Investments in Gold – Chapter 11: Gold Stocks

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Updated: Mar 5, 2019, 13:14 GMT+00:00

This is chapter number 11 out of 15. Read the rest: Read Investments in Gold – Chapter 1: Introduction Read Investments in Gold – Chapter 2: Advantages of

Investments in Gold – Chapter 11: Gold Stocks

This is chapter number 11 out of 15. Read the rest:

When we talk about gold stocks, we are not talking about the actual physical gold but actually referring to the shares in gold mining companies. By right when the price of gold rises, the prices of shares in these companies will also rise. However Share prices in gold mining companies will not always necessarily rise when the price of gold increases. There is also a myriad of other factors to consider as well. One need to consider management abilities, geologist’s reports, labor relationship, the company’s gold hedging position; prospecting or mining, political as well as environmental factors.

As compared to a basket of gold mining companies’ shares, individual gold shares are more prone to fluctuations and thus more risky. The risk to reward ratio is higher and therefore such investments are considered more speculative. Then again, the higher risk also provides for higher returns. You can expect such returns from mid and large-capitalization un-hedged established gold mining companies with verified reserves and a strong balance sheet coupled with a capable management team.

Gold Stock Options

Like futures options, gold stock options are contracts between two parties that expire at a mutually agreed date in the future. The options gives the purchaser the “rights”, without the obligations, to buy (Call Options) or sell (Put Options) a gold mining stock at a specific price on or before the mutually agreed date of expiration.

With stock options, a trader has substantial amount of leverage as stock options permits him to hold a major stock position with only a little outlay. With options, speculators can wager on the market fluctuations without having to choose the directions of the price movements. In this respect, options traders are trading more on volatility as opposed to price. Nevertheless because of the short term nature of these options, they can become virtually worthless upon expiration.

Mutual Funds and Precious Metal Unit Trusts

Rather than picking individual shares personally, investors also have the option to diversify their risks by pooling their investment in investments vehicles that concentrate on gold mining companies shares. These investment vehicles can take the form of Mutual funds, unit trusts; open-ended investment companies (OEICs) or closed ended funds. The UK Gold & General Fund and the Canadian Sprott Gold & Precious Minerals Fund are two of such kind of investment vehicles that specializes in shares of mining companies. There are also many such funds that specialize in the precious metals sector in theUS. However, investors have to take note that they will also shoulder the additional US dollar currency risk when investing in US precious metals funds.

On the whole, mutual funds or unit trusts represent an ideal way to invest in the precious metal mining sector. The investor’s risk is substantially reduced as the performance of these funds is not dependent upon the shares of any one particular company. On top of this risk reduction through portfolio diversification, the basket of shares is selected by specialists who have a good understanding of the industry and companies concerned.

Read Investments in Gold – Chapter 12: Gold Futures
Read Investments in Gold – Chapter 13: Technical Analysis
Read Investments in Gold – Chapter 14: The Motivations for investing in Gold
Read Investments in Gold – Chapter 15: Conclusion

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Table of Contents

Intro

Intro