How to Diversify Your Gold Stock Exposure - 3 Quick Steps

Are you leveraged up to your ears in gold stocks, waiting for the Greece Bailout Plan to ignite a wave of money printing and hyperinflation?

It's a fair position to have.  But before you buy another junior miner with development in Nevada, or Argentina, or wherever, how about a quick once over your portfolio to make sure your gold stock holdings are geographically diversified?

For 3 key tips on how to do this, we turn to our Gold Stock Guru, Jeff Clark...

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By Jeff Clark, Senior Editor, Casey’s Gold & Resource Report and author of this new FREE Special Report: ‘When Is the Right Time to Buy Gold?’

Jerry’s broker wrinkled his nose in disapproval.

“I don’t like it, Jerry,” he said in a grave tone, as if scolding a misbehaving child. “Why don’t you invest in the gold company I told you about?”

Jerry thought this might happen. His broker was traditional, conventional, and only pushed company products. And the man knew embarrassingly little about gold stocks.

“Because I want to diversify my gold stocks. There’s a lot of gold around the world. And this company is capitalizing on that.”

The broker was shaking his head. “The company I recommend is right here in North America, Jerry. There’s no need to buy one with mines halfway around the world. Besides, we don’t know what the politics are over there.”

Disappointed with the mainstream advice, Jerry left and called another broker. This one specialized in resource stocks.

Jerry explained his reasoning for wanting to buy this particular gold stock. The broker listened patiently, but was so quiet Jerry thought maybe he was cool on the idea.

“Politics in general are somewhat unpredictable there, but less so for mining,” the broker explained. “In fact, they just lowered their tax rate on mining companies. The company he’s recommending is well run, but it’s already a mature producer with a huge market cap, and has no exposure to these other parts of the world you’re looking at.”

Jerry felt comfortable with his original hunch after finishing his discussion with the new broker. He put some of his money into the stock of the younger gold producer, with assets on the other side of the globe.

A year later, Jerry ran into his old broker at a local bar. The man smirked when he spotted Jerry. He was obviously unhappy about losing Jerry’s account and apparently wanted to rub it in.

“You should’ve bought that gold stock I recommended last year,” the broker said smugly. “It’s up 43%.”

“Good for you,” Jerry replied, “But that stock I told you about is up 75%.”

The broker’s smile wilted, and confusion clouded his expression. He spoke tentatively, not sure he wanted to hear the answer. “How’d you know to look at companies there?”

“Lots of reasons,” Jerry replied. “But for starters, there’s lots of gold over there.”

Gold Around the Globe

The keyword is geographical diversification. And while no single investment variable can guarantee profits, geographical diversification does add a layer of safety and enhanced profit potential that investing solely in companies located in one country or region cannot offer.
Jerry’s broker, like many in the U.S. who don’t know much about the gold industry, are uncomfortable investing in smaller producers or in faraway regions. And yet, most of the gold is currently being dug up in Africa, South America, China, and Oceania. North America accounts for only 16.3% of total gold production.

Further, of the 15 largest gold deposits in the world, only five are in the U.S., Canada, or Mexico. Many countries where gold has been traditionally mined, such as South Africa and the U.S., are experiencing production declines, while other areas, like South America and China, are just now starting to rev up.

►First Step to Geographical Diversification: Make sure you have global exposure. If you’re only investing in companies that have deposits where you have cell phone coverage, you’re greatly limiting your profit potential. Don’t ignore a region just because it’s an unfamiliar culture or doesn’t speak your language.

“Can We Tax That?”

Don’t get me started on politicians and NGO’s [Non-Governmental Organizations] monkey-wrenching the free market’s wheels. Hey, I want mining companies to keep cyanide out of the drinking water and for local communities to see some economic benefits as much as the next guy. In point of fact, most modern mining efforts run clean operations and provide good-paying jobs to local residents. But more often than not, greed is the motivation behind the politics – governments want revenue, and mining companies can be an easy target.

As gold and silver mining stock investors, it is imperative we understand and monitor the politics of any region where our companies operate. And not just the federal or provincial authorities; we must be alert to local community sentiment towards mining as well. Just because federal or state regulations are supportive doesn’t prevent a local group from agitating against a development.

