“Buy Gold for $1” — Outside the Stock Market

By Travis Johnson, Stock Gumshoe, February 12, 2010

Today I’ve been getting a lot of questions from folks about the latest teaser for Mike Williams’ True Income newsletter from Stansberry & Associates. The ad is a pretty brief one, compared to others, and it focuses on something that I’ve written about before in this space — corporate debt.

Yes, I’m afraid I just went out and revealed the deep, dark secret before even sharing the tease with you — True Income is a corporate bond newsletter, mostly junk bonds, and this latest tease about buying gold companies “outside the stock market” for a dollar is clearly a teaser for investing in the corporate debt of mining companies. The $1 bit refers to commissions, different brokers work in different ways, but there are some brokers who will charge you $1 per bond (usually $1,000 face value per bond) by way of commission, though for most brokers the actual commissions from bond transactions are still earned on the spread, the market is less transparent than the stock market, and most brokers do the trades internally, so they’ll buy the bond from another investor and sell it to you for a slightly higher price than they paid.

Not that this makes a huge difference if you choose the right bonds, but if you’re a small investor and put just $500-$1,000 into each corporate bond investment, the “real” commission friction that your account faces will be a bit more than a dollar.

So we hear that there’s a gold mining company that is going directly to investors, and offering a guaranteed return of principal and a semiannual payment — that’s not unusual, that is pretty much what every other corporate bond offers (though the “guarantee” is based on their ability to pay and not go bankrupt, of course).

They give a few examples of extremely profitable trades in similar kinds of vehicles, including the debt of Gold Reserve (GRZ), the company that has been extraordinarily volatile because its assets are in Venezuela, and NovaGold (NG), another small gold exploration company that for quite a while was failing to enjoy the success of other gold miners. When these companies were depressed the fear was that they would go bankrupt if their primary assets, these potential mines, didn’t come to fruition, so the debt, like the equity, was priced to imply that there was a decent chance that they’d go under. When ...

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