Instead of gold or silver bullion, many investors opt for precious metals mining stocks because they normally yield higher percentage increases than gold and silver when metals prices rise. However, investing in precious metals stocks carries risks beyond buying gold or silver bullion.

The risks are many and varied, and sometimes unforeseen problems can send stock prices plummeting, which, of course, is true of all stocks. Management mistakes cause most mishaps. With precious metals and other mining stocks, the sizes and grades of ore deposits can be overestimated or the cost of extracting the ore can be greater than expected, resulting in lower profits or even losses.

Additionally, businesses always struggle with economic downturns, interest rate increases, labor troubles, governmental interventions, and environmental requirements. Increases in energy costs–even energy shortages–could plague some mining companies, notably those operating in Nevada’s famed Carlin Trend.

For disastrous management decisions, Sunshine Mining and Refining Company comes to mind. Once a favorite of silver stock investors, Sunshine traded at $13 in early 1998 on the NYSE. However, by 2000 Sunshine was in Chapter 11, and its stock has traded at less than a nickel on the NASDAQ.

In 1996, Sunshine’s management borrowed $30 million and in 1997 an additional $15 million for development of its West Chance ore body at the Sunshine Mine, after which the company is named. Part of the borrowed funds were used to delineate what the company calls a “world-class” ore body in Argentina.

Although management claims the West Chance efforts were successful, management misjudged cash flow and was unable to meet interest and principal payments on the $45 million. Efforts to refinance were unsuccessful, and the lenders took control of the company and mothballed the famed Sunshine Mine. Shareholders wound up with about 3.6% of the company. Unfortunately, this was not Sunshine’s only brush with disaster.

In 1972, a fire in the Sunshine Mine nearly destroyed the company. While Sunshine’s stock price suffered, the company managed to survive. Now, Sunshine Mining essentially has been taken over by its creditors.

Ashanti Goldfields (Ghana) and Cambior (Canada), two gold producers, also exemplify what can happen to share prices when managements make bad decisions. In early 1996, Ashanti (ASL) traded at $25; in 2000, Ashanti’s stock traded below $1.50. In early 1996, Cambior, traded at $16; in late 2000, Cambior’s stock traded at twenty-five cents.

Both companies got caught up in forward sales, and their balance sheets were severely damaged by margin calls in 1999 when gold rallied from the $250s level to $338 on the announcement that 15 European central banks would limit gold sales and leasing for five years (The Washington Gold Agreement). Gold’s price move caused Ashanti and Cambior to liquidate assets and/or convert loans to equity shares at rates that severely damaged the value of their stocks.

Forward selling remains a threat to other gold mining companies because the amount sold short via forward sales is disproportionate to the size of the gold market. Some estimates have total forward sales equivalent to three to five years of production. One or two small short positions could be unwound with only minor price increases. But, the total position is enormous, and reversing it without the price of gold skyrocketing will be difficult, if not impossible.

Forward selling involves borrowing gold and selling it, and it is done mostly by mining companies because, logically, they should be able to replace the borrowed gold out of future production. Forward selling is profitable because the lenders, primarily central banks, lend with charges (lease rates) of about 1%, sometimes even less. The borrowers sell the gold with effective returns of somewhere between 6% and 10%, depending on the borrower’s credit rating.

If the funds from the sales of the gold are invested in high-grade bonds, the borrowers receive probably 6% to 8%, for a tidy margin of 5% to 7%. However, if the borrowers use the funds in operations, thereby permitting those to forego borrowing in the credit markets, then they effectively receive higher rates, depending on the companies’ credit ratings.

Hundreds of millions of dollars are made via forwarding selling. The central banks earn fees on an otherwise “sterile” asset. The mining companies earn 5% to 9%, and the bullion houses that arrange the central bank loans and handle the gold sales earn huge fees. Forward selling pays off like a broken slot machine–except for gold mining companies’ shareholders. Shareholders lose because forward selling distorts gold’s supply/demand fundamentals and puts downward pressure on the price of gold. However, forward selling is not without its risks.

If the price of gold rises, the lenders want additional margin deposits, which is what hammered Ashanti and Cambior. (Despite the borrowers having millions of ounces of gold in the ground, the central banks require “margin deposits,” usually US treasuries. This works much the same way as margin deposits do on futures and stock exchanges.) It is believed that some bullion houses have even given the central banks guarantees that the borrowed gold will be replaced. If so, then adverse developments in the forward sales arena could force government bailouts, such as was the case with the Fed-engineered rescue of Long-Term Credit Management.

Precious metals stocks are a way to participate in the gold and silver market; however, compared to gold and silver bullion, stocks are risky. No one ever went broke holding gold or silver. The same cannot be said of paper assets. Call the <a rel=”nofollow” onclick=”javascript:_gaq.push(['_trackPageview', '/outgoing/article_exit_link/1694742']);” href=”http://www.usgoldinvestors.com”>Superior Gold Group</a>today and start your account NOW!

