In this article I will share my rationale for owning gold and silver mining stocks in my portfolio.
What are gold and silver mining stocks?
A gold mining company locates gold and mines it out of the ground. Just like Apple owns each iPhone it manufactures, gold mining companies own the gold they mine from the ground.
When you own a gold mining stock, you own part of the company.
When you own a gold mining stock, you do not own physical gold; although the company has physical gold in its assets.
If you want to own physical gold, then don’t buy gold mining stocks.
Gold mining stocks are not a safe haven. They are highly speculative assets that come with lots of risks.
You should always read the Key Investor Information Document (KIID) to get a better understanding of risk, all funds have this.
Here is part of the risk/reward profile for LF Ruffer Gold fund:
The risk level is 7, meaning this is the most riskiest investments you can make.
Gold mining companies may also mine other commodities such as silver or nickel, but are primarily focused on gold. You can apply the above information to silver mining stocks.
Why are gold mining stocks in my portfolio?
I first added gold and silver mining stocks to my portfolio in 2017, and have been adding ever since.
I added them for a few reasons, such as:
- gold mining market correlate inversely with the rest of my stocks (hedge)
- they were in the middle of a bear market and over 50% off their all-time highs (cheap)
- gold has reached a bottom and it was starting to enter a new bull market (the asset it mines is increasing in price)
- gold mining sector was in bear market from 2009- 2017, businesses had to streamline to be more efficient (businesses run more profitable as a result)
- stock market rally bull market was coming to an end (opinion)
From 2016 the bulk of my equity holdings were increasing over time, and while that was great, I had this feeling in my stomach that at any moment someone would pull the rug from under my feet.
I wanted to take these profits and invest it somewhere else, where I can get a find a better risk/reward for my needs.
I asked my self:
Which sectors have the ability to perform well during a recession?
That’s when I came across gold and silver mining stocks.
During the financial crash of 2008, gold and silver mining stocks broke into a bull market, reaching all-time highs before retracing into a nine-year bear market from 2012-2020 when the economy got back on track.
Historically, gold and silver increase in value during recessions as investors seek safe-havens over risk-on equities.
Here is the gold price versus GBP for the last 20 years:
Here is the silver price versus GBP for the last 20 years:
There’s a saying in the investment world that history has a way of repeating itself in the market.
History repeats itself first as a farce, then as a tragedy.Karl Marx – philosopher, economist, historian
That’s when I had to make a decision with my money.
Do I take a RISK on gold and silver mining stocks which are preforming poorly, or do I keep adding to my best-performing stocks?
Here is the performance of my best Tech fund:
Performance of gold mining fund:
Performance of silver mining fund:
You can see the tech fund crushes both the gold and silver mining funds in terms of annual returns during the four years recorded, and was on track to do much better.
Everyone in the world has heard the term:
Buy low, sell high.
Both the gold and silver funds were off their all-time highs and in a bear market.
If my inkling comes true that there is a recession due in the coming years, and gold and silver increases in price like in 2008, then gold and silver mining stocks should follow suit and I could stand to profit.
Of course, if I am wrong, I would lose money.
I weighed the risk to reward based on what I was willing to lose in order to gain, and allocated a small percentage of my portfolio to gold mining stocks and silver mining stocks, with the plan going forward to increase my holdings every few months.
What is my plan with my silver and gold mining stocks?
I was not expecting any immediate return with gold mining stocks, and was fine with the market going sideways for years or even sliding lower (which they did end up doing).
My plan was to wait for a recession to start, then assess how my fund was doing and either hold if my theory came true or sell if my idea turned out to be false.
In the week starting March 9th, 2020, when the market went into free-fall due to fears of a pandemic, this should have been the time for my gold and silver mining stocks to shine, right?
My gold and silver mining stocks got absolutely rekt:
Do you see that big red candle? That was my hopes and dreams being crushed when my funds dropped like a stone.
I spent the next few days trying to figure out what happened, and whether my idea of gold and silver miners rallying in a bear market was incorrect, and if I needed to cut my losses.
Fear and great beats market fundamentals in the short term.Harvie Singh (if nobody said it before me?)
Due to the COVID-19 panic, I learned that retail investors and institutional investors liquidated their equity holdings for cash.
Cash rules everything around me. C.R.E.A.M. get the money— dollar dollar bill, yo.Wu-Tang Clan
Cash is king in terms of uncertainty.
Gold mining stocks are highly speculative. They are not a low-risk investment. They don’t return much of a dividend yield, and for some investors they were the first stocks to sell when in panic mode.
When I logged into my broker account and a RED number almost approaching five figures next to my gold and silver mining stocks, I wanted to close my position and take the huge hit.
That would be better than being in fear of it going down even more.
I was thinking out of fear and not logic.
When you let the former control your investment decisions, you’ll often end up losing money.
The fundamentals for buying gold and silver mining stocks did not change. In fact, they got better (lower oil prices make operating costs cheaper). The only thing that changed was the price.
We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.– Warren Buffett
I quickly learned that gold mining stocks also had a huge drop in 2008 (see the GDX graph above) due to panic-selling before reaching all-time highs in the years to come.
As they say, history tends to repeat itself.
I ended up listening to Warren and buying, I’m so glad I took that leap of faith as they have since hit ATH.
The experience has taught me a lot as a retail investor, which is to have a plan and stick to it. Only adjust your plan if the fundamentals change – not the price.
If you don’t have a plan, then you’ll sell in these times due to fear.
Only when the tide goes out do you discover who’s been swimming naked.Warren Buffet
It appears that the bull market for these mining stocks started a little after recession fears. I will follow the market closely and start closing out some of my positions over time.
How do I find the best gold and silver mining stocks?
You’ll have to do your own research to find the best gold and silver mining stocks. I suggest speaking to a specialist in your local area, and not to take anything in this article as advice – it’s purely for entertainment purposes only.
I own a gold fund where a fund manager picks what he or she believes are the best gold mining companies.
Owning a UK gold mining fund was beneficial to me because I did not want to spend weeks researching gold mining stocks, as I was busy on other projects.
Many large gold and silver mining companies are located outside the UK, and it’s very complicated for a UK citizen to buy individual stocks outside the EU, and involves lots of paperwork.
That’s why a UK gold mining fund appealed to me.
I also own a UK silver mining fund. This fund also owns physical metals and silver royalty companies in its fund.
The funds I own are Merian Gold and Silver and Ninety One Global Gold:
I am not a financial advisor or tax professional and hold no formal qualifications in this area. This blog is strictly for entertainment purposes only. Please speak to a certified financial expert if you’re looking before making any investments.
If you have any questions about gold or silver mining companies, please leave a comment below.