Right on the Money: Doug Casey on Economics, Investing, and the Ways of the Real World with Louis James

Chapter 14

Doug Casey on Gold Stocks

September 30, 2009

Louis: Doug, we were talking about gold last week, so we should follow up with a look at gold stocks. If one of the reasons to own gold is that it’s real—it’s not paper, it’s not simultaneously someone else’s liability—why own gold stocks?

Doug: Leverage. Gold stocks are problematical as investments. That’s true of all resource stocks, especially stocks in exploration companies, as opposed to producers. If you want to make a proper investment, the way to do that is to follow the dictates of Graham and Dodd, using the method Warren Buffett has proven to be so successful over many years. Unfortunately, resource stocks in general and metals exploration stocks in particular just don’t lend themselves to such methodologies. They are another class of security entirely.

L: “Security” may not be the right word. As I was reading the latest edition of Graham and Dodd’s classic book on securities analysis, I realized that their minimum criteria for investment wouldn’t even apply to the gold majors. The business is just too volatile. You can’t apply standard metrics.

D: It’s just impossible. For one thing, they cannot grow consistently, because their assets are always depleting. Nor can they predict what their rate of exploration success is going to be.

L: Right. As an asset, a mine is something that gets used up, as you dig it up and sell it off.

D: Exactly. And the underlying commodity prices can fluctuate wildly for all sorts of reasons. ...