Why Gold Still Matters — And How To Profit With Gold Mining Stocks
Around my neck of the woods, you’ll see a lot of clean-cut young men sporting a simple look. They’re usually the type of guy who drives a truck, always gives you a “yes sir or no ma’am,” and always has a girl on their arm.
Blue jeans, cowboy or work boots, a clean t-shirt, a ball cap (optional), and a gold chain necklace (with or without a cross).
There’s nothing like a nice piece of gold jewelry. It never goes out of style. It’s just another variation of a classic look you’ll notice across many different cultures.
The aesthetics are just one reason we’ve been obsessed with it for millennia. It’s just nice to look at. But that’s the beginning of gold’s appeal…
The Universal Appeal Of Gold
Gold has never been just an ordinary metal.
For starters, it’s one of the rarest metals on Earth. Estimates of gold’s actual rarity vary. If you search for estimates, you may come across an interesting anecdote. Supposedly, all the gold ever mined could fit underneath Paris’ Eiffel Tower, forming a cube of just 60 yards on each side.
I don’t know whether that’s true, but one thing is certain. Gold holds a unique place in the history of civilization. We’ve used it for at least the past 6,000 years, through the rise and fall of countless great empires. Through that time, man has used gold as a medium of exchange and a store of wealth – sort of a universal currency.
This has been just as true in modern times. The U.S. used gold to back up the dollar until as recently as 1973, pegging the price of gold at $35 per ounce. We’ve been off the gold standard for around 50 years now, but it hasn’t lost its status as a store of wealth. It hasn’t lost its reputation as a hedge against inflation, either.
In times of economic uncertainty or when inflationary pressures build, investors tend to buy gold and gold mining stocks. Also, thanks to gold’s status, the yellow metal often rallies when the U.S. dollar falls in value.
Ways To Invest…
Thanks to recent financial innovations, investing in gold has never been easier or more accessible. If you want to gain exposure to physical gold, simply buy shares of an exchange-traded fund (ETF) like the SPDR Gold Shares ETF (NYSE: GLD).
Gold mining stocks are also a logical choice for investors. They offer a portfolio hedge during uncertain times. They can also offer significant appreciation potential. A well-run gold miner can easily deliver 2x, 3x, or 5x the return of gold during a major rally. That said, a few gold and silver mining challenges are worth highlighting.
– Miners must sell gold at prevailing market rates (or enter into contracts to sell at predetermined prices in the future). So, there is no way to establish a competitive advantage or secure any product differentiation. Commodity industries like this are usually exposed to extreme cycles, which makes gaining an edge over the competition difficult.
– Many of the lowest-cost, easiest-to-mine reserves have already been exploited. As a result, miners will often expand into more politically unstable markets or employ more technologically advanced mining techniques. Both of these come at a cost.
– Gold miners in some countries have had trouble keeping their costs down. As a result, some have remained unprofitable or only marginally profitable despite a significant rise in prices. One reason is that gold is priced in dollars, but expenses are incurred in their local currencies.
With that said, let’s briefly discuss ways you can invest — and potentially profit…
How Profit With Gold Mining Stocks
Again, ETFs and mutual funds are the way to go if you want to gain broad exposure to the gold miners. Many of these funds have exposure to mining stocks listed in countries like South Africa and Australia. These markets can be tough for individual investors to access. Moreover, mutual funds specializing in the industry are often actively managed. And the best fund managers are well-equipped to know which miners offer the most significant potential.
I like the VanEck Gold Miners ETF (NYSE: GDX) for a simple broad-exposure option.
As for individual stocks, buyer beware. There are a lot of small, fundamentally weak miners with unproven reserves. These companies are collectively referred to as the “junior” gold miners. Many of these stocks have little to no revenues and are more or less exploration firms with shaky prospects. These stocks can offer tremendous upside for investors who are comfortable with risk.
Most investors are better off sticking with mid-to-large-cap miners with proven production potential. Below is a list of the larger and more respectable gold and silver mining firms. Each company is currently profitable and projected to be profitable within the next year.
Remember, this is just a simple screen for profitable mining firms with significant market caps easily accessible to U.S. investors. But it should help you search for gold mining stocks with significant upside.
P.S. If you already have exposure to gold and other precious metals, maybe it’s time to consider “digital gold”…
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