Guide to Investing In

Gold & Silver

Mining Stocks

A Special Report by Jeff Clark

Senior Analyst, GoldSilver.com
 About the author…
Jeff Clark’s family owned mining claims in California, Nevada, and
Arizona, and his father won awards for gold panning (yes, there are
such contests!). Jeff worked as a mining analyst for Casey Research for
8 years, primarily as the senior editor of BIG GOLD. He’s been a
featured speaker at some of the world’s most prestigious investment
conferences, and now serves as senior precious metals analyst for
GoldSilver.com. Follow him on Twitter @TheGoldAdvisor. Or send
questions to JeffClark@GoldSilver.com

As Mike Maloney revealed in the Ultimate Guide to Gold & Silver Mining Stocks video with Ronnie
Stoeferle, he will soon be buying gold and silver stocks for the first time in over a decade.

As a long-time mining stock analyst, Mike asked me to write this report to provide our readers with
some additional insights into sector.

The purpose of this report is to help you decide if you want to invest in gold and silver equities, and
if so, to give you some options to consider. If precious metals continue to perform well in coming
months and years, this could be an exciting way to earn additional profits.

For the investor familiar only with owning gold and silver directly, mining stocks introduce a whole
new set of risks, from management execution and political interference to metallurgy or labor
issues. As a result, Mike wants everyone to understand what they’re getting into if they choose to
follow his lead.

This report serves as an introduction to mining stocks and covers a few of the ways to participate
in this exciting sector, while possibly limiting some of its risks.

Of course, we would not recommend an investor buy mining stocks without first doing the financial
equivalent of putting locks on your front door—buying physical gold and silver. Ignore that and you
just might find yourself vulnerable at the worst possible time: the middle of another financial crisis
or market crash, when precious metals tend to perform their best relative to other assets.

This report will cover the three realities with mining stocks—which are our opportunities—along
with the primary ways to participate. Keep in mind that as Mike always says, these are not
investment recommendations. This is education and research, and you should use this report as
your first step into exploring this sector. In other words, do your own due diligence before
investing in any of the companies or securities mentioned here.

With that, let’s jump in.

Guide to Investing In Gold & Silver Mining Stocks 1

 Section One
The Three Realities with Gold & Silver Mining Stocks

An entire book could be written on mining stocks, but three things stand out about this market
right now, as we head into 2020.

Opportunity #1: Gold and Silver Mining Stocks Are Historically Undervalued

It’s quite dramatic when you look at mining stocks from a historical perspective.

Mike and Ronnie showed this reality very well in the video. For example, this chart shows the
ratio of the Barron’s Gold Mining Index (BGMI) to gold. Notice how undervalued gold stocks are
relative to the price of gold compared to their long term averages.

Through the end of 2018, the gold stocks/gold price ratio was at 70-year lows. And despite the pop
last year they’re still near all-time lows. The ratio is lower here in early 2020 now than the
beginning of both the 2001 and 2009 bull markets.

This also highlights the potential for gold stocks. From current levels…

Gold stocks would have to rise roughly four times more than the price of gold just to get back to
the historical median. They’d have to rise 16 times faster than gold to match the all-time high.

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I’m not saying they’ll do either of these things—the point is that they’re deeply undervalued at this
time in history, and as a result their potential to provide leverage to the price of gold is enormous.

Gold stocks are also historically undervalued relative to the general stock market. Here’s the ratio of
the same index, BGMI, to the S&P 500 since 1950.

Gold stocks as a group remain near historic lows relative to the broad stock market.

Why are gold stocks so undervalued? I suspect the primary cause is because investors have been
disinterested since tech stocks, banking stocks, and so many other sectors have been doing so well.

Further, investors were skeptical of the mistakes the industry made in the past—poor delivery,
overpaying for acquisitions, and high costs. The industry has since largely improved on many of
those fronts—something markets will soon enough take notice of as the changes translate into
stronger earnings when metals rise.

Because gold stocks are so undervalued, and because the general stock market is so overvalued,
gold stocks could potentially trounce the S&P 500 in the next gold bull market. No guarantees, of
course, but the setup is quite strong. In fact, it may already be starting—look how the Gold Miners
EFT (GDX) performed last year against the major US stock indexes:

Guide to Investing In Gold & Silver Mining Stocks 3

In 2019, gold stocks as a group outperformed the S&P 500, Dow, and Nasdaq.

Last, this chart shows all the major gold equity bull markets since the 1940s. The thicker, red line
is the current one.

