Futures, Shares, or Physical?

October 19, 2002

I have a few thousand shares of mining stocks, which I bought for pennies each. I guess they have done well, I rarely ever check. People ask me all the time about selling their physical to buy shares. Do shares go up faster than physical gold and silver? I don't know. Maybe yes, and maybe no. Maybe it depends on the shares or where the mine is located. Maybe they don't go up faster. I do know several things, though, and they may make you think. That is why I write these columns for GOLD EAGLE.com: To make you think. The more you know, the more sensibly you can act.

There are lots of different types of mines and shares. There are shares of mines that are open and operating, and showing a profit, and then there are the other kind. The other kind, are those who have property, and maybe have core drilled it, and found interesting results. Or there are mining stocks for potential mines, closed mines that show potential for more ore, foreign mines, etc. Shares of mines that are open and operating, usually show high P/E ratios, because the price is based on an increase in the POG (price of gold) and they may be a poor buy now.

Mines with potentials, closed mines, etc, are mere gambles, and from lots of experience from operating three hotels in the ex-mining town of Silverton, Colorado, I saw it in person many times. We in Silverton used to say, when another rube got into town, that the only thing mined, were the investors. Foreign mines, if they are really excellent, are subject to their government nationalizing them, so as not to pass up a golden opportunity to enrich their treasury, and this has happened more times than most want to admit. Mine operators can too often be likened to used car salesmen. They have their entire fortune invested in this hole in the ground or acreage, and they must raise more capital to continue exploration, buy equipment, or whatever. They need money urgently, and the best way to do that is to sell more shares. The best way to do that, is to fake or exaggerate everything in their command, to make this thing look appetizing, in the hope that they can pull it off, and make a killing. The proprietors of the mine usually hold a majority interest, so the stockholders are at their mercy as to how the money is spent, whether the books are cooked, profits hidden, or a multitude of possibilities. If you owned a hole in the ground, and thought there was a potential, wouldn't you do the same? If you knew this was a habit of mine promoters, and it is, would you buy the stock? Remember, it takes a huge amount of machinery to run a mine, plus lots of electricity. Running power poles and service to remote mines can be very expensive, as can hoists, mucking machines, rail, locomotives, cars, blasting powder, and the lot.

A great friend of mine, recently bought thousands of shares in a closed mine not far from Denver, in a ghost town. I photographed this ghost town 40 years ago, and thought the rusting machinery and crumbling buildings were charming. So this promoter buys the mine that has probably been mined out 70 years ago, and thinks there is undiscovered ore. Not me, I told A…., but he went ahead. Guess what? You can imagine.

As far as I know, the EPA, and MSHA make domestic mining durn near impossible, because of regulations, rules, and bureaucracy. Where is the ore going to be smelted? I don't believe there are any smelters left in the US, thanks to clean air regulations. Ore must be extracted, then milled, and finally smelted, before it can be turned into Gold Eagles. Milling grinds the ore into face powder consistency, and then separates the gold and silver from the rock in which it was embedded, by means of centrifugal force, plus various chemical reagents, vibrating tables, bubbling, etc. A fully operational mill that will never run again, is in Silverton, Colorado, if you are interested. Self guided tours of this enormous place are well worth the $4. After milling, the "cons" (concentrates) are taken to a smelter, where the final processing takes place, complete with smokestacks and acrid fumes. That's why there are none left in America. American mining stocks, unless there are proven reserves, milling and smelting plants available, might be poor investments. Take a chance.

Futures on precious metals are subject to quick drops in metals prices, with resultant margin calls, as has happened as I write this in a major way. Investors in futures can be wiped out in an instant, and this is in all futures, not just gold and silver. It is a fact that about 95% of futures buyers get creamed at one time or another, and in the end show a loss. Ask me! I took a $20,000 bath on silver futures a couple of years ago. I hear from my clients almost daily, that they are long, short, or the market went against them, and they have to cough up dough for margin calls. Futures have bankrupted a lot of people over the years. Some of the saddest things I have done are my clients selling their physical, to buy shares. I cringe, but it's not my decision.

Then there are physical metals, which one can hold in one's hand, admire, love, and realize just how much capital, machinery, and effort was expended to gain it. It is an incredible amount, believe me. I am lucky to have operated business in a gold mining town, known miners, been through mills, and mines, and spent hours and hours over Jack Daniels, talking with these geologists, miners, mill workers, truck drivers, high graders, prospectors, etc. There were the "tramps" who would blow into town for a season, then go off to another mining town. Fascinating conversations and observations. I watched the mines in Silverton go from profit to no profit, to closed, and then sealed up forever. I wouldn't buy any stocks in those mines when they were open, due to being told by the "hands" (as they are called) about the true condition and profitability of them. One of the general managers of the biggest of them, which is now sealed, is a good friend of mine. Ask Alan B. about mine stocks. He doesn't own any. My few thousand penny stocks are a gamble, and I know it, but it is a tiny part of my net worth, so a bit of gambling is sort of fun.

The romance, risk, and glorious history of gold mining is splendid, to put it mildly. The ruins of past glory holes, abandoned tram lines, and tailings left in the wake of an exploration, can consume a man's life in exploration and research. Gold mining is one of America's greatest past industries, and I am so glad to know, and have known all about them, in and about Silverton. In foreign lands, where there are few regulations, wages are low, and air pollution is not worried about, it is possible that mines can be profitably operated and gambled upon by shareholders. But not me, because I don't trust foreign publicity, promotions, governments, currencies, abilities, franchise agreements, land titles, or a hundred other things. But then I am a worry wart, so maybe one shouldn't pay attention to my rantings. These columns I write, I repeat, are designed to cause you to think. Protect yourself in any way you think good, but protect yourself. I consider my protection to be what I can hold in my hands, store in my safe, and can get at quickly. Maybe I am simply a Scrooge McDuck who doesn't trust pieces of paper with ink on them, or promises made by someone I don't know, in a place I have never been, for a property I have never seen.

The Federal Reserve Bank of New York holds the world's largest accumulation of monetary gold.

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