Gold Stocks and Gold Production: A Beginner’s Guide

- August 11th, 2019

Want to invest in gold stocks? Here’s a breakdown of why it could be a smart idea and how to expose your portfolio to gold production.

For many investors, gold has been a reliable portfolio addition, as it is seen as an ideal diversifier and a source of stability.

As the price of the yellow metal continues to rise, with stocks moving in tandem, many market participants have begun to wonder if now is the perfect time to buy gold stocks.

Here we examine why investing in gold stocks can be beneficial for investors and how to add the precious metal to your portfolio. Additionally, we explore the different types of gold stocks and their relationship to gold production.

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What is a gold stock?

Before investing in a gold stock, it is essential to know what they are and how they work. Like all publicly listed stocks, gold companies issue shares that are available for investors to trade. When you purchase shares of a gold stock, you are essentially purchasing a stake in the company, making returns or losses from its profits.

There are two main paths to take when purchasing from companies with gold mines. One way of obtaining stock is by purchasing it from major mining companies like Barrick Gold (TSX:ABX,NYSE:GOLD) or Newmont Goldcorp (TSX:NGT,NYSE:NEM). The other way is investing in a junior miner such as Great Bear Resources (TSXV:GBR,OTCQB:GTBDF). While both avenues have their pros and cons, it’s worth noting that investing in a junior gold stock can be inherently risky. Since these companies often fail due to the risks associated with exploration and development, you stand a greater chance at also taking on a loss. 

Finally, market participants can also obtain gold shares through investing in gold streaming and royalty companies, such as Wheaton Precious Metals (TSX:WPM,NYSE:WPM).

Although no stock is 100 percent foolproof, investing in a successful mining company can alleviate some of the stress of a down market when you keep in mind that if a company’s share price goes down, it becomes more affordable to purchase and investors can more than likely anticipate that it will rise again.

Why invest in gold stocks?

As concerns around an economic growth slowdown and a basket of geopolitical issues continue to plague the market, investors are turning to gold for its safe haven nature. For many market participants, gold has been a reliable portfolio diversifier due to the fact that it has the ability to act as a hedge against portfolio volatility.

Additionally, the second half of 2019 has seen gold entering a period of prosperity, making gains not experienced in years as it shot up over 7 percent by the close of Q2. Due to the fact that, as the value of the metal goes up, gold stocks rise even further, this form of gold investing can be an ideal way for investors to gain exposure to the metal.

With that in mind, there may be no better time than the present when it comes to buying gold stocks. Below are a few more reasons why it may be enticing for you as an investor to enter the gold market. 

Cost effective

While purchasing physical gold bullion via bars, coins and jewelry is the most direct way to gain exposure to gold prices, it also has the payment of high commissions attached to it, as well as additional costs that come from transportation, storage and insurance of the gold bullion.

Due to the fact that gold stocks are not a tangible investment, market participants are able to own the metal without having to pay the fees associated with physical assets.

Growth potential

Although investing in gold stocks is an indirect way to gain exposure to the precious metal, there is an upside to this because it offers more growth potential. Since 10 ounces of gold today will remain the same 10 ounces of gold in the years that follow, it does produce an income stream. Many investors, including Warren Buffett, shy away from the yellow metal for that very reason. 

However, because gold companies tend to expand over time, investors can benefit from gains in gold production — an added bonus that does not come with holding gold bullion. 

Is gold a good hedge investment?

 
Get an in depth market report for free!
 

The relationship between gold stocks and gold production

When investing in gold stocks, it is important to understand that they have a direct relation to gold production. If an investor has purchased a share from a company that is experiencing a high level of production, they can get more for their return based on those production rates. 

However, the downside to this relationship can be seen if an investor has purchased shares from a company that is experiencing low levels of production or if extraction of the yellow metal has cost the company a significant amount of money. Production can also be negatively pressured by harsh environmental issues where the mines reside, shutdowns due to care and maintenance and even mine strikes from local workers.

When looking at gold stocks from the lens of how it can be affected by gold production, it appears to be an investment with more risk for more reward. 

What are the different kinds of gold stocks?

As previously mentioned, there are two main types of gold stocks — those of large cap companies and those of junior miners. Below, the Investing News Network (INN) has explored these two popular options.

Large cap gold companies

Large cap gold companies are known for the lower level of risk that comes with investing in them. While some companies have an easier time multiplying share price than others, investors are not likely to experience stock that rises 10 times in value (also known as a 10 bagger). 

Despite not being able to rocket in price, investing in a large cap company also protects market participants from large swings within the market. If there are no bolstered gains, there are no extreme losses either. Large miners are generally easy to value as they sell at large-cap valuations.

Small cap gold companies

Investing in junior mining stocks can be tricky, and it is often challenging for investors to pick out winners within the stock market. 

If a junior makes a big discovery, very few of them have the mining operations necessary to develop a property; for many, the goal is to hit upon a deposit that’s attractive enough to catch the attention of a major producer that will buy it from them at a profit.

Even though the odds of success are low, many investors are attracted to junior mining stocks because, as resource specialist Peter Krauth of Money Morning writes, “all it takes is just one 10 bagger to make up for all the dogs in the pound.”

Is gold a good hedge investment?

 
Get an in depth market report for free!
 

How to invest in gold stocks

INN has put together a handy guide of investment tips, which would be beneficial to anyone looking to purchase gold shares.

The main takeaway? Educate yourself. From the company itself, to production levels, cash flows, quarterly results and even the price of gold. The more you know, the better decisions you will be able to make. Here are a few things the experts we spoke with suggested looking at:

Look for good management — “The biggest challenge in the industry right now is people,” said Lawrence Roulston of WestBay Capital Advisors. When he looks at mining stocks, he wants to see capable, experienced management teams.

Buy quality and look for “when” stories — Brian Leni of Junior Stock Review suggested that investors position themselves well in quality companies, adding that it’s best to look for “when,” not “if,” stories.

Find the difference between price and value — “I want to put a value on every company that I want to invest in, and I want to see if I can get it at a price that is substantially lower than the value that I can perceive in that stock,” said analyst Jayant Bhandari.

Think long term — Consider taking a wider-reaching view by investing in companies focused on generative or early stage exploration, said Mark Ferguson of S&P Global Market Intelligence. Similarly, CRU Group’s Alex Laugharne said investors should avoid “piling into” hot markets and expecting immediate returns.

Remember to look for flaws — Don’t just look for positive features in companies, commented Brent Cook of Exploration Insights. “Nine times out of 10 there will be a fatal flaw that shows up.”

What are the best gold stocks to buy?

Interested in the stocks that are currently making waves in the market? INN has recently reviewed a list of 6 gold stocks to watch in 2019 according to Raymond James analysts.

For other possible gold mining companies to invest in, check out our lists of the TSX and TSXV-listed gold stocks that are up the most year-to-date.

Don’t forget to follow us @INN_Resource for real-time news updates!

Securities Disclosure: I, Nicole Rashotte, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: Great Bear Resources is a client of the Investing News Network. This article is not paid-for content.

The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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