– Some of you have been
wondering, is it better to invest in the commodity or the company that is making money from
deriving that commodity? So, for example, should you buy gold or should you buy gold mining stocks? Should you buy oil or should you buy oil production companies? Let’s talk about it right now. (techno sound) (coins jingling) (techno sound) It’s no secret that I have
a very optimistic outlook for gold and silver, platinum, precious metals prices across the board. And the actual physical metals I believe are going to increase
by quite a bit in price. But is it more profitable to
then own the mining companies that are mining for
those assets and what are the advantages and
disadvantages of each tactic? And I’ll give you my
disclosure right up front, I own precious metals of most types and I also own companies which mine for those precious metals as well. The way it generally works is this, or the biggest consideration I will say is with a commodity, even
oil, cotton, anything, it’s immune to company specific risks. And what I mean by that is that if there’s a gold mining company and they can make bad business deals, they
could embezzle money, the CEO could suddenly quit, maybe there’s a military global uprising
where they’re operating out of, or they don’t get the
permits that they need and this is all company specific risk. But if you’re talking about
the actual metal itself, gold for example, would
have the same value regardless of any other
kinds of external events. Gold is gold, it will always
be gold, you could buy an ounce of gold here or
in Mongolia or you could pick it up in Venezuela
and it’s the same thing. So you free yourself from all
the company specific risks by owning the commodity itself. Having said that, there
will tend to be bigger gains in the actual companies
that mine for the metal. And I’m not talking about
exploration companies, you guys know that I don’t
like exploration companies I like production
companies, companies that already have gold, for
example, in the ground and they’re digging it
up and selling it, OK? And I’m just using gold
as an example here, it applies to any commodity, silver, platinum, palladium,
even oil, even cotton, coffee, pork bellies, whatever. But when gold prices go up 10 percent, you’re very often going to see that the companies which mine for gold, they increase by a lot
more than 10 percent. And the same goes if it goes up 30 percent that the companies that mine for gold are going to go up by a
lot more than 30 percent. And I have a video that explains to you why that happens, but
what you’re dealing with is that the profit margins
of these companies, perhaps they’re making,
as ridiculous examples, we’ll say they’re making one dollar per ounce of gold that they sell. And then the price of
gold goes up 50 percent. But then how much profit
does that company make? Because their operational costs
are set, they don’t change. All that’s increased
has been their profit. So if gold goes up by so
many dollars per ounce, you’re going to see that
the company’s profits actually increase by hundreds
and hundreds of percent in terms of how much profit
they were making before at the lower price, the
price goes up one percent, 10 percent, whatever and all of a sudden they’re making two, 300
percent more profits. That’s why you’re going
to see bigger swings in the actual companies which
mine for the commodities. However, you do have
to consider that there will always be company specific risk. So if you feel comfortable with a company that you’re invested in, it’s probably a pretty good idea to own those shares, if you’re feeling comfortable that nothing’s going to go wrong. But anything could happen
to any company at any time from terrorism, to war breaking out, to an SEC investigation, to perhaps the entire management team just makes bad business deals or maybe one of them’s an alcoholic and he winds up, you know, driving a van off a cliff, whatever, and there’s always those kinds of risks. So you can sleep better
at night if you own the physical metals and you just, you understand that they’re not going to increase as dramatically, in general, as the actual companies which produce the metals, in most cases. What I do and as I said, by way of disclosure, I own a bit of both. I do own some precious metals companies, but then I also own a lot
of actual precious metals. And it’s all superior to a lot of these paper precious metals. So if you’re going to buy the GLD ETF, what do you really have? You have just a contract,
a piece of paper. You’re dealing in the world of legalese and technicalities, there’s
nothing in your hand, there’s no gold, you don’t own the gold, you own GLD and it’s the ETF, but you don’t actually have an asset. So you have to keep in mind that it depends on each
person, they’re different. I mean, what’s your tolerance level, what kind of risk tolerance do you have? What do you think is going to happen? How do you want to act, where do you want to end up 10 years from now based on how you’re going to invest? That should come into play when you decide should you buy the
physical precious metals, or the actual metals mining companies? And, in general, you’re the only one who can answer that, I can’t tell you. You know, this is all
opinion from my perspective and it’s kind of accurate
