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- Why
GLD is boring - Gold
miners are notorious liars - A
small-cap gold miner
“Buy NYSE:GLD!”
It seems like almost every analyst with even a small
interest in gold is on the GLD bandwagon. The exchange traded fund introduced by State Street Global Advisors in
November of 2004 has so much popular appeal and media coverage that you’d think
it was the only way to invest in gold.
The idea is, every share of GLD represents 1/10 of an ounce
of real gold that the ETF’s custodians keep in a vault in
you. Indeed, there’s no way the gold in
their vault will ever end up in your hands – but they do have daily and weekly updates about how much gold they
have, and how much they’ve bought and sold. To date, they hold more than 1100 metric tons of gold bullion, worth
more than $40 billion.
So why do I think it’s boring?
As someone who personally owns physical gold, I can’t
understand why gold investors would be interested in owning GLD. It offers none of the benefits of owning
physical gold, and none of the upside of buying a gold security.
Having physical gold in your possession is a security blanket;
it protects your bottom dollars from the eventuality of a currency crisis. But having it in a vault in
event.
Buying a gold security, like a junior miner, explorer,
royalty trust or refiner gives you the potential to multiply gains made in the
price of gold. But GLD only barely keeps
pace. It will never multiply gains made
in gold unless you want to trade GLD options.
Okay, so it’s not a total bust. GLD has ridiculously low fees, so any gains
made in the yellow metal are almost entirely passed onto the ETF shareholders. And unlike holding the physical metal, there
are no transaction costs outside of what your broker charges you to buy
shares.
And I can see how regular investors might want to get a
little exposure to gold as a hedge in their portfolio.
But if you’re a true believer that gold is headed for much
higher numbers, it doesn’t make much sense to hold GLD.
Furthermore, if you want to get rich from gold, the physical
bars and coins won’t ever do that for you. Physical gold is great as a store of value. That’s all. The best we can realistically hope for is that it will stay one step
ahead of inflation, and protect our principle. Physical gold has never, ever paid a dividend. There’s no compound interest. No cash-flow.
If you want to get rich, you have to stick your neck out a
little and buy stock in small gold companies. It’s said that only one gold venture in a thousand will ever get any
gold out of the ground – so it’s vitally important to buy the best of
breed. A junior gold company that can
actually mine gold and bring it to market can multiply gold’s gains many times
over.
Unfortunately, most junior gold companies go belly
up. And even worse: most of the
geologists and marketers in the junior gold business are glorified con-artists. They might not have any gold at all, but they
hope they can bump up the share price and sell their shares for a huge
payday. Or they’ll hope to cherry pick
some drilling results and sell their stake to a bigger mining outfit before
anyone’s the wiser. Mark Twain famously
said, “A gold mine is a hole in the ground with a liar standing next to it.”
So, how can you tell who is the real deal, and who is
another charlatan next to a pile of dirt? Well, the best way to separate the wheat from the chaff is to find a
small company that’s actually producing already. Someone beyond exploratory or drilling
phases. You basically want to find a
small company that’s already proven it has gold by getting that gold out of the
ground – and you want some obvious proof that they have lots more gold
left.
We recently found such a company. They have proven and probable reserves of
over 1,504,000 ounces – or approximately $1.6 billion worth of gold in the
ground. But they’re only a $166 million
company. So…they have gold worth 10
times their share price. Usually, it’s
the other way around: a company will have assets 1/10 of their market
capitalization. But since this company
is so small, they’re flying under the radar of institutional investors who
would love to take a bite of the apple.
But they’re just too small.
They’re already bringing 60,000 ounces of gold to market
every year, with plans to increase production. They’re profitable today – and it appears that they’ll continue to be
profitable for a long time considering the size of their reserves.
The most likely scenario I see coming for this company is
that they’re bought out by a bigger company with the resources to bring more of
their gold reserves to market faster. If
that happened, the company would see a huge boost in share price. It could double or triple overnight. And since this company was recently listed on
the AMEX, a buyout isn’t out of the question. Getting listed on an exchange isn’t easy. To do so, companies have to be completely up to date
with their financial statements, corporate governance and SEC audits. So when a company gets listed, it tells the
marketplace at large that they’re probably on the up and up. For that reason, a bigger miner could scoop
up this company any day now.
The good news is, this company is still largely
undiscovered. It’s literally the
cheapest junior gold miner in the business with a P/E of just 15. (The average P/E is over 40 for the
industry.)
And right now, you can find out the name of this company by
taking a trial subscription to our flagship service SmallCap Investor Pro. If you’re a gold investor, I strongly
encourage you to take a look by clicking here now.