Metals Investing for the Canny Investor: Ride the Volatile Metal Spot Price or Cut to the Chase and Invest in a Gold Mine?

There is a great deal to be said for trading up from equities and bonds to precious metals.  Stocks and bonds can lose value when some legal, political, or economic trouble threatens.  Arrange to take physical delivery of gold, silver and platinum, however, and the investment will retain value even when atomic Armageddon sends humanity back to the Stone Age.  Let us start by taking a look at trading in these precious metals and getting yourself a piece of a gold mine.

Alluring Gold

Gold (http://www.premiumexploration.com/) So beguiling and tempting since the dawn of recorded history.  Recognized by every civilization for its purity when refined.  Perhaps the only metal that keeps to itself and refuses to alloy.  Captivating as jewelry to Egyptian pharaohs, Nubian kings, Mesopotamian caliphs, Oriental despots, Crusaders, popes and abbots, and Nazi Reichsführers.  So malleable in its pure state, gold is transformed into jewelry, struck as coinage, fashioned into decorative items and statuary to be buried with ancient notables.

Once confiscated from conquered peoples, gold has a habit of disappearing because it can be melted down into bullion and nobody’s the wiser.  Gold then disappears down bank vaults and miser’s caches.

Being 19 times heavier than water, any gold that reaches the earth’s surface and is exposed to the elements is soon eroded, washed down streams and even bays to create gold-rush bonanzas of the last century and a half.  By scientific count, even the gold mined from Africa, Russia, the Philippines and Australia is minuscule in quantity.  And yet, it is amazing how new hoards surface from the poor of India who have accumulated them for centuries.  Or from the devout of Thailand who hammer endless gold leaf onto their gigantic statues of Buddha.

The Price of Gold and the Gold Standard

Gold (http://www.premiumexploration.com/) is one of those commodities where speculative demand, not economic supply and demand rules.  This is so because industrial applications – dentistry, the gold connectors in computer circuit boards and your mobile phone – are far less important than the store of value gold provides.  The precious metal is a currency reserve for nations and a store of value for consumers.

The role of gold as currency reserve and store of value has diminished through time.  Because it never corroded, gold lasted for generations.  The early civilizations in the Fertile Crescent were the first to use gold coinage, contrary to popular belief that modern currency started with the salt given roman troops as “salarium”.  And yet, the ancient Egyptians themselves already had gold ornaments thousands of years before.

Originally, modern nations issued paper bills with the “full faith and backing of the government”.  The United States, for one, promised that holders of US paper dollars could exchange them for an equivalent amount of gold specie anytime they wished.  The first US president to take the nation off the gold standard was Franklin Roosevelt, aiming to follow the example of Great Britain which dropped the gold standard in 1931.  The Great Depression was on and the economy would take another 15 years to get back to anything resembling the pre-Crash economy.  Congress declared citizens could no longer demand payment from the Federal Reserve in gold.  By this simple device, Roosevelt was free to print any amount of currency he needed to keep the big banks open.

That year, the afternoon fix in the London Metals Exchange reported that the price of gold had risen markedly from the international level of $20.65 per ounce,prevalent at least since 1833, to $34.69, a 68% adjustment.  For the next four decades or so, the price stayed at $35 an ounce, providing a world devastated by World War II a measure of financial stability.  And then, President Nixon took the US off the gold standard yet again.  In 1973, gold jumped nearly three-fold to $97.32 an ounce.

Gold never looked back after that.  The average annual price peaked at $612.56 in 1980, corrected to $375.67 in 1982, and has been testing $1,800 an ounce since late 2011.  At those levels, an investor who had predicted such runaway prices could have made a 5,100 percent profit by taking a long position on the 1970 price.

The price of commemorative coins that contain precisely one ounce of gold (e.g. the American Gold Eagle Bullion, the South African Krugerrand and the Canadian Maple Leaf) are similarly in the range of $1,292 to $1,436, about the same as the current spot price.

Getting Yourself a Piece of a Gold Mine

Vancouver-based Premium Exploration Inc. (the Canadian Venture Exchange, CVE:PEM) is a publicly-traded exploration and mine development firm with some very interesting leases in Montana and Idaho.The stock has already corrected severely from about CAD$ 111 in 2011 to just CAD$ 5 cents currently.Having no revenue to speak of, the issue is moribund but awaiting developments.  PEM attests that development costs have been CAD$ 2.5 million to 8.34 million in the recent past.

Reuters reports that the company’s Idaho Gold Project is along a 30-kilometer “trend,” known as the Orogrande Shear Zone (OSZ).  Gold-in-soil and geophysics properties suggest that the “Friday Zone”, Buffalo Gulch, Deadwood, “Monday” and Lucky Strike zones together may have at least 629,000 ounces of indicated potential or 21.5 Mt @ 0.91 g/t of gold with 0.4 g/t cut-off.  In May 2011, Premium Exploration completed seven drill holes within 2,758.3 meters in Friday Zone but no further positive developments were reported.

Premium Exploration (OTC: PMMEF; http://finance.yahoo.com/q?s=PMMEF&ql=1) also has rights to the Chrome Mountain Property within the Stillwater Igneous Complex in South-Central Montana. The property is a 1,473 hectare, platinum group target, practically on top of the neighboring Stillwater Mining Companies East Boulder Mine.

Early Conclusions

By reason of popular recognition and the currently-high spot price, gold is the foremost of the precious metals that give prudent investors a refuge against hyper-inflation, the widespread banking system weakness that plagued the US and Europe since mid-2007, and even another war all over again with Russia and Red China.  Should the indicated reserves of Premium Exploration in Idaho pan out, the stock may well see a return to a $100 stock price.