In a recent highly publicized debate earlier this week, Binance founder Changpeng “CZ” Zhao handed gold-proponent Peter Schiff a 1,000 gram gold bar and asked him if it was real.
Schiff’s answer: “I don’t know.”
The tactic was intended to prove to the audience that gold has trust and authentication issues that Bitcoin does not.
I will not go down the rabbit hole of debating the relative merits or drawbacks of crypto-currency – it would take 10,000 words and be completely outside of the scope of my gold-based research.
However, it raises an important question not just for gold, but more on topic: for gold stocks.
How can you tell if your gold is real – and also: how can you tell if the gold stock you’re buying is legitimate?
The answer to both questions is remarkably similar.
One very old method for self-authentication of physical gold is to use a specialized coin scale that measures both the weight and size of different coins.
This example is a gorgeous vintage scale, but they sell similar scales made of plastic that are extremely affordable. Gold coins of specific weights also have specific sizes, which these scales can verify within a degree of certainty that most fakes can’t satisfy.
Of course, there are many different ways of authenticating gold, but the simplest method is to only buy from trusted sources that would face a rather asymmetric downside if they were ever caught selling fake gold.
Well-known retailers have a massive incentive to authenticate all of the precious metals they sell.
A small-time coin dealer at a back alley coin show doesn’t have much downside for ripping you off. What’s your recourse? You won’t ever see them again. They don’t care about you – they’re not in business for repeat customers.
But a major gold and silver retailer has huge downside risk. They have a reputation to uphold, and in a competitive business like precious metals sales where consumers can take their pick from a dozen or more major retailers – trust is paramount.
Buying gold stocks is very similar.
You want to own gold companies run by well-known people who would face a catastrophic downside if they were found to be engaged in some kind of fraud.
For instance, I recently had a call with a mining executive who has already successfully started and brought a mine to production, and is in the process of doing it again. In fact, he’s just days away from first production on his 2nd project, and is eyeing his 3rd. I believe the market will be playing catch-up very soon…
The best gold executives aren’t in the game for one at-bat. They all aim to have long-term careers to shepherd many companies and projects to completion. A one-time scam might net someone millions… but a successful career in gold mining can result in hundreds of millions.
The Ted Williams or Mickey Mantle of gold mine executives is someone I talk about quite a bit in the pages of this publication: Pierre Lassonde.
He founded Franco-Nevada, which is arguably one of the biggest success stories in gold stock history. But he has another half dozen world-class companies and projects under his belt.
There are mining executives focused on building a long-term career, and they need to be hyper aware of never even appearing to betray the trust of their investors.
That’s why I tend to only ever recommend firms where I know of the people involved, or I know someone who will vouch for them.
People matter most in this business. A great mine with lousy leadership is not worth your time or money. It won’t matter how much gold they have in the ground if the company is run like their own private piggy bank, or they don’t have the competence to see the project through.
For instance, Lassonde is still active in the gold sector. I know it’s very likely that people and businesses he interacts with are competent and honest.
And Lassonde is not alone. There are a handful of highly competent veteran gold executives out there who I know are as good as their word.
If you’re serious about gold investing, you need to seek these people out and buy their companies when they’re selling for a discount to their assets.
Today, most of the companies I cover are still well under fair value. It’s a good time to put money to work.
Best,
Garrett Goggin, CFA, CMT
Lead Analyst and Founder, Golden Portfolio