Why Buy Gold Stocks?

One of good methods to participate in the present gold bull market is via having shares of gold mining firms. Actually, a number of qualified gold pundits think that mining share holders will ultimately make more money when compared to those who only buy gold bullion. I normally believe this view. But, lest there exist any confusion, let me as well point out that owning gold bullion should be the Base of one's precious metals portfolio. It's only after one has established a position in owning physical gold bullion that one should think purchasing gold shares.

Prior to buying any mining shares, it is also important to know whether one is investing or else speculating. As discussed in one more article in this topic, there is a difference. Like in other sectors of markets, there are mining shares which can be investments, as well as there are those which are speculative plays. In all candor, most mining shares are risky, speculative stocks above real investments, as explained by the famous Graham as well as Dodd. Though, depending on amount of risk one can tolerate, speculating in mining stocks might be an particularly rewarding approach. In reality, people who speculate in the mining sector are those who have the chance of the greatest gains. Elsewhere on this subject, I mentioned the fact that Google (GOOG) stock have moved out from about $100 per share to approximately $700 per share since this company's IPO. It might shock you, but, in the mining share sector, that kind of share price increase isn't that unfamiliar. On the other hand, it is also familiar to view one's portfolio go behind by 20% to 30% while the valuable metals go through one of these frequent pullbacks. Speculating in mining shares isn't for everyone! There may be a many stomach-churning moments!

Luckily, there are a variety of mining companies whose shares meet up Graham as well as Dodd's definition of investment. We'll chat about one of these companies initially. Then, I'll mention a few of the other types of most speculative methods that to invest in the mining sector. I own shares in companies which do meet the Graham and Dodd definition of investments. However, I also have shares in mining companies that are highly speculative. I don't necessarily suggest these types of stocks for most people.

My favorite gold company that to INVEST is Goldcorp (GG/NYSE). Why? Firstly, their flagship mine is situated in Canada, one of the most politically stable nations for natural resource investment. There are several very promising gold deposits in the Venezuela, but understanding what you understand about Hugo Chavez, might you need to risk your dollars in that country? Goldcorp has its projects in Canada, the U.S., Mexico, Chile, and Argentina. Each of these countries are "mining-friendly," therefore there is comparatively less geopolitical danger. Goldcorp is bought and sold on the NYSE, thus it is most "liquid" as far as mining stocks are concerned. As a significant gold providing business, its stock price is more less unstable than if it were a junior producer or an exploration company. So, if preservation of one's principal is important, Goldcorp is a better bet than a smaller mining company. Goldcorp have also paid a dividend Each MONTH for a number of years. Therefore, Goldcorp investors make a return on their principal. Because we are in a bull market for precious metals, Goldcorp's share price have moved high quite considerably. Therefore, when one buys Goldcorp stock, individual also takes an opportunity to enjoy share price appreciation.

There are other reasons to like a company like Goldcorp. Back in the 1990s, when we are in a bear market for valuable metals, various mining firms hedged by agreeing to sell upcoming production at the at that moment-prevailing costs. This strategy worked well on some time when the price of gold wasn't going up. It allowed firms to raise much-wanted money. However, hedging is really a terrible plan at the time the price of gold is going up. Yow will discover that the price of gold has moved up hundreds of dollars for each ounce at the time you're forced to generate the sale. As a shareholder, how would you feel if your company had agreed to sell future production of gold for $300 for each ounce, but the price of gold had subsequently gone around $850 per ounce by the time the gold was to be sold? There are a few businesses which have made these types of terrible decisions. Goldcorp has not engaged in any hedging or forward sales of production.

Next positive attribute of Goldcorp is that, unlike another chief producers, it's "locked in" chief known valuable metals deposits on behalf of upcoming production. In 2006, Goldcorp merged with Glamis Gold, a company together with most important assets in Mexico. World gold production have actually been declining over the last few years, as well as there are a few experts who consider that we could have already reached "Peak Gold" regarding our capacity to improve future production. Goldcorp has the capability to include to its production or, at the very least, keep its production at a top level. Lastly, it has one of lowest for each ounce costs of production of any main gold making company. The lower the price, the larger the earnings margin, in particular in a bull marketplace for gold!

