{"id":3168,"date":"2015-06-03T14:36:44","date_gmt":"2015-06-03T18:36:44","guid":{"rendered":"http:\/\/www.silver-investor.com\/blog\/?p=3168"},"modified":"2018-06-10T10:54:51","modified_gmt":"2018-06-10T10:54:51","slug":"why-physical-precious-metals-are-safer-than-mining-stocks","status":"publish","type":"post","link":"https:\/\/www.themorganreport.com\/blog\/why-physical-precious-metals-are-safer-than-mining-stocks\/","title":{"rendered":"Why Physical Precious Metals Are Safer than Mining Stocks"},"content":{"rendered":"

 
\nWhy Physical Precious Metals Are Safer than Mining Stocks
\nBy David Smith of Money Metals Exchange<\/strong>
\nWhen investors first become interested in the precious metals, they may be drawn to invest in mining stocks.
\nThe allure of making several times your money on an exploration company that hits a big strike can be tempting. Yes, a gold-silver producer (or an exploration stock) can sport larger gains during a bull run than the price of the underlying metal itself. This is part of a trade-off, because mining operations face all sorts of unique risks.
\nWhen you hold physical gold and silver<\/a>, the price of the metal must go higher than what you paid for you to have profits on paper. And those profits would be no more or less than the actual rise in metals.
\nMining Companies Face Management Risk, Political Risk, and More<\/strong>
\n

\"Tailings<\/a>
Tailings Dam Failure \u2013 Photo Courtesy of Cariboo
Regional District Emergency Operations Centre
<\/figcaption><\/figure>A mining company\u2019s stock price can be hurt by a management, which pays itself too much or doesn\u2019t control operating costs. Natural disasters like floods, rock falls, or worker fatalities inside a mineshaft can cut into profits (and shareholder confidence).
\nUnexpected tax increases like the ones Mexico imposed last year on miners have been hard on producers. And it\u2019s even more difficult for explorers, who by definition don\u2019t show a profit until they either sell a deposit or somehow put it into production.
\nAnd mining companies face other political risks as well.
\nFor example, Argentina\u2019s economic mismanagement has resulted in bond defaults, currency exchange controls, and high inflation \u2013 all of which have placed headwinds in the way of mining companies who would otherwise be making a significant profit.
\nThese factors can be a drag on the share price of the companies you hold \u2013 even if the price of gold and silver<\/a> is rising at a fast clip.
\nLast year, a mining company in British Columbia had a tailings dam failure (the holding pond where mineral residue from the metals\u2019 milling process is stored). A large opening dumped highly toxic waste into nearby streams and pristine lakes.
\nThe accident posed a pollution risk to one of North America\u2019s most prolific salmon streams. This copper-gold operation, a $17 dollar stock, lost 60% of its share value in just two days.<\/u>
\nIn another example, a mining company in Brazil, judged to have one of the richest deposits of PGMs (platinum and palladium) in the world, ran into construction cost overruns for its underground mine. The stock declined 99% from its high and has essentially gone bankrupt.
\nHigher Metals Prices Do Not Mean Higher Mining Stock Prices<\/strong>
\n\"Image2\"<\/a>One of Canada\u2019s few platinum group metals producers \u2013 albeit a high-cost operation \u2013 has dropped from $12\/share to around 0.25 cents over the past 8 years, even as the price for palladium, its primary production metal, soared from $200 to a 12-year high of almost $900 per ounce! Even now, palladium trades near $800 an ounce.
\nA massive gold-silver-copper deposit which straddles the borders of Argentina and Chile and was supposed to be in operation by now, is in a state of \u201ccare and maintenance\u201d while competing local interests decide whether or not it can be operated in an environmentally sustainable manner. The project owners are reportedly in the hole to the tune of $6-8 billion with no production in sight.
\nThe list goes on and includes several major projects, which were simply nationalized (stolen) by hostile governments, off times after the owners had expended millions of dollars in exploration and development. You can guess what this sort of thing does to a company\u2019s share price.
\nTo be fair, it is possible to make money \u2013 sometimes a lot of it \u2013 with a well-run, profitable metals\u2019 producer. But since 2006, mining shares as a group have actually underperformed metals\u2019 prices.
\nAs the next major bull leg gets underway into 2015-16, these stocks could begin to over-perform once again. Or you might have the good fortune of owning shares in a little-known exploration company that makes a big strike. One of these \u201clottery tickets\u201d can return 10 \u2013 20 times your money. But with less than one in 1,000 properties ever advancing to production stage, the odds against an investor are long indeed.
\nBuy the Physical Metal FIRST… Only Then Should You Consider Mining Stocks<\/strong>
\n\"Image3\"<\/a>David Morgan of The Morgan Report<\/a> has long counseled investors to buy physical metal first. After that, if you want to accept some added risk, consider picking up a few established producers and \u201cstreamers\u201d \u2013 companies who help finance a producer in exchange for receiving some of its production stream later at a deep discount.
\nThen, if you are willing to take even more risk, consider placing a small amount of money you can afford to lose into a long-shot exploration play. (For those who are interested, The Morgan Report\u2019s Asset Allocation Table is a great place to start looking for these kinds of stocks.)
\nWhen you buy physical precious metals \u2013 silver, gold, platinum, or palladium \u2013 the same suggestions and caveats that bear repeating apply:<\/p>\n