Investing in Gold and Silver Stocks - Gold Explorers

"A mine is a hole in the ground owned by a liar" - Mark Twain

For anyone considering getting into gold and silver, buying gold and silver stocks can be a great way to benefit from rising precious metals prices. I own gold and silver stocks and have done pretty well but that is not without learning some hard lessons the very hard way. The purpose of this article is to share a little of my experience so maybe you don't have to learn the same lessons.

A tip about buying stocks in general- if you ever feel yourself on the verge of buying any stock simply because you feel that you are just about to miss out on the opportunity of a lifetime that may never come by again then shut off your internet, throw away the number of your broker and give the password to your online trading account to your friend - who should then change the password. Such feelings are generally the result of conversations with excited friends or enticing email bulletins send around to millions. The fact is you can guarantee that if you are feeling that way then probably thousands even millions also are and are just poised to buy that elusive stock. Stock prices only go up if more and more people come into the market to buy. If everyone is a buyer then that means when you turn around to sell there will be no one left to sell to. Great stock buys come by all the time, you just need to learn to sit on your hands be patient and make your decisions not from impulse but based on cold research of the plain boring facts. As legendary trader Jesse Livermore once said - it wasn't the trading that made me money - it was the waiting - patience is the key.

So anyway back to gold stocks. I am not an expert but I have learnt the importance of knowing thing the difference between a Gold Explorer, a Developer and a Miner,

Things to Know about Gold Explorers

A gold explorer is a company who has a piece of land and perhaps have done some preliminary tests to see if there is gold present in the soil. A developer is someone who has found a feesible piece of land with proven presence of gold and is in the process of building a mine. A Producer has a mine that is producing gold - it is only at this long awaited stage that they will produce any money at all.

The first thing to understand is that the probability that a gold explorer will make it all the way to be a profitable producing mine is very very small, perhaps 500 to 1 odds. At the explorer level the fact that they have an amazing team of experienced geologists, people who have spent their whole lives in mining , who have access to great financing only reduces those odds marginally because their are so many factors that play into whether a project will be successful - many unforeseen at the time of inception. Even if you get the odds down to 100 to 1 or even 50 to one that is extremely high if you are only going to invest in one or two companies.

The other thing to remember about explorers is that they require loads and loads of cash, year after year after year and will not show any income until they have a producing mine. By the way the process of going from being an explorer to a producing mine can take as long as ten years and definitely over 5. What this means is that you will see huge volatility in share prices and huge dilution because they will constantly have to go back to the market to get more and more money - so for existing shareholders you will constantly see the share price be battered over and over again.

Often money is raised by gold explorers by hyping a project via press releases and investor letters, saying they are on the verge of one of the greatest finds ever and this is your chance to get in. If you look at the price chart of a gold explorer you will see that it will start off very small but at some point the price spikes very high - only to sink down in the following months. This spike high is where they have succeeded in drumming up excitement, where your friend is rushing round to your house desperate to share the good fortune of this company with you and people hurriedly jump aboard so afraid they will miss out. The subsequent sink in price is where reality sets in that despite the much hyped, excited story building a producing gold mine takes many many years with so many hurdles to jump, it will be a long time until they will see any real cash. Always remember that with explorers prices are extremely volatile. I can't tell you the number of times I have bought worried I was going to miss out only to see the price plummet and stay there for years.