information, too, but I’ll say it’s my opinion. You’ve got to be careful of companies if the company goes the wrong way, but they’ll generally
perform better overall than the actual underlying commodities. So, if you only have 1,000
bucks, you choose one and do it and don’t do the other. But if you have a bigger portfolio, then you’re going to
maybe want to diversify in the sense of, not that
I’m a fan of diversification because I am not, but that’s my opinion, don’t take anything I say as
advice, I don’t give advice, but the idea is that
maybe you would want to spread it out a bit and get a little bit of the actual physical
metals and then a little bit of the companies which mine the metals and have a good spread of both of those if it’s possible and
realistic for your situation. And the other one thing
I would sort of mention to have you think about is that when you buy the precious metals they are excessively less liquid than if you just bought
the mining company. Because the mining
company, you could buy it and turn around an hour later
and sell it if you want, then buy it back the next day
and then sell it a week later. If you’re dealing with the
actual physical precious metal, you buy an ounce of gold for example. And there’s also insurance costs and there’s a little
bit of a rip that they take off the top, if the price of gold is 1,300 dollars an ounce they’re going to sell it to you for 1,340 dollars an ounce, depending how much you
buy of it of course. But there are little
markups here and there and there are a lot of problems when it comes time to sell it back. You have to make sure to get a good price, but they’re going to take
a rip on when you buy it and they’re going to take
another rip when you sell it. Just like a stock commission, you know, you pay when you buy it,
you pay when you sell it. So there’s a little bit
of a shred off the top on every time you make a transaction. And it’s a lot harder to
sell your precious metals. If you have a whole bunch of silver coins and you go, OK, I’m going to cash these in because silver’s gone up a lot and then you have to work out who you’re going to sell it to, and make sure that they’re going to buy
it back from you, etc, and there’s all sorts of headaches with that, it’s not as liquid. It can be done, especially
when precious metals start going up a lot in
price, it’s not going to be very hard for you to be
able to sell them back to someone who wants to buy them. Just when you buy precious metals make sure you get five
nines pure precious metals if you can, so 99.999
percent pure of gold, silver, platinum, palladium, whatever. And you want to do that
and that’s very important because a lot of people say,
yeah, we’ll sell you gold, but we’ll do it cheaper,
but you don’t realize that you’re not getting as pure of gold. Or maybe it’s not a
full ounce and they just start acting like it’s a gold coin but it’s less than a one ounce, right? So you have to be very cautious. And personally I’ve bought
precious metals from a couple of banks, I’ve
bought them through goldsilver.com, I have no affiliation, I make no money, you guys
can go buy from there and I don’t get a kickback or anything. So I’m just telling you
that’s one place that I like because they do have really pure metals. And they’ve got a great
reputation and a lot of professionalism, so they
don’t want to ruin that. And they’ve been a pretty good company. There are a few other ones as well, just be careful, you know, you don’t want to be buying gold from that guy who’s got the commercial on TV telling you that he’ll buy your gold, just come in and buy a dishwasher from him or whatever. Always be careful with that stuff, make sure you’re getting
good quality precious metals if you decide to go that route. If you’re trying to look into buying the precious metals mining companies look for producers not explorers, make sure they don’t have
too much forward hedging, like they pre-sell the gold
that they’re going to produce ahead of time just to get the money because they’re desperate now. You want them to be
operating in militarily and politically friendly regions, ones with good infrastructure so they have enough workers, the right
kinds of water rights, they’re getting all the
permitting that they need. It’s a pretty complicated
and involved process but there are really good quality
precious metals companies. There are producing companies
that are spitting out lots of metals and they’re
doing it at a low cost for the production of
it, so they’re making a really good markup or
a good profit potential on each ounce that they sell. And they’ve got great reserves
and you make sure, too, I almost forgot, make sure
that they have a reserve life index of more than 10
years, double digit RLI. Which means that that’s how many years, at the current extraction
rate, will they last until their entire resource runs dry. If they’ve got 100 ounces
of gold in the mine and they’re digging out those 100 ounces, eventually they’re going
to run out of gold. And then the price of the stock usually goes down quite a bit. So make sure that they have
some strong reserve life index and that they keep increasing
that or expanding to it by finding new finds and
developing new mines. I hope that’s helpful. If you don’t agree with me,
if it’s not helpful at all, if you can’t stand it, please click Like. And if you’re tired take a nap, if you’re hungry get something to eat and I’ll see you next time.