The Surprising Truth about the Volatility of Gold & Silver Mining Stocks

Though I’ve been blogging about the merits of gold and silver for almost six years now, the one characteristic that most investors fail to understand, by far, are the reasons behind the periodic volatility that afflicts gold and silver every year. In the commercial investment industry, thousands of financial consultants worldwide try to manipulate their clients into making terrible decisions through the use of two emotions – fear and greed. Through appealing to clients’ greed, financial consultants are able to deceive their clients into believing that overvalued stock markets propped up by computerized, rigged HFT algorithms and the Central Bank QE program by-product of inflated currencies are instead, really undervalued. Through appealing to clients’ fear, financial consultants are able to keep their clients out of volatile but profitable asset classes such as gold and silver by selling them on the erroneous principles of beta and by convincing them that increased volatility means increased risk. Thus, financial consultants are able to convince clients to engage in behavior that is a winning proposition for their companies but a losing proposition for their clients – remain invested IN general stock market indexes and paper gold and paper silver products (largely ETFs), but remain OUT of physical gold and physical silver assets and OUT of mining companies that own physical gold and physical silver assets.  

 

The number one global myth in the investment world is the strategy of diversification. Diversification is nothing but a sales strategy designed by commercial investment firms to arm legions of clueless, incompetent financial consultants with a strategy that helps them pry hundreds of millions of dollars of fees from the checkbooks of wealthy clients. I’ll provide weight to my contention that diversification is nothing more than a sales scam and not an intelligent investment strategy with some cold hard facts at the end of this article. The number two global myth in the investment world is the belief that volatility is directly correlated with risk. On the surface level, this seems like a logical conclusion to draw from volatile assets. If assets rise and fall within several standard deviations of the norm, then massive speculation must be occurring within these asset classes and investors must not be investing in such asset classes based upon fundamental values, right? Not necessarily. With gold and silver in particular, most investors do not consider another possibility behind the volatility that affects these two precious metals – banker manipulation and illegal banker fraud. If one understood that banker manipulation was the largest singular factor responsible for the volatility that afflicts gold and silver every year, then the perception of gold and silver as not only solid investments but as the only acceptable forms of money would gain serious momentum versus its perception among the masses as barbarous volatile relics to be avoided.  

 

In any event, once the investment industry knew that their propaganda campaign of equating volatility with risk had successfully injected this belief into the psyche of investors worldwide, bankers merely began introducing periodic steep bouts of volatility into gold and silver prices as their weapon to convince investors not to purchase precious metals, and instead, to purchase much riskier stocks that traded on the major global stock market indexes. In fact, in this article I wrote in August of 2006, I stated that the first necessary step one must take on the road to building wealth is to shed oneself of all the investment beliefs one has learned in school and from the commercial investment industry.   When I first started blogging in 2006, I also warned investors as to why they should not believe the commercial investment industry propaganda of “volatility equals risk”.

 

When I claimed that steep bouts of volatility in gold and silver and PM mining stocks were primarily created by banker manipulation more than five years ago, there was very little acceptance of my theories and most investors and financial journalists chose to ignore the very substantial supporting circumstantial evidence. Instead, the mass financial media chose to actively marginalize such theories and tried to discredit and dismiss me by labeling my theories as “conspiracy” theories. When US Central Bank governors also publicly pronounced that the Federal Reserve never manipulated the price of gold and was in fact even disinterested in the price of gold, naive acceptance of Central Bankers' lies further fueled the media's framing of the truth as conspiracies. This, despite US Senator Ron Paul’s recounting of a meeting in which then US Federal Reserve Chairman Paul Volcker walked into a room and demanded of a staffer as the very first piece of information he wanted to know, the price of gold that day. This, despite former Federal Reserve Vice Chairman Alan Blinder’s testimony that “the last duty of a Central Banker is to tell the public the truth.”  

 

Today, given the prominence of accusations about Federal Reserve, HSBC, JP Morgan, Goldman Sachs, et al participation in the manipulation of gold and silver markets by US Senator Ron Paul and prominent industry figureheads Don Coxe, James Turk, Eric Sprott, and GATA, the ones that sloughed off my accusations of banker manipulation of gold and silver markets as conspiracy rants from five years ago now appear to be the naïve, unsophisticated ones. Today, Central Bank manipulation of gold and silver prices is now accepted as part of the inner workings of the gold and silver markets by any analyst that possesses any level of credibility among the most seasoned gold and silver investors. Thanks to the efforts of men like Ron Paul and the organization GATA, many people now realize that Central Banks serve the interests of the moneyed elite and no one else, a topic that I blogged about nearly five years ago as well.  

 

Due to decades of misinformation deliberately spread by bankers all over the world, while the gap between reality and perception about precious metal markets has closed significantly, a large gap between reality and perception still exists in regard to gold and silver mining stocks. As recently as a month ago, the internet cyberworld was inundated with articles about a “historic end” to the viability of PM mining stocks. The expressed consensus was that since mining stocks had failed to rise with the underlying prices of gold and silver futures during the first quarter 2011, this was an obvious sign that mining stocks had topped out and would crash from here on out. Ironically, the commercial investment industry propaganda machine had churned out and disseminated the exact same storyline in January and February of this year as well. The reason I recall this so clearly is because I specifically wrote an article to rebut the storyline about the death of the gold and silver mining sector back on February 9th. However, despite my strong opinion that gold and silver mining stocks had not yet topped out, my belief did not preclude my caution against banker manipulation schemes executed against mining stocks. In fact, just a few weeks later, I warned against a banker take down of gold prices that indeed materialized after my warning.  

