Why you must own gold, not just gold miners

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As regular readers may have noticed, I'm a big fan of mining stocks.

But it's important to remember - although their fortunes may be linked, owning a gold mining stock is not the same as owning gold itself. You should always have exposure to the yellow metal itself.

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Here's why

Rick Van Nieuwenhuyse is one of the top exploration geologists in the world. Formerly vice president of exploration at Canadian gold mining major Placer Dome (since bought by Barrick Gold), he cut his teeth during the mother of all bear markets in the 1980s and 90s.

Budgets were being cut left, right and centre. Nothing was being invested in exploration. Metal prices seemed to be endlessly falling. Our Glorious Gordon - still Chancellor in those days - was unnecessarily selling our most precious asset, pushing down the gold price even further. But Rick Van Nieuwenhuyse was one of the select few with the vision to see that this couldn't go on: that the commodities tide would turn.

He left Placer and took over a pretty-much washed-out mining company called NovaGold (NG) with lots of debt and no real assets. He was planning to use his exploration experience to do some good deals with major mining companies and build a new gold company. He focused the company on Alaska, where he knew the terrain, identified some promising properties and began to conduct joint ventures.

In 1999, Rick bought the Alaska Gold Company for $5.5 million, selling some of Alaska's land to pay for the deal. Alaska had created millions of cubic yards of tailings by dredging ancient beach gravels to produce gold. Nova saw an opportunity and began to sell these tailings as sand and gravel for construction. Trucks would drive up, load up with sand and gravel, pay up and leave. The money poured in.

How to build a mining giant

Nova didn't blow its cash on wine and women. The company spent it on exploration, just as the major mining companies were cutting back. And Rick discovered or brought into development some fantastic properties: Donlin Creek, the Rock Creek/Saddle Project, Nome and Shotgun as well as the Galore Creek Project in a joint venture with Teck Cominco, another mining superpower.

In terms of market cap, Rick turned Nova into one of the biggest gold companies in the world, while fighting an aggressive take-over attempt by Barrick, the world's largest gold miner, which many chief executives with less ambition would have jumped at.

Nova Gold had so many of the qualities you look for in a mining company. It ticked all the boxes. It had:

- Fantastic properties with vast amounts of metal in the ground.

- A personable, determined and charismatic president with an unrivalled, proven record in exploration; a president with vision, who understands gold and what is driving this bull market in metals.

- A decent share structure.

- Plenty of cash in the bank.

- A chart that suggested the company was a buy.

- Low political risk: with properties in Alaska and British Columbia, this was not a company that was going to have its assets snatched by some despot.

- At a late stage of development with plenty of exploration upside.

Mining is risky, even in a bull market

Then on Monday, as gold soared to $830, the stock plunged by over 50%.

The company had made the following announcement:

November 26, 2007 - Vancouver, British Columbia - NovaGold Resources Inc. (AMEX: NG, TSX: NG) and Teck Cominco Limited (TSX: TCK.A, TCK.B; NYSE: TCK) today announced they will suspend construction activities at the Galore Creek copper-gold-silver project in northwestern British Columbia. A recent review and completion of the first season of construction indicate substantially higher capital costs and a longer construction schedule for the project. This, combined with reduced operating margins as a result of the stronger Canadian dollar, would make the project, as now conceived and permitted, uneconomic at current consensus long-term metal prices. NovaGold and Teck Cominco continue to view the property as a substantial resource and will initiate a comprehensive review to evaluate alternative development strategies. The Galore Creek partnership will conduct an orderly suspension of construction activities and will work with employees, the Tahltan Nation, local communities and other stakeholders to minimize the impacts of this decision.

Even though we are experiencing one of the greatest metals bull markets in history possibly the greatest in living memory - mining remains an extremely difficult and high-risk business, and one that ruthlessly punishes even its greatest players. It is not a game for the faint-hearted.

If you believe in a commodity, you must own the commodity itself. Companies that produce that commodity will give you greater leverage, yes, but you are also exposing yourself to company risk. Even with a company like Nova that ticks all the boxes, Stercus accidit'.

I have no doubt that Rick and Nova will bounce back from this, particularly if they value the mine at higher consensus metal prices, but these must be extremely difficult times for him and his shareholders.

By the way, Nova may well be a buy here, if you dare

Turning to the wider markets

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Citibank cash boosts financials

Despite a late surge, London's blue-chip FTSE 100 index still ended the day in negative territory, down 39 points at 6,140. REtailers including Next and Home Retail Group, owner of Argos, fell on news from peer signet of a sharp fall in Q4 profit. However, financials including Barclays were boosted by good news for US bank Citigroup (see below). For a full market report, see: London market close.

On the continent, the Paris CAC-40 closed down 24 points, at 5,434, yesterday as strength in the insurance and banking sectors failed to offset losses for automotive stocks. And in Frankfurt, the DAX-30 was 36 points lower, at 7,531.

Across the Atlantic, stocks pulled back Monday's losses as news of a $7.5bn cash injection by the Abu Dhabi Investment Authority for Citigroup cheered investors. The Dow Jones added 215 points to close at 12,958. The tech-rich Nasdaq was up 39 points, at 2,580. And the S&P 500 was up 21 points, at 1,428.

In Asia, the Japanese Nikkei had fallen 69 points to 15,153 today, and the Hong Kong Hang Seng was up 161 points, at 27,371.

Oil falls on rumours of increased Opec production

After falling over $3 yesterday on speculation that Opec could increase production quotas when it meets next week, crude oil futures had fallen further - to $94.32 - this morning. In London, Brent spot was at $93.14.

Bargain-hunters came back to gold this morning following yesterday's 1% fall, sending the yellow metal to an intra-day high of $815.30. However, it had since fallen back to $802.60. Silver, meanwhile, had dipped to $14.25 an ounce.

The pound had fallen against a revived dollar this morning and was last trading at 2.0615. The pound was also at 1.3978 against the euro. And the dollar was at 0.6779 against the euro and 109.04 against the Japanese yen.

And in London this morning, electronics retailer DSG International announced that H1 pre-tax profit had fallen by a quarter, mainly due to weakness at its PC World stores. The company also announced that it was cautious on the outlook for the second half as consumer confidence looked fragile ahead of the key Christmas period.

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