Gold mining stocks come with some advantages, among which is that their value is linked to the price of gold and is more sensitive to it than gold bars. The reason for this is that the value of stocks is determined by anticipated profits over the life of mines. This is based on the relationship between the mine's reserves, the cost of production, and the anticipated value of the extracted gold.
The costs of mining companies are generally high, and they are leveraged against the price of gold. Anything over the cost of production is profit when the price of gold raises. If profits increase, gold mining companies pay high dividends.
With this in mind, there are some risks associated with investing in gold shares. First, it is difficult to accurately predict the amount of reserves available in a given mining site. Core drilling programs are used to evaluate the quantity of reserves, sapling the potential gold reserves. This serves to measure the concentration of gold in different rock locations. While the reserves discovered are extrapolated over a large area, the overall amount of reserves is an estimate. They cannot give guarantees that they will actually extract this amount, as it may not be there in reality. Human judgement plays its role as well, especially when it comes to companies whose primary goal is exploration. They may claim that gold reserves are promising as to manipulate the figures and attract investors. Fine judgments may be made by both the financial controller of the company and the geologists.
There are other risks when it comes to investing in gold mining stocks. These are associated with the directors' competence, the company's level of indebtedness, the health of their balance sheet, and the dividend policy, established by the directors. Other risks are associated with capital expenditure for future operations, costs for lengthening the life of the mine, size and quality of reserves, etc. Additional risks relate to the metal's production costs. Potential labor problems and political risks in the region or state where the mining site is located should also be taken into consideration. Other factors to look into are income from past reporting periods and price prospects. Another factor involves the prospects of the equity markets and the economy in general. Finally, it is important to know whether the mining company has hedged its produce as to raise funding.
Naturally, it is not only the price of the metal that should be taken into consideration. The above variables have a strong impact on the risk - reward ratio, and investors look at them before making a decision. At the same time, gold miners are not the only companies carrying corporate risk. The decisions investors make can also affect the markets (for example, fear of coming recession.
The costs of mining companies are generally high, and they are leveraged against the price of gold. Anything over the cost of production is profit when the price of gold raises. If profits increase, gold mining companies pay high dividends.
With this in mind, there are some risks associated with investing in gold shares. First, it is difficult to accurately predict the amount of reserves available in a given mining site. Core drilling programs are used to evaluate the quantity of reserves, sapling the potential gold reserves. This serves to measure the concentration of gold in different rock locations. While the reserves discovered are extrapolated over a large area, the overall amount of reserves is an estimate. They cannot give guarantees that they will actually extract this amount, as it may not be there in reality. Human judgement plays its role as well, especially when it comes to companies whose primary goal is exploration. They may claim that gold reserves are promising as to manipulate the figures and attract investors. Fine judgments may be made by both the financial controller of the company and the geologists.
There are other risks when it comes to investing in gold mining stocks. These are associated with the directors' competence, the company's level of indebtedness, the health of their balance sheet, and the dividend policy, established by the directors. Other risks are associated with capital expenditure for future operations, costs for lengthening the life of the mine, size and quality of reserves, etc. Additional risks relate to the metal's production costs. Potential labor problems and political risks in the region or state where the mining site is located should also be taken into consideration. Other factors to look into are income from past reporting periods and price prospects. Another factor involves the prospects of the equity markets and the economy in general. Finally, it is important to know whether the mining company has hedged its produce as to raise funding.
Naturally, it is not only the price of the metal that should be taken into consideration. The above variables have a strong impact on the risk - reward ratio, and investors look at them before making a decision. At the same time, gold miners are not the only companies carrying corporate risk. The decisions investors make can also affect the markets (for example, fear of coming recession.
About the Author:
Want to buy gold coins or physical gold? Don't know what is your best option? Visit www.silverandgold.biz for more info.
No comments:
Post a Comment