Putting some gold into your portfolio doesn’t mean you have to stash bullion bars or hide a cache of coins in the cellar. Many investors prefer to take an indirect approach and invest in the stock of gold mining companies. Here are some key points to consider when taking this approach:
- Gold mining stocks are easily bought and sold. If a cash need presents itself, you can sell your stock immediately. Physical gold and gold coins may not be quite as easily traded.
- You’re buying a company, so there is the potential for additional upside – but of course, downside risk, as well.
- It takes a lot of money to develop and run a mine, so you want to look for a miner that had deep pockets and a sound financial record.
- As with gold itself, gold mining stocks can experience huge price swings. Patience is key.
Mining a money making miner
Identifying a good gold mining stock can take quite a bit of research. You’re looking for a value-plus proposition. In other words, if the price of gold goes up, you want your miner stock to offer a 1x plus gain. Without that additional profit potential, you might as well simply make a straight gold investment.
You’ll want your gold mining company to have particular qualities.
Effective management – The more “skin in the game” they have, the better. Ownership and management that has a vested interest in the success of the company helps protect your investment. The theory goes: if they make money, you make money.
Environmental costs and political risks – You are looking for a company that can navigate the complicated and expensive environmental concerns of mining, as well as the political risks. Let’s face it, gold mining is not a cushy job in a modern plant. This business is often located in hostile environments, including physical risk.
Ability to obtain financing — You want to examine a miner’s current cash position and outstanding debt. Gold mining companies require constant infusion of capital to operate, so their balance sheet has to be hardy.
Panning for profits
Gold mining companies with solid track records, effective management and prudent expense management can enhance your portfolio’s potential. But a prudent investment in this sector will require research above and beyond what is required to analyze a typical stock.
Just like panning for gold, finding a valuable nugget can take some time and effort, but when you do locate a gold mining stock of value, you’ll know it’s been worth the effort.
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