And laws affecting miners can change at any time, and suddenly, making the political climate tricky to judge and planning for mining companies and investors difficult. Would it be safe for me to assume, for example, that your tax planning of 10 years ago has had to be modified? The same applies with mining.

A stable political jurisdiction today can be tomorrow’s iffy hot bed of discontent. For example, the U.S. is consistently rated one of the lowest-risk countries in Resource Stocks’ yearly World Risk Survey. Yet, Washington politicians have drafted a bill that, if passed, would adversely affect mining in the U.S. While nothing is imminent, and we don’t expect it would pass in its current form, we can’t say that mining in the U.S. will never have any risk, and it is something we have to keep an eye on at all times.

On the other hand, eight of the world’s 10 highest-risk jurisdictions are in Africa, where Randgold has all of its operations. However, they mostly operate in countries where the politics are more stable, reducing their political risk to a tolerable and more predictable level.


The lesson: we cannot make assumptions about politics and mining based on geography.

So what’s the solution?

►Second Step to Geographical Diversification: Don’t be overexposed to any single government. In today’s political climate, and for the foreseeable future, there is no such thing as a 100% risk-free country. Politicians and political whims come and go, so risk will always be fluid. And we think gold mining could become an increasingly attractive target as the gold price rises and international economies struggle.


Of course, there are areas we’d simply avoid. Of the 15 largest gold deposits mentioned above, we wouldn’t consider investing in six of them solely because of the host country’s politics. We want diversification but not at the expense of unnecessary risk.

The One-Company Rule

Okay, perfect politics is a fairytale, so is there a way to minimize a downdraft in your portfolio if a government makes a negative move against one of your company’s mines, or mining in general?


There is.

►Third Step to Geographical Diversification: Own a sufficient number of companies. Having several eggs in many baskets will prevent your portfolio from suffering a Humpty Dumpty event if the government where your mining stocks are concentrated decides to follow, for example, Venezuela’s lead. Country risk can be offset with the right mix of stocks. That’s why we don’t just buy Barrick and say, “We’re diversified!”

So... is your gold stock portfolio globalized? Do you have too much exposure to any one government? And do you own enough gold stocks so that bad news with any one company doesn’t sink your portfolio?

The easiest way to diversify, of course, is to buy a mutual fund (see the table below for our top picks). But we think the mining stocks with the greatest profit potential are those newer producers with operations in regions seeing increasing production and greater exploration prospects.

“Buy low, sell high” is easier said than done. Is there a particularly good time to buy gold? Are there patterns in gold’s market fluctuations? Find out everything you need to know in our FREE Special Report How Do I Know When to Buy? Click here to read it right now.

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Signs of Gold Approaching the "Mania" Stage

Investment manias share some key traits in common. When they get going, they REALLY get going (a la NASDAQ 1999). People believe that "this time it's different" (housing bubble anyone?).

And - they are certainly equal opportunity. From tulips, to spices...from houses, to tech stocks...manias are always looking for the next asset class to party with.

So when gearing your investments - one sure thing you can do is throw out the sweethearts of yesterday. US stocks, tech stocks, housing - they've all had their day in the sun recently. Unlikely to repeat anytime soon.

Our beat is commodities because we think, even with their recent resurgence, that this party is only just getting started. Hard assets were ignored for too long, and they're going to come back in a big way.

Gold has been mounting a steady comeback since 2001, posting 9 consecutive years to appreciation versus the US dollar. But wait until this rager really starts to swing into gear - once the mainstream investment world gets its hooks into gold, us "early adopters" will see our gold investments doing moonshots.

And there are already signs that Wall Street, and even Main Street, are starting to catch onto gold. Read on for Jeff Clark's take regarding gold's sudden mainstream appeal...

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Tupperware and ATMs– Gold Goes Mainstream

By Jeff Clark, Editor, BIG GOLD

Are we there yet? Are we there yet? We gold bugs are like little kids on a trip to the zoo; we just can’t wait to get there. “There” being the elusive point in time when the gold mania (no, make that Gold Mania) hits and everyone and their cat will want to invest in the yellow metal. Which of course will propel its price to dizzying heights. $1,500… $2,000… $5,000 an ounce – the sky’s the limit. At least that’s how the theory goes.

