You Can Profit from Penny Gold Stocks
Penny gold stocks have a very special and distinctive characteristic that is not shared by other vehicles of gold investment. To properly understand this characteristic is to give yourself special advantages and opportunities for profit.
To see why this is so we must compare conventional gold investments with penny gold investments. Conventional gold investments are bullion purchases, or stock purchases of foreign and domestic producing gold mines—the "blue chip" mines. The difference between the conventionals and the penny golds is the difference between the known and the unknown and this translates into a propitious time delay with unusual consequences and possibilities.
When an appropriate gold price has been achieved, two important things will be known about the conventionals: (1) the proper price for each of the conventionals, and (2) the short time needed in which to reach that proper price. The opposite is true of penny golds. The penny gold stocks are exploration companies and after the reaching of the proper gold bullion price, the proper price for penny gold stocks will be unknown (and unknowable) and the time it will take for them to achieve their proper price will be unknown in any particular case.
Assume that tomorrow the price of gold were suddenly raised to $300 an ounce. We would know, and know instantly, the proper price for a 10 ounce bullion brick. The price of common gold coins reflects two values: (1) the gold content value and (2) the premium value. Gold coins have a premium value over their gold value for various reasons which include—they are beautifully engraved, are portable, are easily secreted, have guaranteed and known gold content, come in small denominations facilitating their use for exchange and increasing their accessibility to those of small means, and have incurred a manufacturing expense.
Roughly speaking and in quiet times, these coins generally carry a 30 percent premium. After the gold price rise, I would estimate that the market would take about three or four weeks to settle on the proper premium—discounting such things as political stability, economic stability, the extent that gold ownership has been legalized, and the extent that newly minted coins might enter the market.
After the gold price rise, it should take about three months for the market to properly price the producing gold mines. The tug and pull of the market would establish a generally accepted price/earnings ratio, maybe 15 to 1. Simultaneously, the market would anticipate the earnings by integrating such factors as ore reserves and plant capacity. There might be wild gyrations during this process, but after three months the price movements would settle down and reflect known values.
If gold were raised tomorrow to $300, what would happen to penny gold stocks? I would estimate that this price gyration, percentage-wise, would roughly approximate the movement of the blue chips. In 1973 when gold moved from $65 to $127 and then back to $100, the percentage movements of the penny golds roughly approximated those of the blue chip golds. If six months after our presumed gold price rise, we looked back and determined that the blue chips had increased in price fifteen times, we could anticipate that the penny golds had done about the same.[1]
THE NEW BALL GAME
But six months after the assumed gold price rise something significant has happened. The ball game is over for the conventionals, but it is a long way from over for the penny gold exploration companies. The price for bullion has been fixed, the price for coins has been set, and the prices of the blue chip producers are now strait jacketed within the narrow range of accepted price/earnings ratios. (If a company's earnings divided by their outstanding shares equals $1 per share, and if the accepted price/earnings ratio for this industry is 15 to 1, then a share will sell for about $15.)
But what of penny gold stocks? They are not confined by a price/earnings ratio because they have no earnings. They have no earnings because there is no production and no production because there is no proven ore. The whereabouts of the gold is unknown, and there will be a time delay in discovering it.
The penny gold top will come after the blue chip top. The penny gold top will come after a series of spectacular gold strikes and amid widespread publicity of fortunes made by a few penny gold investors. My best estimate is that the strikes and resultant widely disseminated publicity will come two to five years after the proper gold price rise.
Why the delay? The explanation is simple and relates to the nature of mining exploration companies. It takes time. For one thing, exploration is expensive and few of the present owners of gold exploration properties have sufficient capital to underwrite an exploration campaign. If money is raised by the issuance of newly authorized shares it would probably take a year for the stock issuance to be prepared and clear the Securities and Exchange Commission and local state authorities. It would probably take another three months to sell the shares.
Should the company decide not to raise risk capital but rather to lease-option the property to a larger company, even more time would be required. There presently are few mining companies prepared to enter into exploration contracts with the property owners. Very few are geared up to go into the gold business and the few there are would be confronted with many exploration offers. Selecting between the various properties would take considerable time and preliminary analysis.
Exploration itself, once begun, consumes time. The initial prospecting is modest followed by careful evaluation of results. These evaluations may lead to abandonment or extensive drilling. This in turn must be analyzed and interpreted and may lead to all-out drilling or a change in exploration strategy. A successful exploration program could easily take 12 to 24 months.
