Gold has always been a reliable long-term investment choice. If you are looking for an equally secure and profitable option, consider hedging your bets in gold mining stocks as an alternative.
What Is Gold Mining Stock?
Gold mining stocks refer to the tradeable shareholding in gold mining and exploration companies. When you buy gold mining stock, you acquire a slice of the company issuing those shares. As the company’s value rises and falls, the value of its shares follows suit.
Currently, the gold mining sector is prospering with over 300 publicly traded gold mining companies. Picking one of these companies to invest in will require researching the company’s profitability and performance.
You can garner an idea of a company’s performance by monitoring the relevant shares guides, including:
- NYSE Arca Gold BUGS Index
- FTSE Gold Mines Index
- S&P/TSX Capped Gold Index
- Philadelphia Gold and Silver Index
Shareholders can purchase and trade with the stocks of public limited gold mining companies. Such companies typically offer shares through an Initial Public Offering (IPO) or trade these stocks on public exchanges.
Factors that affect a gold company’s stock value are:
- Management quality: Competent leadership steers a company towards achieving goals and keeping shareholders happy.
- Production costs: Failure to control production costs can throw a gold mining company into debt. Even if the company is producing an abundance of gold, soaring production costs easily compromise profits.
- Active projects: A company that is mining and producing gold is generating revenue. Expanding its production will lead to more revenue and higher stock value.
- Mining exploration: If a company has discovered a new mining site with huge potential, its share price will soar.
What Affects the Value of Gold Mining Stocks?
The price of gold directly affects the value of gold mining stocks. When gold prices rise, gold mining stocks do too.
Since the beginning of 2020, gold prices have been soaring, leading to earnings in the gold stock market. The primary reason for this trend is a fear of an economic downturn from the coronavirus lockdown. To protect their wealth, investors buy gold, which is viewed as a haven in times of crisis.
As the demand for gold increases, its price continues to rise. The increase also drives the value of gold mining stocks higher.
Other factors that significantly affect the value of gold mining stocks are interest rates, dollar value, scarcity, and production.
Lower interest rates cause gold prices to skyrocket, which causes gold mining stocks to rise. The opposite is true when interest rates rise, however.
Interest rates affect the value of gold because commodities do not require the payment of interest or dividends. People want investments that yield high returns, so they prefer investing in interest-bearing investments when interest rates are favorable. When interest rates drop, the return on investment falls, and gold becomes a more profitable option.
Value of the Dollar
When the value of the US dollar drops, the demand for gold increases globally. It also boosts gold mining stocks.
The US dollar is the accepted denomination for gold, so a strong dollar increases gold’s price and causes a corresponding drop in the demand for the commodity. When the dollar weakens, gold becomes an attractive investment opportunity.
When the dollar crashes, investors rush to convert cash to gold because it retains value better during economic turmoil.
Gold is a relatively rare material. When there isn’t enough of the resource in circulation, supply cannot keep up with demand, which increases gold’s value on the market. When that happens, gold stocks rise in value.
Gold scarcity is often due to flailing production or banks hoarding the gold bullions that are in circulation.
Gold mining has been around for centuries, and miners have extracted most of the easy-to-reach gold deposits by now. Companies now have to dig deeper and harder to find accessible gold deposits, which has led to a sharp increase in production costs.
The more expensive it becomes to produce gold, the more valuable it will be, which will positively affect the gold stock market.
Gold or Gold Mining Stock: Which has more Value?
It depends a great deal on the market under scrutiny, but most shares outperform the price of gold. It only happens when gold prices are on the rise, though.
Gold mining stocks outperform gold because operating and financial leverage cause a higher percentage of free cash flow. What that means is that a rise in gold prices increases a gold mining company’s disposable income when debts and production costs remain unchanged. An unencumbered increase in cash flow raises the company’s equity value considerably.
The positive effect subsides when gold prices start to drop, however. Gold mining companies will see their shares drop, and can only minimize the losses by cutting operating costs or boosting production.
