Mining stocks can have as much as a 3-to-1 leverage to gold's spot price to the upside and downside. Gold miners are risky because they trade with the broader equity market.
Some tips to consider when picking gold stocks are to find companies with strong production and reserve growth. Make sure they have good management and inventory supported by either buying smaller companies or by maintaining consistent production.
Global gold production has been declining since 2001 and big miners are keeping their gold reserves flush by buying or partnering with small-cap companies, which are in the exploration or development stage.As gold prices rise, gold companies can make more for every ounce of gold they produce, but their net profits depend on their cash costs, i.e. how much it costs them to produce an ounce of gold. Those factors vary from company to company and are subject to currency issues, energy costs and geopolitical factors. You also have to take into consideration how the company grows. There is a finite supply of gold in the ground. According to reports, gold discoveries have been falling by 4 million ounces each year for the past 30 years. Companies, in order to meet growing demand, either have to invest in an active exploration unit in hopes of striking gold, or have enough cash to buy a smaller company. In the World Gold Council's recent Gold Demand Trend report, gold mine supply rose 3% to 702 tons in the third quarter from a year ago as producers hustled to ramp up supply. Global identifiable gold demand rose 12% to 921.8 tons. This trend makes junior miners a risky but potentially explosive investment. They are doing the actual exploring and digging for gold but often have no cash flow and must wait 5-10 years before a mine goes into production. Juniors are oftentimes forced to hedge, lock in gold sales at a low price, which limits profits, in order to secure project financing.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV