The Silver & Gold Data Nobody Wants To Show You | Mike Maloney & Alan Hibbard

Mining Stocks vs. Physical Gold & Silver: A Detailed Analysis

Key Concepts:

• Barron’s Gold Mining Index (BGMI): An index representing the performance of top-tier gold mining companies.
• BGMI/Gold Ratio: A ratio chart comparing the performance of the BGMI to the price of gold, indicating relative outperformance or underperformance.
• Private Placement: The sale of securities to a select group of investors, typically involving the creation of new shares.
• Dilution: The reduction in existing shareholders’ ownership percentage due to the issuance of new shares.
• Gambling Currency: Funds allocated for speculative investments with a high risk of loss.
• Logarithmic Chart: A chart scale where equal vertical distances represent equal percentage changes, useful for visualizing large percentage swings.

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Historical Performance: Gold vs. Mining Stocks (1970-2022)

The core of the discussion revolves around a comparative analysis of gold’s price performance against that of the Barron’s Gold Mining Index (BGMI) over a period spanning from 1970 to the end of 2022. Charts presented demonstrate a significant divergence in performance. Initially, from 1970 to the late 1960s, top-tier mining companies (represented by the BGMI) outperformed gold. However, from that point forward, gold consistently outperformed the mining sector.

Specifically, indexed to 100 in 1970, gold reached approximately 4,000 by 2022, while the BGMI only reached 460. This translates to gold outperforming the BGMI by a factor of roughly 6.5x over the long term. A ratio chart (BGMI divided by gold) visually illustrates this trend, showing a decline from a starting point of 3.56 in 1970 to approximately 0.41 in 2022 – representing an approximately 88.5% decrease in the value of miners relative to gold.

The analysis highlights a particularly severe drawdown for mining stocks between 2000 and 2007, exceeding the gains experienced by gold during the same period. Even after recovery, mining stocks struggled to surpass their previous highs, while gold continued its upward trajectory.

The Zero-Sum Game vs. Private Placements

A key distinction is made between buying stocks on an exchange and participating in private placements. Buying stocks on an exchange is described as a “zero-sum game” – money flows from one trader to another, not directly to the company. Conversely, private placements involve the creation of new shares, with investment funds flowing directly to the company, aiding its growth. However, this also leads to dilution for existing shareholders, reducing their ownership stake.

The speakers emphasize that mining companies are prolific issuers of new shares, often through private placements, making them significant “inflators” – potentially even more so than the Federal Reserve – due to the constant expansion of the share base.

The Leverage Illusion & Downside Risk

The discussion acknowledges the perception of mining stocks as a “leveraged play” on gold and silver. While miners can amplify gains during favorable periods, the leverage is demonstrably greater on the downside. The charts illustrate that drawdowns in mining stocks are more frequent and more severe than those experienced by gold itself.

The speakers explain that while miners may initially gain more than gold during an upswing (e.g., gaining $6 while gold gains $3), they also lose more during a downturn (losing $5 while gold loses $1). This asymmetry, compounded over time, is the primary driver of the divergence in performance. The 2000-2007 period is cited as a prime example, where the mining index experienced a substantial drawdown while gold remained relatively stable.

Investing in Miners: A Checklist & Caveats

The speakers caution against blindly investing in mining stocks and provide a five-point checklist for those considering such investments:

1. Gambling Currency: Allocate only funds you are prepared to lose entirely.
2. Undervaluation: Ensure miners are undervalued compared to physical gold and silver.
3. Short Time Horizon: Recognize that long-term performance favors physical metals.
4. Professional Help: Seek guidance from experienced analysts or subscribe to reputable newsletters.
5. Diversification: Allocate funds appropriately and diversify within the mining sector.

Mike explicitly states, “If you think you’re smart enough and talented enough to absolutely nail the bottom and then sell at the top be my guest.” Allen echoes this sentiment, emphasizing that without professional assistance, investors are likely to suffer losses.

Notable Quotes:

• Mike: “Mining companies, explorers… all of the whole sector, they are the greatest inflators on earth, even more so than the Federal Reserve.”
• Allen: “You’ve got a greater risk of downside drawdowns if you are in the mining companies.”
• Mike: “Convert your current gambling currency into shares of companies that dig up money.”

Data & Statistics:

• Gold Price Increase (1971-2022): Approximately 98x increase from its price on August 15, 1971.
• BGMI Performance (1971-2022): Decreased from a starting point of 3.56 (relative to gold) to approximately 0.41, representing an 88.5% decline.
• Long-Term Outperformance: Gold outperformed the BGMI by a factor of approximately 6.5x over the period analyzed.
• Drawdown (2000-2007): Mining stocks experienced a larger drawdown than gold during this period.

Synthesis & Conclusion:

The analysis strongly suggests that, historically, investing in physical gold and silver has been a more reliable strategy than investing in mining stocks. While mining stocks can offer periods of outperformance, the inherent risks – including dilution, greater downside volatility, and the need for specialized expertise – make them a significantly more speculative investment. The speakers advocate for a cautious approach, emphasizing the importance of allocating only “gambling currency,” seeking professional guidance, and maintaining a short-term investment horizon if one chooses to venture into the mining sector. The core takeaway is that gold itself has consistently proven to be a superior store of value over the long term compared to the companies that extract it.