Gold and silver are part of a pretty volatile, politically incorrect, and emotional market. It's been said that they both trade on fear of risk in the other currencies that are legally pushed on people around the world.
Unfortunately, a good portion of the analysis about gold is either blindly bullish or blindly bearish. This is the curse of long-term bull and bear markets -- it's very difficult to know who is right about what and who just happen to be riding a bull market without knowing anything about what's going on.
In this article, I'll be responding to a particularly bad article, but it covers gold from an alarmingly common view that gold mining stocks are somehow less risky than other stocks. This isn't just about one article, but about a mentality that needs to be understood and responded to.
Bad Advice From Good People
One of the worst articles I have read this year about gold was published by a group that I really respect in general -- Casey Research. This shouldn't be seen as me bashing the company or author -- I'm not. But I do think the advice is horrible, and considering how many gold and silver investors read Casey Research articles, a response is simply needed.
The title of the article is "How to Invest Your Mother's Money". The answer? Gold mining stocks. The investment is labeled "low risk" in the description, and includes the following words:
"I have a strategy that will both reduce risk and hand us big gains when our industry turns around. And it can be summed up in one phrase: Buy the next big producer before it becomes one. Buying gold stocks certainly isn't risk-free. Yet we can minimize the risk and capture higher returns by selecting companies that are on track for big growth."
It sounds balanced, but it simply isn't, and it's horribly risky.
Gold Stocks Aren't Low Risk, Sorry
I don't own any gold stocks because I'm cautious and boring. Gold exposure comes in different ways, and the simplest way to take advantage of what one believes is a long-term bull market is just physical gold -- actual physical stuff, not even GLD or silver via SLV.
Buying gold miners takes on a whole new level of risks, including management, political pressures, shareholder issues, disappointing news about assets not holding as much gold as thought, plus just good old exposure to the ups and downs of the gold market.
And no, just because one is trying to pick a stock on track for growth, because that's far easier said than done, the market will typically price a lot of known or predicted future growth in, and all the above risks don't magically disappear.
What to Do Instead?
There are plenty of alternatives to dumping money into gold stocks like Randgold (GOLD), Barrick (ABX), Market Vectors Gold Miners ETF GDX, Goldcorp (GG), or Newmont Mining (NEM). This doesn't mean these are bad investments -- they can certainly be part of a well balanced portfolio.
The most notable alternative for a low-risk portfolio would be the permanent portfolio. It has exposure to cash, bonds, gold, and stocks. It's done well over the last decade and hasn't lost money since 1994. That's a low-risk way to get exposure to gold, because 25% of the portfolio is golden.
In the end, lowering risk isn't about just picking one thing and dumping money into it -- it's about balance, rebalancing, and diversifying.
I Must Hate Gold, Right?
I don't hate gold, I love it. I probably like it a little too much, because emotional attachment is generally a bad idea when discussing and analyzing assets, because emotions can be blinding.
Still, just because I like something doesn't mean I'll bet my mother's life savings on it. Not even remotely close. And I would absolutely never promise someone that gold mining stocks could ever be a "low risk" way of investing, especially not if I was selling a subscription to my gold mining stock newsletter.
This is especially true, because the future of gold could include some strong crashes before we see the gold mania so many are expecting -- never underestimate the power of politicians to delay the inevitable.
That's bad form, bad advice, and hopefully the great folks at Casey Research will keep publishing great content like they have in the past, and fewer articles like this one.