Investment Management - Gold Miners and the Price of Gold

28 July 2005

Historically, in an inflationary era (ours is the greatest inflationary expansion in human history, as I understand it), it is wise to withdraw one's assets from the common shares of corporations (stocks), as inflation damages the prospects of most all businesses, and from bonds, as these decline in value as inflation erodes the purchasing power of both the invested capital and the received interest.

What then remains?

Historically, precious metals have been both the wisest and safest investment in inflationary times. Further, we are presently at the cusp of a historic investment opportunity.

Mary Anne and Pamela Aden, based in Costa Rica, have demonstrated that the value of gold mining shares has declined relative to the price of physical gold, in a dramatic 36-year downtrend (http://www.safehaven.com/article-3139.htm). This is despite the run-up in the value of gold to historic highs above $800 per ounce in 1980, and coupled with the subsequent decline in the price of gold associated with a period of financial restraint by the US Federal Reserve Board under the enlightened leadership of Paul Volcker subsequent to 1980.

The value of gold mining shares relative to the price of gold is now on the verge of breaking out of this 36-year negative trend. The implication is that we could sometime soon be entering a very long era of rising gold share values relative to the price of gold. Further, multiple historic factors indicate that the price of gold is set to rise (with expected intermittent setbacks) over the next decade or more, and this trend has been in place since 2001.

While the decisive trend break has not yet occurred, I suspect that we are growing nearer daily to that anticipated historic turning point. Therefore, for those concerned about personal financial security in an uncertain age, investment in the shares of gold mining companies may prove to be a wise long-term choice.

I have provided a number of links on this site for those who wish to pursue such opportunities further. While many other excellent investment opportunities may exist, I think this may prove a relatively secure one in a highly uncertain world.

I will add the caution that gold mining is an extremely difficult business, fraught with untold complications, including political risk, environmental challenges, escalating operating costs, and the inherent uncertainties of mineral exploration and mining. Therefore, one must diversify, and carry out "due diligence" when choosing to invest in the shares of gold mining companies.

The upside, of course, is that the gold miners possess, "in the ground," a resource that is expected to grow in value, perhaps considerably, and very likely more steadily than in the 1970's.

At different times, it will prove advantageous to invest in physical gold, as well as in the shares of gold miners. I advise the reader to familiarize him or herself with the writings of advisers in the area of precious metals to learn more of these "timing" opportunities.

My present view is that at some point over the next several months (up to perhaps 18 months or so), the gold miners will prove the best investment vehicle (relative to physical gold). However, that is my thought for the present time-period only.

A somewhat exciting aspect of where my wife and I presently live is that Northwestern Ontario is a historic gold mining centre, with the world's richest gold mine only a few hours away, in Red Lake, Ontario (the Goldcorp Red Lake Mine), and a number of prospective exploration sites again becoming active in the area surrounding Kenora (we have visited the Amador Gold site near Shoal Lake, and are also following news from Houston Lake Mining, Halo Resources, Cabo Mining Enterprises (now Cabo Drilling) and Nuinsco - all with exploration sites in our area).

Readers may also wish to examine potential investments in other precious metals, for example, silver, platinum, palladium and rhodium. However, I caution that gold has the strongest historic base as a stable store of value in uncertain times.

Disclaimer: I am not an investment advisor. The above is my personal opinion. The reader is advised to conduct his or her own investment research before making any investment decision.

10 August 2008: Also - be sure to read my more recent posts on the topics of precious metals and secular trends, starting here: "Gold's 1980 High – Think $5000 - No $6000 - per Ounce."
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