Gold Mining Stock Investing 101 - Booms & Busts

Should I invest in gold stocks? Is it too late? Is the financial reward worth the financial risk? During a booming gold market your profits can be fast and furious. Unfortunately your profits can disappear as quickly if boom turns to bust.

When it comes to a new gold mining venture succeeding, the odds are overwhelming. Questionable mineral rights, metallurgical uncertainties, or environmental problems may be insurmountable. A smaller Nevada ore body may have more profit potential than a larger richer remote Alaska ore body.

In one area, political uncertainties can hinder the most promising foreign gold mining venture. Yet, in another area, positive political changes will open new opportunities.

Odds against even discovering a new gold deposit is formidable. In North America, the odds of discovering an actual deposit are 150 to 1. Odds against that deposit being profitable10 to 1.

Should you invest in a gold mining company? Is the financial reward worth the financial risk? It can be. During a jump in precious metal prices, most gold mining stocks increase in value substantially and exponentially in proportion to the actual increase in bullion price.

But, you don't need higher gold prices to be a big winner. Your company may make a new or additional discovery, or another company make a rich strike on a nearby property. You could realize profits of 10 or 20 times your original investment—or more.

A well-chosen exploration company can be your biggest winner, your investment increasing 100 times more than a similar investment in a larger gold-producing mining company. An exploration company can also produce your biggest loss.

Which mining properties? Mining properties fall into six basic categories.

Mining Properties:
Speculative Properties have definite indications of mineralization. Funds and work are needed to determine if the property may be economically viable.
Dormant Properties have mineral deposits believed to be uneconomically viable at present metal prices. But, with higher metal prices or a new metallurgy innovation the property may have future potential.
Dead Properties can consist of older mines with exhausted ore reserves or without future potential, higher metal prices or not.
Pre-Development Properties have reserves based on preliminary drilling and are ready to undergo feasibility studies.
Development Properties have proven reserves and a tested metallurgical process for extracting the precious metals. A feasibility study supports the project's economic viability.
Producing Properties are doing just that—producing gold.

Those are the six basic mining property categories. A company may have one type of property or any combination of properties.

The gold market—like the U.S. Stock market—could go considerably higher or considerably lower. From 1975 to 1980 the Dollar continued to drop and gold increased from $140 to $1,040. Two years later, 1982, the precious metals market collapsed Market lows showed gold $298. The stock market started to climb—and climb it did. The Dow Jones Industrial Index Average increased 144 percent in only five years.

October 19, 1987, that which was going to go on forever, didn't. Stock market euphoria ended. Without buyers, sell orders piled up. The Dow Jones Industrial Index plummeted 508 points.

The next trading day, another wave of selling swamped the London Stock Exchange. The biggest one-day loss, exceeding 24 percent, hit the Australian stock market. The Hong Kong market remained closed. Large U.S. securities firms and over-the-counter market makers were on the brink of collapse. And to the rescue, the Federal Reserve. The Federal Reserve manned the credit pumps and flooded the system with billions of inflationary dollars of credit.

In 2008 the dollar hit all time lows and the financial markets shaken. The Federal Reserve once again manned the credit pumps and flooded the system with billions of inflationary dollars or credit.

Who will pay the bill for billions in easy money and credit created to save large securities firms and profit major banks? Eventually the middle class will pay with higher taxes, or the thrifty and retired will pay through inflation, or both. The bill will be paid.

"Panics do not destroy capital: they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works."____ John Stuart Mill, 1867

What signals are flashing today? The answer will come with passing of time. Boom or bust, to cushion future financial shocks we need to greatly reduce or completely eliminate personal debt. Then for both profit potential and financial preservation think about adding gold to our investment portfolio—as a long term investment.

When it comes to gold mining stocks, we have a choice, from exploration to producing. Your choice depends on your investment needs and comfort level. To help you make that choice, find a well-informed investment professional with a proven background in precious metal mining stocks.

"Wisdom is the principal thing; therefore get wisdom: and with all thy getting get understanding." Proverbs 4:7


_____________ Michael E. Odell

For Other Posts by Michael E.Odell —click on "Blog Archive" at upper right
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