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Wednesday, March 9, 2011


Gold Stater Comment: Gold shares can (and do) lag bullion in a bull market.

If you read the comments of gold gurus you find almost to a man the idea that at some point, in a true bull market gold shares must explode upward and lead the price of bullion. Gold shares provide true "leverage" in a gold bull market they claim.

And they are right. Which is exactly why, in an era of deleveraging gold shares will always lag bullion.

As I've pointed out many times, Leverage is synonymous with Risk. What are the risks associated with gold shares? Let me count the ways:

A) Fraud - accounting fraud, fraud in the mining reports, fraud in representation of the quality of mines.

B) Mismanagement. Poor acquisitions, bad hedging strategies, poor drilling strategies, poor marketing strategies.

C) Dilution. Gold companies can issue stock in unlimited quantities diluting whatever stock you hold.

D) Stock multiple contraction that brings down the value of all stocks leading to:

E) Broad market collapse that has investors selling all stocks.

The fact is the bull market is 10 years old. While Bullion has quintupled, the leading gold stock NEM has tripled. The same is true for the broad gold stock market. (You can always find a junior gold stock that has soared, while most have collapsed to Zero)

Many analysts point to the great depression when gold stocks did in fact soar. But that was because there was a bullion confiscation.

Could that happen again? Unlikely, because the bullion confiscation occurred back then because the Treasury had issued sixty times as many Demand Notes (dollars) that were convertible into bullion, as the Fed had bullion on hand to redeem those notes. They had to confiscate gold or there would have been a run on the Fed.

Now Demand Notes (dollars) are convertible into NOTHING. So there's not need for a bullion confiscation.

The fact is that bull markets occur for different reasons. This time it is because investors are losing faith in PAPER ASSETS. it stands to reason that they will not have great faith even in PAPER GOLD ASSETS.

I'm not saying don't buy gold shares. Many issues will perform well. But make your core holdings bullion.

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