There are two points to this chart:

The current bull market has not risen all that much, so based on history it’s likely not too late to
invest in gold stocks. Further, as Mike and Ronni point out in the video, bull markets tend to mirror
the prior bear market—and since the last bear market in gold stocks was one of the most severe in
history, it would not be surprising to see the next bull market long and strong.

Almost all past bull markets have ended in a parabolic rise. If the price of gold rises quickly like
it has in previous market crises, this pattern for gold stocks is likely to repeat. Remember that one
of Ronnie’s core forecasts is that gold and gold stocks will become a target for general investors
again. If he’s correct, the next bull market could easily mimic the kind of manic rise we’ve seen
before.

Opportunity #2: The Leverage with Gold Stocks from Higher Gold Prices is
Stronger than Ever

This is the primary reason investors buy mining stocks: leverage.

The reason leverage can be so powerful for miners is because of the dramatic effect a relatively
small increase in the price of gold or silver can have on profit margins. For example, if a miner
earns a $100 profit at a $1,200 gold price, and gold jumps to $1,300, their profits just doubled,
even though gold only rose 8%. You don’t see this kind of leverage in almost any other sector.

Here’s what that leverage can look like…

Guide to Investing In Gold & Silver Mining Stocks 4

In the first half of 2019, the World Gold Council estimated that the average all-in cost to produce
an ounce of gold among the majors (companies that mostly comprise the Gold Miners ETF, GDX)
was $950. Look what happens to potential profit margins as the price of gold rises beyond $1,200.

As gold and silver prices move higher, profit margins explode. A company that was barely
profitable can see its earnings surge from just a small increase in the price of the metal. And these
kind of jumps in earnings will attract investors to the sector.

Costs will rise over time, of course, but generally speaking costs rise much slower than the price of
gold.

This reality is even more evident when you look at free cash flow, one of the strongest barometers
of profitability in the sector. But don’t take just my word for it: the chart below is sourced from
mining analysts at BMO, who show the projected increase in free cash flow from the major gold
producers at different gold prices.

Free cash flow among the majors nearly doubles when the gold price moves from $1,400 to $1,800.
This kind of spike will show up on the screen of many Wall Street firms.

The increase in profit margins is even more dramatic among the silver producers…

Guide to Investing In Gold & Silver Mining Stocks 5

In the Global X Silver Miners ETF (SIL), the 17 largest silver producers had an average all-in cost
of $13.28 at the end of 2018. Look how profit margins could explode as silver moves higher.

Again, costs will rise over time (especially if we enter an inflationary period with rising
global wages), but these hypothetical examples show how earnings can provide enormous
leverage in a rising price environment.

It is not uncommon in bull markets to see gold and silver stocks outperform the metal by three
or four times.

So, if gold and silver rise, say, 50% over the next couple years, gold stocks could double or
triple from current levels. And silver stocks triple or quadruple. Not every stock will see that
amount leverage, of course, and there’s certainly no guarantees, but this is the kind of
leverage that’s occurred in past bull markets.

This is why Mike will be buying gold and silver equities. As he says in the video, “mining stocks
will explode once gold and silver make new highs, which they will.”

Leverage works both ways, of course, and it’s something you need to be aware of before you
invest in this sector…

Opportunity #3: Mining Stocks Are Volatile and Risky

Mining stocks can be exciting. If you think gold and silver are headed higher, then it would not
be unusual to see the stocks rise two-three-four times more than the metal they produce.

But real life is not always that straightforward. That’s because, first, these stocks can be
very volatile. We want to take advantage of that volatility, but volatility works both ways. There
could be days where it sparks daydreams of a beachside home… and days where you fear
your entire investment is in jeopardy.

So, be honest with yourself. Are you the kind of person that might panic if you see a gold stock
drop 10% in one day? Or a silver stock drop 20%? If you are, it might be better to stick with
option #1 below. If you decide to proceed, just be aware that mining stocks can jump around a
lot and plan your allocation accordingly.

The second and more important issue is this: mining stocks introduce risks you don’t have
with bullion.

Lots of things can go wrong with a miner—the company might mismanage the deposit… the
local government might increase taxes or regulations… Mother Nature might not have
deposited what geologists thought… the list goes on. These things don’t happen to all miners, but
the risks are real and will eventually happen to you if you invest in this sector for any length of
time.

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 Even seasoned pros can be caught off guard. Here’s a quick story, which is a little
embarrassing to admit…

Yours truly sank a good chunk of money into what was an exciting new gold producer in 2014:
Rubicon Minerals (RBYCD). Our team thought it was one of the better up-and-coming
companies.

