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Investors view gold as a safe haven metal and they are purchasing it to protect themselves from risks such as negative geopolitical events, financial crises and inflation.
However, there are many advantages to buying gold mining stocks instead of physical metal. The reason is that gold companies can potentially generate higher returns than an investment in physical gold by expanding their production and reducing costs. This allows gold mining companies to increase their profits by allowing their share prices to outperform the price of gold.
But beware, not all gold stocks outperform gold. For this reason, investors must carefully choose the best gold stocks to buy.
Investing in gold mining stocks can play an important role in a diversified investment portfolio. Gold is a good inflation hedge and as is well known, it has held its long-term value. Since owning physical gold is complicated and relatively expensive, buying gold stocks becomes a great way to get the exposure you need in your portfolio.
Investing in gold mining stocks is also much easier than buying physical gold, as shares of companies that mine, refine and trade gold are bought directly on your brokerage account.
Some of the most popular gold mining stocks in this industry include:
Gold mining stocks are divided into two categories, major and junior. The majors are the ones that have been in the industry for many years, have proven methods for exploration and mining, and have steady production year after year. Juniors are usually smaller companies and investing in them is more risky, but you can make huge profits if a junior manages to find a good mineable mineral deposit.
Focus on stable political regions - Better stay away from mining companies operating in politically unstable and generally insecure regions.
Look balance sheets - The best companies all have solid balance sheets and low debt.
Ignore the hype - Instead of listening the hype of brokers, focus on reasonably priced mining stocks with favorable geology.
Look at the market capitalization - A company's marketing can be so successful that it will sometimes cause the gold mining stock to rise too high relative to the size of its ore body. The market capitalization of a mining stock should not exceed half the value of the gold.
Choose established areas - Choose those mining stocks that operate in a geological area similar to that of nearby producing mines.
Look for a high average daily trading volume - When looking for junior mining stocks, this is an important factor. The more actively the junior mines are traded, the more liquid they are.
Look for constant production - Some of the most promoted gold mining stocks are penny stocks that have yet to start producing, increasing their reserves, or raising the money needed to go into production. The prospects for these mines are by no means certain.
Invest in stocks with a broad base of operations - The best gold mining stocks with the least risk have a diversified reserve base in order not to depend on the production of a single mine or the political situation.
Look for longevity in reserves - Companies with low reserves must have continued success in their exploration programs to maximize mining production, and this success is never guaranteed.
Look for the mines that are already producing - The solid manufacturing base reduces the risk of relying only on new developments.
Environmental factor - Look at the environmental constraints. Especially in Europe, only a particularly rich discovery justifies the costs of overcoming environmentalists' objections.
Invest in gold stocks instead of bullion - Unlike bullion, gold mining stocks have the potential to generate income. High-quality gold stocks can pay off well by opening new mines and increasing production. But keep in mind that you should limit your gold stocks to a limited portion of your portfolio, even if they look very attractive to you.
Read about UGPay Group AG's investment in the "Urals Gold" project.