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Gold and silver are still the best gold and silver investments.

December 20, 2010 – It is human nature to want to make good things better, and that is the hook that brokers use to lure investors into gold and silver mines. On the surface it seems reasonable that such investments can multiply the growth in the metals’ price, but in reality the multiplying factor is considerably less than what is suggested. And the risks involved outweigh any potential gains.

Explanations of how mine investment multiplies growth in gold and silver prices are always qualified with something like “assuming everything else remains constant.” In mining, that is rarely, if ever, the case. Unlike most other industries, mining operations are closed ended, meaning they have a finite life during which all capital investment must be recouped and any profit must be realized. Most investors are comfortable reviewing the financials of familiar industries but they are confounded by those of mines.

The picture is further clouded by assessing the value of a mine, and thus its shares. The process involves taking core samples of a site and extrapolating what amounts to a grain of sand to describe a beach. And because prospectors are seeking funding for the operation, errors tend towards the high side of potential yield. Also, movement in gold prices are already accounted for in the forecasts and therefore the shares, countering the multiplying effect. Finally, profits are often very difficult to fix because operating expenses are dependent on local currency while revenues are dependent on the price of gold. With many mines located in underdeveloped nations, profits can vary wildly and hyperinflation can wipe them out completely.

Political instability, quality of management, technical complications, and a host of other potential risks add up to making mines a poor bet for gold and silver investments. The best bet is – and always will be – plain old gold and silver.

Shannon King

Senior Staff Writer – GoldSilver.org

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