This truism doesn’t apply to just gold stocks. To book a profit and actually participate in the upcoming wealth transfer, you will need to sell your gold and silver bullion, too.
Yes, I know gold and silver are different “investments” than other assets—they’re real money, for starters, and have numerous other advantages. But the profit is only on paper until you sell. You may not sell all your bullion—maybe you want to leave some for your heirs, or maybe gold is somehow part of the new monetary system—but to change your life and invest in the next undervalued asset class, you’ll have to sell the biggest chunk of your holdings.
Those of you that are Insiders will get Mike’s exit strategy at the time, but the movie Gold already gives us one big hint about when to sell: when precious metals get ridiculously overvalued. When they enter a mania and the frenzy pushes prices so high that you know in your gut they’re getting out of hand—that will be the time to sell.
By the way, the person I know that owned Bre-X stock actually multiplied his investment, if memory serves me right, about 70 times. He sold before the fraud was discovered—he didn’t know it was a fraud, but ended up making a killing anyway because he felt the stock was getting way overvalued. When extreme overvaluation hits any investment you own, that’s the time to be looking for the exit.
We at GoldSilver believe a day is coming where gold and silver will be overvalued—WAY overvalued. And we’ll be selling at that point to lock in the increase in our standard of living.
The good news is, gold and silver are undervalued now. They’re still priced in buy mode. If you don’t have enough, you can still be part of wealth transfer. Buy a meaningful amount relative to your total assets, enough so that your purchasing power will balloon once the shift takes place.
If you don’t know what to buy, it’s pretty simple: gold and silver bullion. Low premiums, easy to sell, with prices poised to shoot much higher. And for some specifics, check out our new brand new article, How to Buy Gold Coins.
Gold Theme UPDATES
We’ve written about a number of themes in the newsletter, many of which have had further developments since the articles first published. As these themes play out, we thought it would be useful to provide updates as they come along. Click on the link to see the original article.
Last week I wrote about the spike in ETF volume for the biggest gold fund in Europe (it’s worth seeing the chart if you missed the article). Master chartist Nick Laird of goldchartsrus.com shows that the Xetra Gold ETF has added a whopping 2.5 million ounces since the start of 2016.
We think this kind of surging volume is due to happen in North America, too, at the next crisis.
Several industry analysts wrote to say they thought my article was a good summary of the coming supply deficit. If you didn’t see the article, it’s worth perusing, as it’s pretty clear that new supply of gold is going to fall.
How much of a crunch we experience will depend on demand, too. Here’s the latest with that side of the equation:
• The World Gold Council reported that global gold demand in 2016 rose 2%, reaching 4,308.7 tonnes, a 3-year high.
• The Royal Mint in Britain is now running its machines through the night to keep up with demand for gold and silver bullion. It’s producing 50% more coins and bars than last year, and January sales were up by a third.
• US Mint sales remain elevated: 37.7 million ounces of silver Eagle coins were sold last year, the fifth highest on record; gold Eagle coin sales hit 985,000 ounces, the strongest year since 2011; and gold Buffalo coins reached 219,500 ounces, fourth best annual total and 0.5% higher than 2015.
• Turkey recorded the highest increase in precious metals deposit accounts in December.
The crunch may already be underway: gold demand in December for the “Silk Road” countries (China, India, Turkey and Russia) was 274.2 tonnes, while global mine production was only 260 tonnes. And don’t forget that China is slowly taking over the Comex, as Mike points out here.
If this level of demand keeps up—or grows, which is probable in a crisis—at the same time the amount of new gold coming to market declines, we could see some real fireworks in the price.
As our original article pointed out, the Indian government had increased the import tax on gold to 8.75%. Combined with other restrictions, gold imports have fallen, at least officially. Capacity rates from refiners have fallen to just 25% of normal levels, for example.
But the official numbers can be misleading. As my contact in India pointed out, we don’t know if gold buying has actually fallen, because much of the trading has gone underground.
Further, Russia's largest bank, Sberbank CIB, now says it will supply 20-25 tonnes of gold to India this year, starting at the end of the first quarter.
But will Indians switch to silver if gold remains expensive and difficult to buy? We’ll see, but they’re already sitting on a LOT of gold. The World Gold Council just released a comprehensive study of the Indian market and reported that Indians hold somewhere between 23,000 and 24,000 tonnes of gold, worth at least $800 billion. If the interventions from the government get too draconian, it’s more likely Indians will shift to silver instead of giving up on precious metals altogether, and this shows they have enough gold to do just that.