But it’s not just a theory anymore: in the past year, we’ve been seeing unmistakable signs that gold indeed may be going mainstream.

For example, we have always said that when the Mania phase of this gold bull market really got underway, mobs would break down the doors of pawn shops and coin dealers in order to get their fill of the yellow metal.

While most pawn shops’ doors are still intact, that trend seems to have already begun. In August 2008, the U.S. Mint temporarily suspended sales of the one-ounce American Gold Eagle and in September of the American Buffalo coin, because it couldn’t keep up with customer demand.

In December, bullion dealers from Johannesburg to New York City were starting to run out of gold coins when investors caught in the economic downturn scrambled to get into safe-haven assets. The sudden “gold rush” was so extreme that large coin dealers posted disclaimers on their websites that their customers should expect delivery times of a month or more.

According to the World Gold Council, in the first quarter of 2009, “the biggest source of growth in demand for gold was investment. Identifiable investment demand reached 595.9 tonnes in Q1, up 248% from 171.3 tonnes in Q1 2008.”

At the same time, there is a counter-trend in motion: cash-strapped Americans are selling their scrap gold like there’s no tomorrow. All over the country, housewives throw Tupperware-style parties to sell their gold jewelry by the ounce, often at a steep discount to market price. And businesses like cash4gold.com – which, by the way, we do not recommend – are popping up like mushrooms after a summer rain.

But even Joe the Plumber may soon be enticed to turn from seller to buyer. Even if he never sets foot into a coin store, he’ll be able to get his share of gold – in easily affordable, and portable, slices. And he won’t have to look any further than his nearest airport, bus or railway station.

A German company has come up with a brand-new marketing concept for the yellow metal: shop for gold while you wait.

Asset management company TG-Gold-Super-Markt is planning to set up 500 ATMs at strategic locations all over Germany. The machines will distribute one-gram (0.0353 oz) mini-bars of gold, about the size and thickness of a child’s fingernail. The tiny gold pieces will cost 31 euros – around US$44 – which includes a hefty 30% markup to spot.

Thomas Geissler, chief executive of TG-Gold-Super-Markt, told Reuters that this new way of selling bullion “is an appetizer for a strategic investment in precious metals. Gold is an asset everyone should have, between 5 and 15 of your liquid assets in physical gold.”

Even though Geissler admitted that “In absolute numbers, the demand for physical gold is still tiny,” he sees a very bright future for the yellow metal. “[In] relative terms, the growth is explosive,” he noted, “inquiries have been doubling every six months.”

Are gold ATMs the go-to “gold mine” of the future? While we wouldn’t necessarily bet on it, Geissler is. And the fact that he thinks it a lucrative enough business to set them up is no doubt encouraging. It’s moves like these that we think we’ll see more of as gold becomes increasingly popular. The countdown for the moon shot is on.

As you may know, the BIG GOLD editors go even further than Thomas Geissler: we recommend that you hold up to 33% of your overall portfolio in physical gold, 33% in cash, and 33% in select investments. One of those investments may be one you’ve never heard of before. Yet it has given our subscribers 54% returns in 2008 – at the same time the common stock market was plummeting. Read our brand-new report here

How Do Gold Stocks Perform in Deflationary Depressions?

Let's take a stroll down Great Depression memory lane to find out what would happen if, in fact, we do slip into a deflationary depression. Would our gold stocks get trashed?

It's important to consider all the possible scenarios that could unfold...since it seems like we're heading for, or already in, a depression, we now need to figure out if it will be inflationary, or deflationary. And then, which investments will perform well in each environment...with the perfect scenario being one that would perform well no matter which way the money scales tip.

Do gold stocks fit the bill? Read on to find out!

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Gold Stocks in a Depression

By Jeff Clark, Editor, BIG GOLD

What if deflation wins?

While we think the odds are strongly stacked against it, particularly given the government’s furious pace of money printing, the prudent investor understands – and respects – the time-tested adage, “Nothing is guaranteed.” So while our chips sit squarely on the spot marked “inflation,” what will happen to gold stocks if we’re wrong?