 

It is my strong belief that Central Bankers that are so preoccupied with trying to suppress the price of gold and silver would not ignore the opportunity to illegally intervene and suppress the price of precious metal mining stocks as well. For example, Central Banks have enlisted the aid of corrupt commercial banks to invent gold and silver derivative products and therefore create massive paper supplies of gold and silver at the same time physical supplies are becoming increasingly scarce. If we look at the chart below, you can clearly see the recent underperformance of gold and silver mining stocks that has led the financial media to inundate the public with declarations that mining stocks, as an asset class, are dead weight and should be avoided at all costs.

 

 

However, if you remove the emotion of “fear” from this conclusion and if you inject the explanation of deliberate banker price suppression schemes executed against mining stocks, a completely different take on the asset class of mining stocks will emerge. You may just startlingly conclude that the “best in class” mining stocks are grossly undervalued and a great buy this summer season whether or not the bottom has been put in for the summer, versus the commercial investment industry conclusion that they are dead weight. If you look at above chart I’ve posted of the Philadelphia Gold & Silver mining index, you will note that this index was at the same level just a few weeks ago in mid-June as it was in mid-September of 2010. Despite the flat performance of the Philadelphia Gold & Silver mining index during this duration, by mid-June 2010, silver had risen 74% higher than its mid-September 2010 $20.44 an ounce price and gold had risen nearly 20% higher than its mid-September 2010 $1,270 an ounce price.  

 

To illustrate that investing in volatile mining stocks need not subject an investor to an emotional roller coaster ride, note in the above chart, the several points in which I pointed out that mining stocks were undervalued and in which I pointed out that they were likely to be hit by the bankers to the downside again.

 

In the links I provided in this article, you can see that I publicly blogged about the first two points in the chart above, but that I reserved notification of the third “cash-out” point in the chart above for my subscribing members only.   In conclusion, I hope to impress upon you the following. Bankers deliberately manipulate and introduce volatility into gold and silver mining stocks specifically 

 

(1) to keep people out of these stocks and out of anything gold and silver as they know people equate volatility with risk;

(2) to induce people to panic sell out of mining stocks during rapid downward volatile periods they create as a mechanism to support their immoral fiat currency banking system; and

(3) to keep people invested in general stock market indexes so they can continue to collect fees even if they end up destroying the wealth of their clients.    

 

As you can see from the above chart, the volatility of the mining stocks necessitates the use of an active management style, the antithesis of widely accepted and adopted diversification strategies, to optimally benefit from being invested in this asset class. From mid-June 2007 until the end of the first quarter 2011, if one had invested in the HUI Gold Bugs Index or the Philadelphia Gold & Silver Index and had elected to ride out every scary bout of volatility in the past four years, one still would have been rewarded respectively with a cumulative 73.18% and +59.71% return! Compare this to the respective returns of the US S&P 500, the ASX200 and the FTSE100 over the comparable investment period of -13.53%, -10.90% and -22.70%. Thus, the investment industry labeled “volatile and risky” gold and silver mining indexes returned a hugely positive +59.71% and +73.18% return over the past four years while the industry labeled “less volatile and safer” global market indexes all produced double digit losses. From the recent negative press that the financial media has given gold and silver mining stocks recently, if you didn't know the facts, one might have believed that gold and silver mining stocks had massively underperformed, instead of massively outperformed, the major global stock market indexes in the past four years! (and even when one incorporates the massive hit gold/silver mining stocks took in 2008.)

 

This is all you need to know that the commercial investment industry is more interested in milking their clients for fees and spreading lies, deception and propaganda than in actually acting to preserve and build their clients’ wealth. In my opinion, “safe diversification” and “less volatile” strategies are nothing but pure absolute rubbish invented by and regurgitated from the mouths of commercial investment industry bigwigs.   Furthermore, incorporate a keen understanding of banker manipulation schemes and the understanding of when to enter and exit gold and silver assets and when it is necessary to ride out volatile periods without panic exiting, and one can easily add a great deal of “extra” performance to even the stellar returns of the HUI Gold Bugs Index and the Philadelphia Gold & Silver Index.

 

Simply put, if you trust bankers with your family’s financial future, continue holding fiat currencies and heeding the propaganda of commercial investment industry financial consultants. However, if you lack confidence that the Pound, Yen, Euro and US Dollar will fail to hold their purchasing power over the next decade, a feat that they have failed to accomplish since they were conceived of by Central Bankers, then it’s far beyond the time when you should have started investing in physical gold, physical silver, and best-in-class gold and silver mining stocks. I do admit that commercial investment industry employees have an amazing capacity to cry wolf for years on end and still maintain the trust of their clients. However, armed with the knowledge of this article, it’s time we all stopped falling victim to their misinformation campaigns.

 

 

About the author: JS Kim is the Chief Investment Strategist for SmartKnowledgeU, a fiercely independent investment research and consulting firm that focuses on precious metal investments as a means of wealth preservation against the banker’s path of fiat currency destruction. From its launch in June 2007 to the end of the 1st Quarter 2011, the SmartKnowledgeU Crisis Investment Opportunities newsletter has returned a cumulative +200.96% return (in a tax-deferred account), significantly outperforming the  +59.71 and +73.18% return of the XAU Philadelphia Gold and Silver Miners Index and the HUI Gold Bugs Index. Click on this link to follow us on Twitter!