But the amount of gold that came out of the mill was dramatically less than what had been
projected, primarily due to the complexity of the metallurgy. Not only was the company forced
to stop production, it became clear it might never produce any gold.

The stock plummeted, and when I sold I’d lost 95% of my initial investment. I had very little
left of my investment—on what was considered a “producer”, i.e. a more stable stock than the
early stage “juniors” that should have theoretically been in business for a long time. Rubicon
wasn’t a fraud, just proof that Mother Nature can be tricky sometimes.

As Mike said in the video, “this is my gambling money.” If you have some gambling money, have at it.
If your retirement will be jeopardy if these stocks don’t work out, then you might want to pass.

The bottom line is this:

You are speculating when buying gold and silver stocks. You must have the emotional
fortitude and financial breadth to invest successfully in this sector.
The flip side is also true. Due to the leverage miners typically offer, you don’t need to sink a lot of
cash into these kinds of stocks to see some serious profits.

Section Two
Strategies for Buying Gold & Silver Mining Stocks

There are several ways to participate in the mining sector. But before you buy a mining stock…

Strategy #1: Buy Physical Gold & Silver: They Offer Profits at Much Lower Risk

No, this does not give you exposure to the miners. But hear me out for a moment…

Gold is usually viewed as a defensive asset. But in the turbulence we expect to kick up in the reset
of the global monetary system, we believe gold and silver can also be offensive assets.

In other words, we expect to do more than just protect our lifestyles by maintaining our
purchasing power; we anticipate investors will flood into gold and silver and hand us gains well
beyond par before it’s all over. If we’re right,you can profit mightily from gold and silver bullion
without the added risk
of mining companies.

Look at it this way: your profit may not be as big, but your investment risk is 90% lower. What if
only some gold stocks rise and you picked the wrong ones? Or the stocks break tradition and
don’t rise like they have in the past? The risks that come with the miners are ones you don’t have
with bullion itself.

With physical gold and physical silver you have the ability to preserve and grow your
wealth without speculation.

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Strategy #2: Buy a Mining Stock ETF or Mutual Fund

Probably the easiest way to participate in this sector is to buy a mining ETF or mutual fund.

Yes, funds come with both good companies and not-so-good ones, but this diversification lowers
your risk tremendously. Besides, there is a way to get exposure to more good stocks than bad
ones…

First, here are the primary gold mining ETFs. The top 5 primarily invest in producers, while the
bottom two are focused on the smaller “junior” companies including explorers.

Favor ones with a reasonable expense ratio and high liquidity (AUM—Assets Under Management
—is a good proxy for that as more holdings usually means more volumes and better price
discovery). You can continue your research by looking at each fund’s website, starting with the
fund’s holdings. Keep in mind that the two “junior” funds carry a higher degree of risk and will be
more volatile.

The main thing to be aware of with ETFs is that they are, for the most part, passively managed.
The stocks are usually selected based on the size of their market cap (which is why you get the
bad with the good). There are exceptions, such as “smart” funds like GOAU, which chose
companies based on pre-selected performance metrics, but technically it’s still not “actively”
managed.

One advantage of ETFs is that they trade like stocks, and thus allow you to buy and sell intraday,
and set bid prices (mutual funds don’t offer this feature).

Here are the ETFs devoted primarily to silver miners, with top two focused mostly on producers
and the bottom one on junior companies.

You can see that SLVP has an expense ratio that is 40% lower than SIL and has logged a stronger
performance. That’s attractive, of course, but glance at each website and see which you’re more
comfortable with.

For more active management, where fund managers attempt to identify the stocks they think are
best and not just select them based on size, you’ll want to look at mutual funds. That active
management does come with higher expense ratios than ETFs.

Guide to Investing In Gold & Silver Mining Stocks 8

Here are the more popular mutual funds devoted to the precious metals miners.

I would avoid those with excessive expense ratios and ones that have underperformed. I
personally would eliminate the Midas and OCM funds based on high expense ratios, and the
Vanguard and second US Global funds based on below average returns.

As with ETFs, look at the components of each fund before you invest, to make sure you’re
comfortable with the companies it holds.

As an FYI, I owned Tocqueville Gold Fund for quite a few years, mostly because I know manager
John Hathaway and know he is on the same page as us about monetary issues and where gold is
headed. I don’t own it now, but that’d be a top consideration for me if I were to buy a gold fund
again (it even has 14% of the fund currently invested in gold bullion), though there are other
attractive ones, too.
ETFs or mutual funds are a good place to start if you’re new to the mining industry or
you want exposure without having to pick winners from losers.

Whatever you decide, just don’t trade too much. Plan on holding through the next bull market,
and selling when this market gets way overheated.

