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The bull market has been receiving more press coverage in 2003 than it did for the first 15 or so months of its existence. More people know now, for example, that gold-related mutual funds have been among the top performers of the last two years, though they have recently lagged.

What is less covered, however, is that-more often than not-those who have tried to take advantage of gold's bull market have not yet made any money. In fact, many have lost money, largely by doing what investors typically do: buying high, and selling low. Regularly, I hear from people who thought sure as shootin' that gold was off to the stratosphere a few months ago, and were making big bets as gold breached $350.00 per ounce, $360.00 per ounce, etc. Similarly, I hear from some who bought at or near the peak of the gold stock rally in mid-2002, and are still waiting to be made whole in spite of the fact that gold is some $25.00 per ounce higher now than it was then.

Sadly, this is normal behavior for investors in virtually any sector. It is rather like the speculative technology stock bubble that peaked in early 2000. Most of the investment money came in at the top of the market. In some respects, therefore, it should be little surprise that lots of people now who have sought to take advantage of gold's big move-and that of gold shares-are suffering a little due (primarily) to their getting into the sector a little too late, at least as far as the first "leg" has been concerned.

For those investors who have been longer-term admirers of gold and gold shares, though, something more pervasive has actually been at work for many years, dooming a lot of these people to investment disappointments. As I have written in past commentaries, at the top of the list is the fact that "gold bugs" use far too much emotion in making investment decisions. Rather than looking at gold as a commodity and gold mining shares as companies requiring a lot of scrutiny before an investment is made, people for years have thrown money at the sector almost indiscriminately. You'd think that the laws of mathematics and economics had been repealed, and that nothing else mattered as long as the company in question was producing (or hoped to one day produce) GOLD.

I've long since come to the inescapable conclusion that the great majority of investors in gold stocks over time have had little more knowledge of their industry and on how to evaluate both the sector and individual companies than did those giddy investors in Internet shares in 1999 and 2000. All the latter cared about was that prices for companies' shares were going up, and that-after all-"this was the future!" They got into the overall move late, and bought shares in worthless companies to boot. Seldom did the actual, real world economics of the sector or the individual company matter. Helping this along usually has been a combination of hype and bad (or self-serving) advice from the gold stock promotion industry itself.

Particularly if we merely get a slow, steady climb in gold's price and not the explosive hundreds-of-dollars per ounce move some are still predicting, it behooves us to make sure past mistakes are not repeated again. For starters, this means making a realistic assessment of the gold market and its future prospects before making any investments in the sector. In addition, it's also important to have some general "feel" for the broader economy, currency markets and other issues which can directly or indirectly impact not only the gold price, but the financial prospects of individual companies, and of the gold industry generally.

I can't in a commentary of this size deal with every possible variable, as I do in my newsletter and occasional sector updates. However, in the end, everything boils down to understanding the difference between being an investor (and hopefully an informed one at that) in the gold arena and being a speculator. This is not to say that speculators can't make a lot of money in gold shares, if they know what they're doing. However, my experience has shown that too many people who think they are "investing" in gold companies are not, but are instead engaging in a very reckless form of speculation.

Subscribers to The National Investor, among other things, have the right to have me give them opinions on their present portfolio holdings of all kinds, including in gold shares. More times than I can remember, I've had a new subscriber send me a list of stocks that includes a surprising number of small exploration companies usually purchased many years ago. As you've already guessed, virtually all of them are now out of business. Looking at when these stocks were purchased, more often than not it was at or near the end of one of gold's many rallies over time.

Particularly shocking on some occasions has been the fact that some of these people put considerable portions of their overall portfolio in these kind of speculative stocks-a cardinal sin whatever the industry in question. On top of that, it almost always turns out that this list of corpses represented the only gold shares they bought in the past!

It is never wise when deciding that any sector/industry is worthy of a part of your portfolio to put all of that allocation into the most untested, speculative young (or old) companies out there, no matter how exciting they sound. One must first look at those proven companies who actually produce gold at a profit, and decide which one (or few) of them is the best. Further, it is now more important than ever to understand those basic economic fundamentals I referred to earlier, since recent changes in the currency markets and high energy prices (to name just two) are, even for many popular and strong companies, now constituting a "double-whammy" against profits.

Once the bulk of your determined appropriate exposure to the gold sector has been taken with relatively stable, producing concerns, a small portion should indeed be spread among some of those speculative exploration "plays" that have the potential of hitting the proverbial home run. Always bear in mind, though, that the majority of the small gold mining exploration companies in existence today-no matter how exciting they sound, how slick their public relations or how great a history the region they're exploring in has had-will be out of business down the road, their shareholders penniless. This will be true even if gold's bull market continues, let alone if it does not. Thus, the last thing you want to do is put your serious gold sector investment money exclusively, or primarily, in such companies.

A combination of having a good handle on the overall economic/market picture, understanding the gold market's fundamentals particularly and sticking primarily with companies deemed appropriate for investors can result in great profits in gold shares. In addition (as I have also written in previous commentaries) knowing from time to time that the market requires trading can bolster your gold portfolio's longer term performance. With this foundation already addressed, the "kicker" of occasionally speculating in well-researched young companies can not only be fun and exciting, but can provide opportunity for explosive profits while not at the same time jeopardizing the overall condition of your portfolio drastically. Without this foundation, however, what too many still erroneously refer to as "investing" in gold shares can prove devastating.

Chris Temple, Editor
The National Investor
www.nationalinvestor.com

May 16, 2003