Gold stocks are a way of investing in gold for higher-risk investors.
Are gold stocks right for you?When deciding on which form of gold
investment fits our needs best, we take into account our risk profile and objectives as well as our ability to
analyse the investment options available to us. If we are able to carry out an accurate analysis of an individual
gold mining company, either by ourselves or through the services of a brokerage analyst, we can go directly to the
stock exchange and purchase shares of gold stocks instead of a basket of companies as in a mutual fund or ETF. This will likely give us more control over our
investment results because of the precise targeting but also take away the diversification that is built into an
investment basket. This increases our risk profile but as with all investments, greater potential risk usually
translates into higher potential returns. Individual stocks are therefore more suitable for high-risk investors.
Valuing gold stocksAs already discussed, investing in individual gold
stocks (mainly from the markets of Australia, Canada and Johannesburg) and the baskets that own them (funds) are
considered leveraged plays on gold because they have fixed costs that either add to or take away
from investment results, increasing or decreasing profits as the case may be. The basic idea is that if a gold
mine produces gold with more value than its fixed costs, that excess value is pure profit and the bigger the
difference, the greater the leverage, both on the upside and the downside. Adding to this leverage is the other
factor that funds don't account for--the individual Proven and Probable Reserves (P+P) of
gold still under the ground that also go up in value with the increase in gold prices. One way
of valuing gold mining stocks is by calculating the Market Cap per Production Ounce (Market Cap per P+P Oz.) by
dividing a company's P+P by its market capitalization.
Yet another quirk in gold stocks is the fact that although they all produce exactly the same product--pure
gold--the gold is valued differently depending on the company. This is because different
companies have different cost structures and different risk profiles. For example, some mines may be in
politically unstable areas subject to crime and terrorisism while other miners may be in a stable
financial and ecomomic national climate that is not likely to see any production interruptions or criminal activity
like looting and kidnapping for ransom.
Mining vs exploration stocksThere are two basic types of gold
stocks--gold mining stock and gold exploration stocks. The former have steadier valuations
because they are already producing gold and have a record of profits while the latter are far more
speculative, although sophisticated new electronic exploration technologies are making the business of gold
exploration significantly less hit-and-miss. Regardless, both types are inherently more risky than the general
stock market because they are so undiversified. The flip side of course is that when things go their way, they
offer more handsome returns than the general market.
Alternative precious metals
An alternative to keep in mind for your portfolio is that when the price of gold enters into an extended upswing
or bull market as it has done recently, investors sometimes will look at precious metals alternatives like silver
and platinum which may be relatively better values because they haven't gone up as much in price.
An important difference between gold stocks and gold funds however, are the dividends that are paid out as
income by stocks which funds may not pay typically. This may make a difference if income is one of your investment
List of gold stocks
As a serious mutual fund investor, your should make it your responsibility to find out what the funds you own
invest in, regardless of whether you bought them through a broker or purchased them yourself directly from the
issuer. To help you in this regard, we provide a ready reference--here are some of the top
gold stocks holdings in the gold
mutual funds mentioned in this
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