If you are trying to decide whether to invest in gold or gold stocks, remember that investing in gold bullions is more secure long term. You can often earn more through perceptive short-term investments in gold mining stocks, however.
Types of Gold Stocks
Investors have many different options when it comes to gold stocks.
You could invest in a gold exchange-traded fund (ETF), which lets you track the price of gold. It is an affordable investment option that works by following gold bullion prices with each fluctuation. Examples of these types of gold shares are the SPDR Gold Shares ETF and the PowerShares DB Gold ETF (DGL).
Alternatively, you could purchase gold stocks. For example, gold mining companies that people frequently invest in are Freeport-McMoRan (FCX), Barrick Gold (GOLD), and Goldcorp (GG).
Risks of Investing in Gold Stocks
Gold is not too volatile, but market forces do affect the level to the degree that shifts profits to losses. Gold stocks are riskier because the company’s actions and performance also multiply the market effects on its stock value.
For example, everything else about a gold mining company might be doing well, but a single wayward statement from a company executive could send its stocks into freefall.
There are also production risks to consider. For instance, an accident at a mining site, declining ore grades, a worker’s strike, and other incidents affects production, and in turn, stock prices.
While the above risks are manageable, gold companies have little control over other risks, such as environmental disasters or political instability. Flooding or an earthquake at a mining site will halt production and damage a company’s stocks, perhaps for years. The same risk applies to political upheaval in the country hosting the mining site.
7 Gold Mining Companies to Consider As An Investment
It is safer to buy gold mining stocks from established companies with operational mines. You should also target companies that have an excellent track record of yielding a high ROE (return on equity)—it indicates shareholders are earning more money per dollar invested.
According to data from various industry analysts, the best gold company investment opportunities right now are:
Agnico Eagle Mines (AEM)
Agnico Eagle has one of the best performing gold mining stocks. The company’s performance has been consistently impressive for several years, indicating that its prospects are strong.
Another promising indicator is the company’s success in keeping operating costs under control and delivering mining objectives.
Kirkland Lake Gold (KL)
Kirkland Lake stocks are a prudent investment for two reasons. Firstly, the company’s debt ratio is lower than many of its competitors. Secondly, the company’s mines are in countries with stable governments—Australia and Canada.
The company recently acquired Detour Gold, which increased its asset base. The current Earnings Per Share is also attractive.
Newmont Corp. (NEM)
Newmont is one of the few gold companies with substantial capital. Most of it comes from the company’s robust gold production capacity, which yields over six million ounces per year.
Investing in the company with the largest gold production in the world seems like a safe bet.
SSR Mining (SSRM)
SSR Mining is not the largest gold producer, but it has built a fine reputation for steady cash flow and minimal debt commitments. The company operates in stable locations, such as Canada, the US, and Turkey.
Barrick Gold Corp.
The Canadian company has one of the most sought-after gold mining stocks on the planet. It boasts mines in Canada, the US, Africa, Australia, and South America, placing it among the world’s most active and consistent gold producers.
Kinross Gold Corp.
Kinross Gold has mining operations in Canada, Brazil, Ecuador, the US, Russia, Chile, Mauritania, and Ghana. While many of the company’s sites are not in stable regions, it has still kept operating costs low and gold production profitable for years.
Wheaton Precious Metals Corp. (WPM)
Over 50% of Wheaton Precious Metals’ revenue comes from gold production. Expectations are high regarding the company’s stocks because of its considerable cash flow capabilities.
There are also projections that Wheaton’s gold output will rise considerably from 680,000 ounces in 2020 to 814,000 ounces by 2023.
In 2020, COVID-19 caused much uncertainty surrounding the global economy, but it was a winning formula for gold. The economic uncertainty, combined with dwindling global gold production, has led to the price of physical gold increasing steadily, which has also boosted the value of gold mining stocks.
If you would like to invest in gold stocks right now, our experts are available with more information. Contact us today to schedule a consultation.