Gold Mining Stocks

Investing in gold mines is a proven way to enter the precious metals industry. If you are considering investing in so-called paper gold, why not look into the source of all that precious bullion – gold mines?

While investments in mining stocks aren’t for everyone (and should be considered with some care as mine investment can be volatile,) the return on principal has been historically higher than investing in bullion. Let’s look at the basics of mining stock investments.

Like other companies, many mining operations are publically traded on stock exchanges worldwide. What makes investing in gold mines, or even silver or platinum mines, different from your average corporation is that these mines are producing a commodity with historical staying-power.

Gold mining stocks can be very lucrative, especially during bull markets, and perform very well when gold prices rise. What makes these investments so tempting is that as gold prices rise, profits for the mining companies can skyrocket because their operations costs don’t budge. Unlike other industries, costs and expenses for a mining company during boom times stay static. This may translate to significant profits for stockholders.

It is worth taking note that while the value of mining stocks may be related to gold prices to an extent, it does not always correlate to trends in gold prices. There are just too many factors that influence the value of mining stocks to be able to reliably predict price movements just based on the price of gold.

As with all forms of investment, the investor should exercise prudence and find out as much about the mining operation as possible, before making an investment. When it comes to gold mining, there are several considerations that are regarded as accurate indicators of the viability of an investment.

  • Proven Reserves (gold in ground) –The total amount of gold the mine has been determined to hold and is expected to mine before ceasing operations
  • Cost per Ounce –How much the company expects to make per ounce of gold extracted after accounting for labor, equipment and other operation expenses
  • Debt – Starting a mining operation is very expensive and most companies borrow heavily to begin extraction
  • Market Price – The total amount of share issues multiplied by share price
  • Junior or Senior Mining Company
    • Junior mining companies generally have low stock prices because they are spending relatively small sums of money trying to identify and open up new mines with the hopes of finding vast new deposits. These are risky ventures, but the potential for very high return exists.
    • Senior mining companies are usually established companies working in well-known areas and turn a consistent, steady profit. These investments are much lower yield, and represent lower risk.

While it may be tempting to bet heavily on a new mine run by a junior operation, remember that, no industry (even with a historically reliable product like gold) is free from risk and fortunes are lost much more often than they are made.

As always, all changes to your portfolio should be discussed with your broker.