THE DELAYED EXPLOSION
But when things begin to happen you can expect spectacular fireworks. Obscure, tedious, dull and time consuming exploration effort can suddenly pay off in spectacular results. A gold strike! Several months later and at a different property—another gold strike! After two or three strikes then comes the gold fever and there is no fever like gold fever.
The affected companies see their shares jump in price 100 to 1000 times. The public suddenly realizes that the gold rush is not over; that there are fortunes yet to be made. Most of this public didn't make a penny in the previous gold price rise to $300 because they were ignorant of gold and had not invested. They had heard many stories of the big money that had been made by others, filling them with vain regrets and lingering envy. But now their past envy only fuels their present greed. On they come and jump into the penny gold stock market with both feet.
Meanwhile back at the mine—how are the blue chips doing? They would still be languishing in the price/earnings strait jacket of yesteryear. Since the hypothetical gold price rise of, say, two years ago, the blue chip gold index may have advanced five percent. But in all probability the penny gold index has now increased 10 to 20 times, caused by gold fever buying.
THE SECOND CHANCE
There you have it—the penny gold postman will ring twice. There is a second chance, a second wind. The adage that opportunity knocks but once doesn't apply to penny gold stocks. You can advantageously close the barn door after the horse is out or corral the cat after it is out of the bag. No need to cry over spilt milk.
I do not know, nor have I ever heard, of a similar investment situation where you can wait until after the big news release and then profitably invest. This almost never happens since the market very quickly discounts such straightforward news. This time delay stems from an inescapable fact: the market cannot discount what it doesn't know. The market cannot discount undiscovered gold. Couple this with the fact that later gold discoveries will be made which in turn will trigger the special and exceptional psychology of gold fever, and you have a truly unique investment situation. The degree to which you exploit this situation is limited only by your own resourcefulness.
No one can predict how high the price of gold will go in the next year or two. If you haven't bought penny gold stocks and if the gold price appears quite high at the time you read this, you will naturally be concerned whether the present "high" prices of gold stocks have discounted the high bullion price. That is, "Is it too late to buy into the penny golds?" For reasons explained in this article it is not too late. For penny gold stocks, "too late" will probably arrive two or three months after two or three spectacular strikes in gold country. These strikes will occur two to five years after the attainment of the proper gold price.
VARIATIONS ON A THEME
In this article I have idealized the happenings to clearly illustrate the point of the delayed, second-move characteristic of penny gold stocks. In real life, events may unfold somewhat differently than our idealized events. But if you understand the principle involved you can make accommodations to changes in circumstances.
For example, the final price for gold may be rather low—such as $125 (unlikely). In such an eventuality the penny gold top could come five years later since there would be much less inducement to perform the exploration necessary to the making of gold strikes. On the other hand, if the price were $500 the added inducement could cause strikes within one year.
Also we assumed in our example the making of a gold strike, that is, a sudden discovery of abundant gold. In real life, the realization of the presence of commercial ore could unfold slowly over a period of several months as the data became increasingly persuasive. A sudden discovery could cause a 100 to 1000 price move in a few days or weeks. An unfolding discovery could stretch out the time of the price move to three to six months. But the same large price move would be made in either case, with about the same amount of gold fever.
We further assumed the gold price rising to be done overnight. In reality it might take a series of price moves over an extended time. But the principle is the same. When the price of gold gets high enough it will induce exploration which will cause gold discoveries which will cause price increases in exploration companies. These price increases will not be shared by the blue chip golds hemmed in by accepted price/earnings ratios.
Norman A. Lamb holds an A.B. in Social Science and Philosophy from Sacramento State University. He is an authority on domestic penny gold stocks and Western gold mining history. Lamb is the author of Small Fortunes in Penny Gold Stocks and its Supplement and a contributor to and Associate Editor of the American Gold News. He is an officer and director of several private and public gold exploration companies and a member of mining associations and professional organizations.
NOTE
[1] The movement of penny gold stocks only roughly approximates those of the blue chip gold stocks—with the penny golds being of greater volatility. In a great and sudden bull market we would expect the penny golds to increase in price more times than the blue chip golds.
A way to indicate volatility during any time period is to note the difference between the high and low for the stock and express this difference as a percentage increase from the low. For example, if the high were 30¢ and the low were 10¢, then the difference is 20¢ and this is 200 percent of the low.
During the first six months of 1974, ASA had a volatility rating of 42 percent and Homestake 40 percent for an average volatility for these blue chips of 41 percent. During the same period the average volatility of the penny gold stocks on the Spokane Stock Exchange and Over-the-Counter was 143 percent.