By Kishori Krishnan Exclusive To Gold Investing News

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They could be an organized band of operators and they could be residing in your city. They could be using every trick in the book to milk every unsuspecting investor who comes their way. And you could just be one of them – the credulous investor defrauded out of your hard-earned money.

Who are these guys?

We are referring to bogus mining companies – the fly-by-night operators, who have suddenly decided to make hay while the sun shines.

With the price of gold over $1,150 an ounce and rising, enthusiasm for gold stocks has become pretty intense.

And given that Canada is home to a large number of gold mining companies, including five out of 10 of the global leaders, many of them could actually go bust before an oblivious and uninformed investor could manage to get his money out.

Of course, buying gold itself is an option, but the companies are said to add an extra dimension of profitability.

Or bankruptcy.

Too many cooks?

The problem is there are so many gold miners and such a variety of criteria for evaluating those companies: forward earnings, production, cash flow, profitability, amongst many others.

Thousands of new mining companies have come into existence from 2003 to 2008 taking investment dollars for speculative ventures.

Don’t forget- post the economic crisis, there has been total devastation of the junior and developmental precious metal mining stocks, as well as huge share losses for the majors.

Several Canadian companies – from Vale Inco, Xstrata Canada, Rio Tinto Alcan and others – have scaled back expansions, cut jobs and shut down unprofitable mines to conserve cash and get through one of the industry’s most difficult periods in decades.

Even in the past few months, with recovery signs from around the world, there has been a lot of sudden activity from gold miners, including a number of capital raisings and a lot more drilling being carried out.

So, how does one keep a cool head? And where does one go?

Especially when there is so much bullish news floating around about the yellow metal.

All bull

If one recalls, gold price had to merely breast the US$ 800 tape and new investors, momentum players and hedge fund operators piled in with even more money, buying everything and anything in sight.

Promoters of speculative companies, and even some serious ones, issued thousands of press releases. Most of them were pies in the sky, asking gullible investors to buy, buy, buy.

Many unsuspecting investors and hedge funds piled into gold stocks during the October 2007 – March 2008 high range. And as prices started dropping in sympathy, momentum players with huge leverage and funds started dumping.

It happens all the time in natural resources. A price run-up sparks fear that prices will only go higher. An an emotional race ensues, creating a self-fulfilling prophecy where prices are pushed even higher.

History repeats?

Those who follow the markets know that analysts rarely issue “sell” ratings, unless a stock is already crashing and they are stating the obvious.

In fact, if one recalls the situation with WorldCom in 2002, which was rumoured at that time to have accounting problems, continued to be championed by Wall Street. A news wire survey of 19 of 26 brokers canvassed at that time maintained “strong buy” or “buy” ratings.

In street speak however, a “hold” rating usually really means “sell”. A real “sell” rating means the stock is poison.

Now, with gold at its peak, do any of the gold stocks really look better than WorldCom?

Time to sell?

Don’t forget – this has also been a particularly good year to be a mining investment banker. According to the Toronto Stock Exchange, as of September 30, miners had raised $17-billion on the TSX and TSX Venture.

In comparison, they raised just $3.9-billion as of September 2008.

When commodity prices began recovering early this year, metals producers wasted no time pumping out equity and debt deals.

There have been 264 financings, the majority by gold companies.

Shouldn’t that be enough to stop you in your tracks?

Gold buyers are currently split between investors that believe a horrible deflation is coming and that money will be wiped out.

Other, smarter investors correctly understand that trillions of new dollars and foreign currencies have been flooding world economies to bail out institutions. All of which would lead to inflation.

Both sides have great conviction.

But capitalism with a paper money system and a central bank manipulating interest rates, and creating money and credit out of thin air are equally bad signs.

Thankfully, the business of swindling by means of fradulent enterprise, and bogus companies purporting to have been organized to work opulent gold or silver mines, is not now so profitable as it was six months ago.

Corporate financial statements and resource reports need to be signed off by a Qualified Person as defined by NI 43-101.

But how many gold companies are actually toeing this line?

Keep watching this space!

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