Tuesday, June 22, 2010

Step-Watching In The Junior Exploration Sector

Putting money into gold exploration stocks is hazardous, particularly since more than 90% of them will never result in a mine. Kevin McElroy suggests this simple metal sieve to keep from being burned: instead of making a list of reasons why a particular exploration stock should be owned, try coming up with points itemizing why it shouldn't be.
As a resource investor especially, you shouldn’t just fear the unknown, you should avoid it. It’s vital to do your due-diligence when it comes to gold miners, especially. You’ve heard me say it before, and Mark Twain says it best: a gold mine is “a hole in the ground owned by a liar."

So if you can’t find easily verifiable information about a gold company’s deposit location, or if you find information that gives you pause, then you have the easy decision to keep your powder dry for another day.

As a gold investor in particular, you have to be skeptical. You should be looking for reasons NOT to own a company, rather than clinging to reasons for owning it. It’s easy to get wrapped up in fancy graphics and exciting press releases from gold companies that appear to be on the up-and-up. But that’s the whole point of those graphics and press releases - to build excitement about the company. Most gold mining executives make their bread and butter from stock options and share appreciation, not gold mining.
Later, he focuses on location and political risk by panning a stock whose property is in Laos. The government there is too authoritarian and corrupt, McElroy concludes, for the deposit to be safe.

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