Strategy #3: Buy a Basket of Individual Mining Stocks

I say “basket” because you shouldn’t buy just one. You wouldn’t pick one tech stock, because it
would expose you to too much risk—what if the one you pick doesn’t work out?

The second issue to be aware of is that the risk/reward ratio greatly increases as you go down
the spectrum in this sector.
Producers are usually the least risky, and tend to follow the direction of gold prices. The
attractive thing about producers is that they are the first targets when the mainstream and/or
Wall Street move into the sector. They’re typically the “first movers.” In fact, some institutional
funds can only buy producers. These stocks will fall more than gold on down days.

Developers and pre-producers can be attractive because they often receive a rerating when
they are about to become a producer of metal and generate revenue—up until this point they
have done nothing but spend cash. While many are successful, some get a surprise that is
different than what they projected (see my Rubicon example above).

Explorers haven’t found any gold yet and may not respond to the gold price at all. This group
is the riskiest of all; an investment in them is basically a bet that the company will identify an
economic deposit. If they do, it is not uncommon to see quick doubles and triples or even a 10-
fold return, depending on what they find. But the general rule of thumb is that you have to

Guide to Investing In Gold & Silver Mining Stocks 9

 invest in a dozen or so explorers in hopes that a couple are successful, as many will not be. And
their relationship to the price of underlying metals is tenuous at best—they change price based
on what, if anything, they dig out of their particular patch of ground.
This report does not include specific stock picks. Even though Mike said he’s adding mining stocks
to his portfolio soon, we can’t provide specific stocks because it wouldn’t be fair to you. We don’t
offer a service that follows the sector, so there’s no follow-up. We could buy or sell a stock and not
publicly report it, so we would be doing you a disservice by giving picks and not offering further
guidance. So you unfortunately can’t rely on us for specific advice. (This also means we can’t
answer questions about stock x or y).

The best thing to do is what Mike encourages about everything: educate yourself.

So, if you want to invest in individual mining stocks, I have a few suggestions to get that education
started:

#1: Hire a professional. As Mike said in the video, Robert Kiyosaki impressed upon him that
“investing is a team sport.” Don’t do this alone—even analysts who follow the industry for a living
compare notes and read each other’s reports.

As Mike mentioned in the video, he and I both follow David Morgan of The Morgan Report, a long-
time newsletter writer/publisher in the sector. There are many other good analysts whose
livelihoods are staked to professionally following the sector, too, like Louis James
(IndependentSpeculator.com) and Brent Cook
(ExplorationInsights.com), to analysts at investment banks and brokerages close to the sector like
Raymond James and BMO (typically available only to clients; check with your broker).

#2: Attend mining conferences. Lots of workshops and presentations, along with the opportunity
to rub elbows with mining executives, newsletter writers, and independent analysts. Many
conferences frequently offer promotions where you can get in inexpensively or even free. Here
are the main ones for the mining sector:

Vancouver Resource Investment Conference (VRIC), held in Vancouver, BC every January.

This is ground central for many junior companies. I’m scheduled to speak there in January
2020 - if you attend feel free to introduce yourself.

Prospector and Developers Association of Canada (PDAC) conference is the granddaddy of

mining conferences, usually held in March in Toronto.

Silver & Gold Summit, usually held in October. The favorite of silver investors. Either Mike or
I usually speak at this event every year.

#3: Watch conference videos. Presentations are usually videoed, so you can view those to learn
more about the sector and get ideas. Just don’t invest based on a company’s presentation; those
are always positive, so look at independent newsletter writers and analysts. Keep in mind that
videos don’t get released until several weeks after they’re recorded, and also that most speakers,
including me, almost always own what’s covered.

In the video, Mike referenced my latest mining picks from the 2019 Silver Summit (those were my
best picks at the time; note I do own all the stocks mentioned).

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Conclusion: Mike is Buying Mining Stocks—Should You?

Despite my cautions, and despite the added risks with mining stocks, I’m personally heavily
invested in this sector. Mike is buying gold and silver stocks, too. That’s because…

Mining stocks as a group are deeply undervalued

The leverage they currently offer is higher than ever
We’re comfortable with the volatility and risks.
If you want to potentially add a little more juice to your portfolio, and have already secured a
meaningful amount of physical gold and physical silver, then you might consider taking advantage
of an investment opportunity that only comes along a few times in a lifetime. If we’re right about
where gold and silver prices are headed, it could potentially be a very fun ride.

"Thanks for reading the report. Follow me on Twitter @TheGoldAdvisor for my latest moves in
the precious metals market"

- Jeff Clark

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