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Gold and Gold Minig Companies Stocks: What is their relation?

Gold is the money of kings,- everybody uses to say these days. It is on the verge of passing the $1550/once and it has had a remarkable 3 year period since 2008. Nobody is disputing that. Experts pretend that demand for gold has been one of the key factors in driving its price. There have been other important factors as well, but we will focus on demand in this article.

This quarter we left behind, gold demand toppled 981.3 tones, with a net worth calculated approx. $44 billion. What is more important to note is that the demand for physical gold has been constantly increasing in a sort of exponential function form, more and more requests from year to year. The two giants of gold demand have been China and India. By now they are the second and third largest gold-consuming markets of the globe. Compared to the previous year the global demand for physical gold increased by more than 100 tones.

And the most important thing is that demand did not increase because of jewelry but because of INVESTMENT DEMAND INCREASE. It is the belief of this author that suitable conditions exist for this investment demand to continue to increase. Of course that increase in demand means increase in price. So, what will you do meanwhile? Seating and seeing it rise and rise while you gain nothing from it?

Sure that gold bullion and ETF’s are an alternative to this but I believe that there is a third sector under looked in this respect: gold mining companies stocks. We almost forget that gold needs to be mined and processed and it does not drop from the sky. Thus why not invest in stocks of such companies?! Here are a couple of good reasons why:

a)    The actual gold mining sector has no liquidity problems and is quite large. There are more than 300 gold mining companies publicly listed and traded on various stock exchanges around the globe.

b)    The global market capitalization of the sector reaches $220 billion.

c)    Capitalizations range from between US$50 – US$300 million to the large cap gold mining stocks of over US$10 billion. (Data from the World Gold Council)

It is logical to advice people to invest in gold mining stocks alongside other forms of physical gold. There is a strong connection between the value of the stock and the price of the physical gold. According to the World Gold Council these stocks do not simply track the price of physical bullion but also act as a potential source of excess return, or ‘alpha’, over the return of physical gold. This is what makes investing in them even more interesting. But there are other factors influencing the value of a particular gold mining company stock. These factors include: reserves of un-mined gold below the surface, royalty income streams, projects future and present that the company has, strength of balance sheets, short and long term debt and management quality. That is why a careful study of each mining company is needed prior to investing in its stocks.

This series of articles we will analyze some of the most important mining companies and their stocks so that an investor can decide accordingly prior to making an investment.



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.