Rick Munarriz, Popular Investments advisor from the Motley Fool thinks Google stocks and Gold are the two most popular investments in this age and time. Based on the above facts, a question can be posed: Between a share in Google and 1 once of Gold which is a better investment. As at 4th January 2008, investing in gold was profitable than investing in Google stocks, with 1 once of gold selling at $ 859.19 while I share of Google selling at $657 in the U.S stock market.

Comparisons between investments in precious metals and investments in financial instruments like stock are always a subject of debate in the financial world. In this decade particularly stocks have shown impressive performances in the various stock exchange markets in the world from the FTSE to the Dow Jones. The skyrocketing prices of stocks can be attributed to stable political environment in U.S.A, U.K and other developed countries. In the last seventy years there has been no war or a major political crisis in the major players in the global economy. The legal structures and the financial infrastructure in the developed world over the last seventy years have improved dramatically facilitating the smooth flow of trade in stock exchanges across the world. With all these factors about stocks noted, it still cannot be concluded that stocks are better than gold.

The year was 2008 and the world financial system was greeted by the rudest shock it has ever had. In a span of less than 24 hours, over 5 major stock exchange markets crashed leaving investors with losses running in billions of dollars. In that instance it was very clear that financial markets are the most vulnerable of markets in the world. It was immediately appreciated that the stability and certainty associated with investing in gold cannot be found in investments in stocks and bonds. Stocks are primarily short term investments. The person who buys stocks with the intention of selling them within a short period of time is bound to benefit more than the person who buys stocks for long run intentions. However when it comes to gold, gold is ideal for the investor with short term motives as well as the investor with long run motives. When the market is bullish gold can be purchased and sold at a massive price when the market becomes bearish. In the long run, the prices of gold are stable swinging in the range of $700- $1200 for 1 once of gold.

For the small scale investor, investing in gold entails purchasing gold coins or gold bars. The small scale investor can also own gold bank accounts or purchase gold exchange traded funds. Gold exchange traded funds are usually sold and traded in the major stock exchanges in the world. Large scale investors like commercial banks and central banks also keep more than 20% of their reserves in gold.

Investing in gold is the only way to store wealth over the long run without depreciation in the value of the wealth. Gold is also a profitable tool of investment in the short run.

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This company is within a few days of producing their first revenues from the sale of copper concentrate. They recently signed a deal with RBS Sempra to sell them 100% of their concentrate.

Their current market cap is about $30 million but they expect to have a positive cash flow in their first full year of about $40 million.

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This aired on July 24th, 2009 on CNBC

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regulators fall victim to greed and fear. No matter how much they fiddle

with interest rates, Bob Marley said it best: “One day the bottom will drop

out…”

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In 98 through 2001 I used to play part-time daytrader. You know the story, internet trading, forums, hot tips…

I was doing alright. Even though I only dabbled small time, I was making a little bit of money. The general wisdom of the day was ‘stock markets always go up’.

Then the dot com bubble crashed. I got killed. I was wiped out of just about all the gains I had ever made. I learned a huge lesson from that. You see, it turns out, there is no such thing free lunch.

Wealth is only created through creating things, tangeable things. Shares of derivitives, and stocks, and other goofy things, are just short term foolishness, inventented by those who are intent on seperating “fools from their money”

Imagine the folly of ordinary people, like me, thinking they are going to get wealthy from no labor or effort. There was a time when I thought my 401k was going to be my golden key to living it up in my later years. All I had to do was pump money into it, and it would magically grow…

That seems pretty silly right now.

If I had bought gold when I started daytrading in 1998 at $250 an ounce, I would have done better than anyone else. But, I listened to the “invstment advisors” that told me gold is not an investment, it’s only a hedge against inflation.

Well guess what, I should have ignored the advisors and bought the gold.

I did do one smart thing… I had been buying guns for about the last 18 years. Since I was a little boy, with a father on the police dept, I have sought enjoyment from guns. I have been, both a collector, and an accumulator. My wife has always thought of it as a rotten expensive hobby. But dad always said, “You’ll never loose money on guns, son”.

Image how this silly story turns out… My collection of guns have been my unintended hedge against this economic disaster.

As one of my youtube friends pointed out… All of HIS stocks have gone up 45% over the last quarter… AR-15 Stocks, AK-47 stocks, Colts, Smiths, Remingtons, you name it, all way up…

Gauging from the prices at the gun shops and shows, every gun I own, has dramatically increased in price… Some used guns are commanding prices, higher than even new.

How would you like to buy a brand new car at a dealership, drive it around for 10 or 20 years… Then take it back to the same dealership where he offers you double you paid for it?

Guns… good investment. Get ‘em.

Please comment, rate, and subscribe… Thanks!

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