What regarding other types of gold mining companies? In addition to the key producing businesses, there are lots of smaller producers as well. Few, if any, of these companies pay dividends, as well as their shares tend to be much "thinly traded" than the shares of Goldcorp and other "majors." Thus, most minor producers, still those who have important identified reserves in the earth, do NOT meet Graham and Dodd's standards for being an investment. But, it should still make sense to buy shares in smaller producers as an "informed speculation." A major company frequently concludes that it's inexpensive to acquire a lesser company with known deposits than to pay the cash on exploring for extra gold or silver. In the current conditions of reducing production moreover rising expenditure of production, I believe that several smaller companies will be acquired through larger companies. When one may identify a business that is a prime "takeover candidate," one have a chance for important share cost appreciation.

Last but not least, there are the tiny exploration companies. Most of these firms are traded on Toronto markets or over the counter. They're lightly traded and very volatile. While one buys shares in these companies, you will need to be ready to lose one's entire money since an exploration company would never locate a significant quantity of gold, much less go into production otherwise sell what it needs to a major company. Lots of such ventures turn out to be worthless. However, if an exploration company identifies a significant deposit, it can develop into a very smart target for acquisition, and that is when shareholders can see huge gains.

One exploration company which has like potential is Northern Dynasty (NAK/AMEX), also discussed in Jim's Picks. In past 2002, Northern Dynasty was basically a penny stock, having a share cost of about $0.40/share. As of early 2008, it had been selling for about $13.00 /share. Why? Initially, Northern Dynasty has identified what's possibly the world's largest undeveloped deposit of gold, copper, and molybdenum in Alaska. There are some environmentalist obstacles to going into production, but it may occur that Northern Dynasty will in the end be able to take its deposits into production. However, it is even more expected that Northern Dynasty will be bought by a bigger mining company, and that's most probably the real reason for why the company's stock has had a great high percentage surge. Two major companies, Rio Tinto and Mitsubishi, have bought large stakes in Northern Dynasty. A third, Anglo American, have entered right into a collaboration with Northern Dynasty to develop one among its projects. While the actually large money decides to have involved with what was once a small exploration company, there is a excellent chance that Northern Dynasty is a "real deal." It will probably be acquired by one of the companies which have by now get involved with it as an investor or as a partner. In alternative, it will have the financial clout to go into production. Either way, one can see its merits.

Unluckily, not all exploration firms turn out in addition to Northern Dynasty appears to be doing. Many never find anything significant, or they are incapable to increase sufficient funds to engage in the costly process of exploring. Drilling is not inexpensive, plus costs has escalated during the past few years. Several exploration companies go out of industry. If one is usually considering speculating in exploration stocks, one of the most main things one can do would be to get the information about the people who are concerned with the company. In the case of Northern Dynasty, their management team is comprised of chief executives of the Hunter Dickinson Group, one of more highly respected Canadian companies in the mining development business. They have a proven track record. There are more exploration companies which also have skilled persons in management and ownership. Those are the types of firms I prefer if I am going to gamble with a tiny portion of my portfolio. Those who have before brought a project into production are far more prone to take action again than people who have not, but exploration companies remain dangerous. Even with the best people involved, there is no assurance which an exploration company can be doing well.

Many concluding remarks are in order. For most people, investment is the one method to go. If you buy Goldcorp, you generally know what you are receiving. One more company I prefer is Agnico Eagle (AEM/NYSE). I'll chat about them in a future issue. If you purchase companies such as GG and AEM, you obtain relative stability and dividends. You have fewer stomach-churning moments! Many people shouldn't speculate. It's just like making a bet. Never risk any money you can't afford to lose. Even if you do choose to make a bet on the speculative mining company, make sure that your bet is an educated bet. Risk only a small a part of your money on any one speculative bet. We are in a major bull market for mining shares. People who have invested and speculated wisely since 2000-2001 have done very well. It is not too late to participate in bull market, provided that you do your homework.


Article Source: FxTradingStock.com

About the Author

Gold Market Monitor is a subscription based membership site that uses an exclusive gold timing strategy. It shows its members the best time to invest in gold bullion or gold stocks and when to exit to the safety of cash. Try the Gold Market Monitor for 60-days and safely profit from up and down trends in the gold market.

by: Greg Matthews

Total views: 33 Word Count: 1787 Date: Sat, 10 Jul 2010

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