- This simple distinction will help you
- A stock barely keeping pace with
- One stock to buy today
Most investors can’t be bothered to buy physical gold. And I
can’t blame them.
It can be expensive and confusing to find the right vendor –
and then you have to take delivery, and find a safe and secure place to store
But many of those same investors will eagerly gobble up
shares of gold stocks.
interested in buying gold stocks, you need to understand the biggest
difference between the two types of companies you’re going to
Of course, there are many non-arbitrary distinctions between
different types of publicly traded gold companies- there are explorers,
producers, refiners – and even gold royalty companies that don’t explore,
produce or refine a single ounce at all.
Those distinctions are important, but there’s a more
important difference that’s vital to understand if you’re going to be a
prosperous gold investor.
Once you grasp this concept, you’ll be ahead of 99.99% of
the other investors in the sector.
I’m talking about the difference between large cap gold
companies and small cap gold companies.
Large cap companies are slow, methodical, and long lasting
with a steady stream of gold bringing a slow and steady stream of profits for
their management and shareholders.
Think companies like Barrick Gold (NYSE:
Barrick is the biggest gold company in the world, with a $46
billion market cap. It’s bigger than such name brand blue chip giants like
Sony (NYSE: SNE), Halliburton (NYSE: HAL)
and Yahoo (NYSE: YHOO).
They have a trailing price to earnings ratio of 18.2 and
they pay a 1.1% dividend.
Since the last time the stock split, on March 2, 1993,
Barrick stock has risen 214%, including dividends.
At the same time, gold prices rose 268%.
That’s not the kind of performance I’d like to see from a
gold stock, but it’s what you can expect from large cap gold stocks – the
ability to slightly over or underperform price increases in the underlying
commodity. There are exceptions as well – and some large cap gold companies
are better at multiplying gold’s gains than others, but you’re not likely to
see many ten-baggers in the large cap gold sector.
So, these companies won’t sail any ships, but on the other
hand, they’re not very risky either. With around a one percent-to-one percent
ratio in the price of gold and the price of their stocks, the downside is
pretty well insulated from wild swings. There aren’t very many of these
companies in existence – maybe 10-20 that would fit in the category. You can
buy them all individually, or you can buy an ETF like NYSE:
GDX and own almost all of these companies, and be satisfied to
simply match gold’s gains. They’re relatively easy to value – like any large
cap company, and they sell at large-cap valuations. No tricks or
companies are a different story altogether.
First off, there are hundreds, and maybe thousands of these
companies in existence. They run the gamut from explorers with zero gold,
zero land, and a small pile of cash – all the way up to producers with proven
The risk and reward moves along the continuum of the
likelihood that these companies will ever find a single ounce of gold.
And most of these companies fail. They never find gold, they
never smell gold, and who knows – maybe they never intended to. You can make
a pretty decent paycheck by starting a gold exploration company, getting
funding from banks, shareholders and well-wishers, and simply walk away from
the company after it fails with a good chunk of money in your bank
Mark Twain famously described a mine as “a hole in the
ground owned by a liar.”
But if you buy the right small cap gold company, you can
make a life’s fortune with a relatively small amount of capital at
An industry group called Ubika Research regularly publishes
lists of the top winners and losers in the small cap gold sector. For the
week ending September 10th, the top five gainers were up
Those gains happened in just one week!
During the gold run up of the late 1970s, junior gold
companies made some of the best gains in market history. None of the
companies exist today, but dozens of companies made huge fortunes for their
shareholders – rising between 1,000% and 20,000% in a matter of
It’s not surprising to see these companies double or triple
in a matter of hours.
But the same is true on the downside.
So you need to understand the risks. You need to know these
companies inside and out. You can’t possibly value them like you would a
blue-chip stock. You need to look at the people, their land, their track
record for success, how much cash they have, how much debt, how much gold
they have in the ground (if any), etc.
In short, it’s impossible to do too much research on these
types of companies. They typically don’t have any kind of analyst coverage,
so if you do your homework and find out the necessary facts, you might be one
of a handful of people on the planet with access to the information.
That’s the type of advantage that gives you a leg up on
other investors, and it’s the only way to travel when it comes to small cap
interested in putting a few hundred dollars into a small cap gold company, I
can’t think of a better one to get started with than a company my boss Ian
Wyatt recently wrote about.
It’s located in North America, it’s already producing gold,
but it’s still a micro-cap – trading for less than $5 a share.
You can buy hundreds of shares for less than $1,000 – an
investment that could easily turn into $10,000 or more in the coming months
as gold continues to rise in price.
Disclosure: long physical gold