The Myth of Leverage

by Jayant Bhandari
Acting Man

Mining Stocks, Gold Prices and Commodity Price Trends

Gold has gone up >400% over the last 16 years. Ironically, it is hard to find a gold mining equity exhibiting similar performance. In retrospect, if one invested in gold, one not only made much better returns, one also took a relatively insignificant risk in comparison to owning equities—equities can go to zero while it is hard for a commodity to fall much below its cost of production. Moreover, depending on the jurisdiction, owning gold might have resulted in lower (or no) tax liabilities.

[…] I am often amused when investors talk about leverage that mining equities offer— a large proportion of investors in the mining sector are driven by this, a sort of casino mentality. As experience over the last 16 years shows, leverage has been a myth and has actually been negative. In their chase for leverage, investors missed out on value-investing and profiting from wealth-creation. Let’s dissect this.

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