GRANT WILLIAMS: There's another story that needs telling. The story of mankind's relentless quest to find gold and extract it from increasingly difficult places and then to turn it into the jewelry, bars, and coins with which we're all familiar.

DANIEL J. OLIVER: Milton Friedman said, and Warren Buffett likes to quote this, that mining gold was insane. You'd dig up the gold in one part of the world, you'd transport it and bury it somewhere else in a different hole. And any Martian watching this would be scratching his head. Of course, it's a little odd to say that an activity in which man has been engaged without interruption for 4,000 to 10,000 years is insane. It seems a little far fetched. People do do insane things for short periods of time but not usually for 10,000 years.

GRANT WILLIAMS: Gold is among the rarest of all the elements. It weighs 19 times more than water and it's twice as heavy as lead, but it makes up only three parts per billion of the Earth's crust. That's the size of the challenge to find this most precious of metals. Since the dawn of civilization, mankind has been forced into ever more extraordinary lengths to extract gold from the Earth's crust. So let's take a look at the evolution of how gold has been mined over the last 1,000 years.

The earliest gold was found in riverbeds as miners diverted streams to reveal the gold beneath. In fact, the ancient Greeks believed that gold was a combination of water and sunlight because it was found in rivers. Placer mining involved swirling water in circles in shallow metal pans with soil from the riverbed leaving gold as it was washed away.

Back in 1200 BC, enterprising early miners would also use water power to propel gold bearing sand over the hind of a sheep, which would trap the tiny but heavy flecks of gold. When the fleece has absorbed all the water it could, the Golden Fleece would then be hung up to dry and beaten until all the gold had fallen off. Hence the legend of the Golden Fleece. A number of early civilizations used a variation of this technique called winnowing, in which soil was bounced on woolen blankets allowing the wind to blow away the lighter sand and thus freeing the gold.

Once the easily accessible gold on the surface had been collected prospectors needed to start thinking about how to work lower down. Beneath the Earth's crust they went, and this required miners to work together in larger groups as they started digging underground. Amazingly, underground mining dates back as far as the Romans. But the real challenge for gold miners was to move on from primitive methods of extracting gold from the soil, to developing machines of increasing sophistication, which allowed them to mine gold from the hard rock below the Earth's surface.

The early days of quartz rock mining were relatively straightforward as far as the shallow deposits were concerned. But until the 1860s, the maximum depth minus could reach was around 300 feet. The sheer size and scale of the economic and geological challenges faced by early miners meant it would take many years of technological progress to enable deeper ore to be reached.

Hard rock miners would sink shafts in order to extract gold from the quartz rock. Drilling was either done by hand or through the use of compressed air drills with the help of a little dynamite. Hydraulic drills were the next evolution. And these helped open up deeper holes in the Earth's surface using drill bits, which became longer and thinner the further they went down. Larger rocks extracted from the mines were crushed by heavy iron stamping machines to release the gold from the surrounding rock.

Hydraulic mining used high pressure jets of water to displace the rock and soil and open up the gold beneath. High in the hills, water was diverted into ditches and through heavy iron pipes. As the water channeled down, gravity increased its pressure and as the pressure reached around 5,000 pounds per square inch, it was pushed through a small nozzle and used to blast the mountains apart. The displaced soil cascaded down the valley and into the sluices below where it would be separated. This new mining technique was productive, was not without cost however, as diverting all that water caused huge flooding in the valleys below, devastating farmland. As a solution to this problem in California, miners turned to dredging, which work like a vacuum cleaner sucking up the material under water and running it through a sluice to sift out the gold.

Mining for gold has gotten increasingly difficult over the last 50 years, not just in finding the deposits themselves, but due to the increased social, political, and environmental factors shaping the mining landscape. But how has that affected the way deposits are discovered and what are the added risks?

BRENT COOK: Now that we're looking deeper and deeper into the earth it's getting much more complex to find, much more complex to recover metallurgy, and now we have to deal with issues to do with social situations, environmental situations. So the cost of finding these things has just gone up exponentially. And the difficulty of finding a new deposit has as well.

Back in the '80s, a new technology was developed in Nevada for heap leach recovery, which meant that you could take low grade oxidized ore-- and oxidized means basically, the gold used to be in pyrite, iron, and it rusted. When it rusted, that turns the pyrite to rust. That liberates the gold. So you sprinkle a cyanide solution on it that dissolves the gold and you could recover it. So that was a whole revolution, we've gone through that. Those deposits, they're mostly gone now.

The next revolution in discovery was when the Iron Curtain fell and the whole world basically opened up to explorationist, geologists. And we could go to places and walk up to outcropping ore bodies that nobody ever looked at. Satellite imagery came in and different metals, different clays, produced a different spectra-- light spectrum. You could see that and process it then you could find areas of alteration and you go straight to that. So that was the big revolution in the '90s. And subsequent to that there's been no revolution, it's just gotten much, much harder to find these things. All the discoveries are happening deeper and deeper and deeper in the earth and that brings a lot of issues, in terms of finding those things. Because really we're looking blind.