The Great Depression Speaks

The most notable example of what happens to gold stocks in a prolonged deflationary environment is the Great Depression. However, the United States was on a gold standard at the time, so miners had a guaranteed selling price – which was a good thing for them, because their operating costs were plummeting. So the comparability isn’t perfect, but let’s see what we can learn.

When the stock market crashed in 1929, gold stocks were part of the general wreckage (sound familiar?). The market then rallied and recovered almost 50% of its losses by April 1930, with gold shares again tagging along. It’s what happened next that gives us our first clue about deflation’s effect.

When the bear market resumed in the summer of 1930, all securities sold off again – except gold stocks. Gold shares stayed basically flat until early 1931, when they boarded the elevator and headed for the penthouse.

Let’s look at how shares of Homestake Mining, the largest gold miner in the U.S. at the time, and Dome Mines, Canada’s senior producer, performed during the Great Depression.

And the chart doesn’t show that you could have bought both stocks at half their 1929 price five years earlier, which would have led to gains of around 1,000%. And get this: both companies paid healthy and rising dividends as the depression wore on; Homestake’s dividend went from $7 to $15 per share, and Dome’s from $1 to $1.80.

Yes, volatility was high in the gold stocks throughout the depression, with occasional wild price swings, but after the 1929 crash most of the volatility was to the upside.

The bottom line is that the two largest gold producers – during a time of soup lines and falling standards of living – handed investors five and six times their money in four years.

From Homestake’s chart, you get a clear picture of what the stock did compared to the market as a whole:

You’ll notice the large spike down in both Homestake and the Dow during the 1929 crash... but then look at Homestake’s recovery immediately afterward, returning close to its old high. This is eerily similar to our recent pattern: our stocks sold off violently last October but have since doubled or more from their bottoms.

You’ll then notice that Homestake took almost two years to exceed its old high, but once it broke out, it was off to the races. The stock doubled four times in five years during a seven-year run to its peak after the ’29 crash.

The conclusion? If history is any guide, gold stocks can hold their own against deflation. And they could profit tremendously if the demand for gold as a safe haven continues to grow.

Gold vs. Deflation

On April 5, 1933, President Roosevelt issued an executive order forcing delivery (confiscation) of gold owned by private citizens to the government in exchange for compensation at the fixed price of $20.67/oz. And less than nine months later, he raised the gold price to $35, effectively diluting the dollar in every wallet 41% overnight and swindling everyone who had turned in his gold.

We don’t know exactly what an untethered gold price would have done during the depression, but given its distinction in history as a store of value, it’s likely to retain its purchasing power in a deflationary setting regardless of its nominal price. In other words, while the price of gold might not rise, or could even fall, your best protection is still gold.

But with this said, the overriding concern is that in a fiat system, any deflation will be met with an inflationary overreaction (as we’re seeing). And the worse the deflation, the more extreme the overreaction will be.

It’s for this reason that the editors of BIG GOLD urge you to own physical gold, in your possession and under your control, given its reliability as a store of value in both inflationary and deflationary environments. If you have less than our recommended one-third of your investable assets in some form of gold, check around for places to buy gold coins and bars at good premiums.

The Silver Lining

For those with an inclination toward silver, our research points to clear signs that silver is increasingly being viewed as a store of value and not just as an industrial metal.

Here’s a comparison of silver’s performance vs. base metals over the past six months (10-1-08 through 3-31-09), which includes last fall’s meltdown:

Silver +6.7%
Copper -36%
Lead -18%
Aluminum -35%
Nickel -25%
Zinc -13%
GFMS Index* -54%

[*Based on the average equally weighted settlement price for aluminum, copper, lead, nickel, tin, and zinc.]

If silver were viewed solely as an industrial metal, the price would be off sharply.

This doesn’t mean we think silver or silver stocks can’t go temporarily lower from here, but rather that the demand for silver as a store of value metal will be growing.

Bottom line: Whether we’re served debilitating deflation or insidious inflation, holding gold (and silver), along with an appropriate allocation of precious metals stocks, offers us both a fort for protection and a canon for profit.

Buying physical gold and silver as safe-harbor assets is for many investors a no-brainer at this point. But only a few have heard of another prudent gold investment – one that has gone up more than 50% in 2008, at the exact same time when the overall stock market bombed. You don’t want to miss out on owning this “48 Karat Gold” stock… click here to learn more.