Miners: The Paper Precious Metals Investment – Jeff Nielson

by Jeff Nielson, Sprott Money:

Regular readers will disregard the current downward trend in precious metals prices. They were already warned, repeatedly, that the supposed “rally” in the precious metals sector this year was a Fake Rally. It was a set-up to position these markets for a crash, timed to coincide (more or less) with a manufactured crash of our bubble markets and already-crippled economies.

However, it was a crash in precious metals markets (the Crash of ’08) which set the stage for the last, real rally in this sector (2009 -11). For various reasons, it will likely be a crash which sets the stage for the Next Rally. Here it is important to note that while the banking crime syndicate can manipulate the price of gold or silver they cannot affect the value of these metals. The longer the banksters pervert the prices of precious metals, the more violent the upward move in gold and silver prices when those prices finally reflect that value.

Gold and silver have value because these metals have universal aesthetic appeal. Because of that quality, and because these metals occur at ideal levels of scarcity/abundance, gold and silver have always been and will always be the best money available to our species.

Gold and silver are eternal stores of value and thus eternal protectors of wealth. These metals are also presently undervalued, to an absurd degree , because of the criminal manipulation of these markets, which has been frequently documented in previous commentaries. The Big Banks and bankers have also confessed to this manipulation.

As Chairman of the Federal Reserve, Alan Greenspan confessed (in official testimony) that Western central banks “stand ready” to manipulate the price of gold, any time the price begins to rise. The Big Banks have already confessed to rigging both the gold fix and the silver fix, but that hasn’t stopped them from continuing to “fix” the fixes. Numerous other forms of price manipulation remain unexposed.

Such sustained, systemic price manipulation has, in turn, produced large supply deficits in both the gold and silver markets. In the case of silver, evidence has emerged suggesting that this market has had a sustained supply deficit for 30 years. It is these supply deficits which ensure there must be an upward revaluation in the price of these metals – to restore equilibrium to these markets. The longer this disequilibrium is maintained, the longer and stronger will be the upward revaluation in price.

For all of these reasons; many investors in gold and silver bullion have a difficult time identifying any other asset class which offers similar security and upside potential, in a time of grave economic uncertainty. We hold bullion as our insurance against currency debasement, economic calamities, and political strife. However, what do investors do with the remainder of their investment portfolio?

What about investors who also want a growth component for their portfolios while still keeping all of their wealth in the precious metals sector? [remove bold face when publishing] The solution to this conundrum can be identified in one, simple phrase: diversify within the sector.

One of the easiest and most effective means of engaging in such precious metals diversification is to build a portfolio of holdings in gold and silver mining companies . While holding (paper) shares in mining companies is inferior in some respects to holding physical bullion, it also offers some advantages:

Leverage
Registered savings plans
Ease in trading

As an innate aspect of their business model, the share price of gold and silver mining companies must always leverage the price of bullion over the long term. A simple hypothetical example will illustrate this principle.

A gold mining company produces gold at a cost of $500/oz, with the price of gold at $1,000, meaning that the mining company realizes a profit of $500/oz. The price of gold then rises to $1,500/oz. For the holder of physical bullion, that person has obtained a 50% increase in the price of their asset (from $1,000 to $1,500). However, for the mining company and its shareholders, the increase in price has doubled its profits margin (from $500 to $1,000 profit per ounce), making the mining company 100% more profitable.

Leverage decreases with high-margin producers and increases with low-margin producers. Referring to the example above, if a second mining company produced gold at a cost of $900/oz, that company would only realize a $100/oz profit with the price of gold at $1,000/oz. However, with the price of gold at $1,500/oz the profit margin of the high-cost producer would increase by a factor of six rather than just doubling, as with the first hypothetical company.

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