RICK RULE: The truth is that the technology involved in finding gold has progressed. The traditional methods of gold and the traditional deposit styles that we mined 200 years ago are tough to find because we already found them and mined them. But the industry is doing a reasonably good job of finding new deposits. The challenge is now, is that the easy to find deposits are often found in political jurisdictions that strike the people that have the money to go find gold as being risky, political jurisdictions. I find myself financing the exploration for gold in places like Congo, Sudan, Kyrgyzstan, Myanmar, Bolivia, places that most people normally wouldn't choose to go on vacation, that's their mistake by the way.

ROSS BEATY: You know people always say, well, mining is really risky because it's really hard to find something. The exploration phase is really risky. Only 1 out of 1,000 prospects ever becomes a mine, so that's pretty risky. It offers an awful lot of scope for shareholders to lose a ton of money. And so it gets known to be a very risky business. But believe me, when you're in the mining business the risk begins when you find an economic deposit.

Once you've found a deposit what do you do? Well, you have to do a whole bunch of technical studies to make sure you can mine it and make money at it. So it's actually ore not waste, and that takes a lot of technical skills. You have to have geologists, engineers, metallurgists, you're gonna have to have a whole bunch of lawyers making sure you got your title right, you've got your surface rights, you've got your social license, and all your CSR people, your environmental studies. You've got to get all that right. You've got to get your permits. So you have exploration risk, you have feasibility risk, is this going to be feasible?

You have price risk. I mean, the gold price can swing, or the silver price can swing, 50% in a single year. I've seen it happen. I've seen gold prices go from $300 to $450 in a year. The silver price goes from $5 to $10 a year. You can have the most genius level metallurgists in your company and they can still get it wrong. You can use a new method and it doesn't work on that particular ore. And finally, you can get in the ground, you can finally start digging it up, and guess what? All of your economic studies are based on drill holes. And the roles might be a couple hundred feet apart or they may be 30 feet apart.

And then you have social risk, you've got to have your social license. Right now in the world, there's all sorts of places that do not want mining, for whatever reason. They don't want mining for indigenous reasons, having to do with the social nature of the tribal peoples in areas that have never had mining. They just simply don't want mining there. It happens in Canada, it happens in Brazil, it happens in Africa, all over the world. Mines are where you find them. They're in great places and they're in terrible places and you just have to take them where they are. It's a highly risky business.

BRENT COOK: The first thing I do when I go to a new project is, yeah, you pick up the rock but what you really do is look around and say, OK, where am I? What's the infrastructure? What's it going to take to get in here to build this thing? Is there a road? Is there power? Is there water? Is there a church sitting on top of the deposit? These things costs hundreds of millions to billions of dollars.

And on top of that, you're dealing with, OK, what's the political situation here? We've seen just this year Guatemala, Tanzania, the Philippines, and Indonesia throw taxes or pull mines or whatever on projects that were built or being built or operating. So that's the a respect that you've got to throw into it. And then you're predicting, as your company, you're predicting what's the gold or copper price going to be 10 years from now when this thing's operating?

GRANT WILLIAMS: The risks involved in finding and building a gold mine are just the beginning. The risks of investing in junior mining companies are every bit as fraught for investors as those faced by the men and women trawling the Earth's crust in search of deposits. Mining companies need to make predictions about the costs of their mines, as well as the future value of the metal they'll eventually be able to pull from the ground. But investors not only have to evaluate these variables, but also make a calculated prediction about the ability of the company's management to successfully navigate the treacherous path from discovery to production. The chances of success are frighteningly low, and new deposits are proving increasingly difficult to find.

BRENT COOK: When you're investing in junior exploration companies, my job is to find the fatal flaw as soon as possible. Newmont did a study a number of years back, where they estimated that 1 in 1,000 prospects turn into a mine of some sort, and a 1 in 10,000 turned into Tier 1 deposit. Now those odds sound really bad and it's not that bad because it's easy to screen out the crap. But it's still really long odds.

I mean, looking at gold we as an industry produce about 90 million ounces a year. We haven't found 90 million ounces since 2006. Right now we're averaging about 20 million ounces a year. So there's a real deficit because you look at their production profiling two, three, four, five years out, it drops off. But you've got to consider it takes, for a large deposit to be drilled out, studied, and built, 10 to 20 years. So anything we find today we've got to think 10 years down the road, more or less, it'll be in production.

NED NAYLOR-LEYLAND: There's unpriced optionality there, because there's going to be M&A wave at some point. There has to be, because the largest companies have been depleting reserves hand over fist and will have to come to the market to buy some of these sorts of names that we bought. You always buy a fund or an index, do not buy an individual stock. Because the risk-reward skew is completely wrong, there's no logic in doing that.

You must limit your downside risk by having an index, which will also maintain 75%, 80% of your upside potential. So that's the first point. The second is to understand what is it that moves them. So while, yes, there's an expiration phase, where you can make 10 times your money if someone drills something out and it looks way bigger than people thought-- that's fine. But for me it's about gold and silver mining companies are mining margin, that's what they're doing.