Gold and Precious Metals

Many investors who follow the gold market focus most of their attention on the price of gold bullion. As a commodity, gold prices move up and down every day based on supply and demand. In particular, it’s the major mining companies that determine available gold supply, and their production levels play a key role in establishing price trends in the gold market.

Because the gold market is global, the price that gold miners receive for the gold they produce is largely determined by factors beyond their individual control. What a miner can work on, though, is cutting costs of production as much as possible. If gold prices are at $1,500 per ounce, a miner that can produce gold at a cost of $800 per ounce has a huge advantage over one that has to pay $1,200 per ounce in production costs. In fact, during periods of falling gold prices, miners with high production costs often have to face extended periods of losses. That can eventually cause those more marginal gold miners to go out of business, leaving only those companies with more efficient operations to continue operating.

Gold investors like that mining companies is that their fundamental business performance isn’t always correlated to the ups and downs of the broader economy. Gold prices sometimes rise during periods of economic strain, especially when prices of financial assets start to drop and cause investors in those assets to get nervous about preserving their portfolio value. However, that can cut both ways, and gold miners don’t always go up as much as the rest of the stock market during times of economic prosperity. The idea, though, is that by providing some diversification, gold mining stocks can sometimes help cushion the blow from losses in other holdings during tough times for the overall market.

The nature of gold mining is such that you can find companies of all shapes and sizes to consider for your portfolio. There are some companies in the mining industry that only have a single mine as the primary source of revenue and profit. That can be lucrative if that particular mine turns out to perform much better than investors expected, but it also leaves the company exposed to massive risk if something happens at that mine to curtail or halt production, such as a labor strike or an accident.

At the other end of the spectrum are companies that have massive operations that span the globe. If you want the giants of the gold mining industry, then two of the biggest companies you’ll find are Newmont Goldcorp and Barrick Gold.

It’s rare for a mining company only to mine gold. As a natural part of the gold mining process, companies almost always find other valuable materials in the ore that they mine. In particular, it’s not unusual to see silver, copper, and various base metals produced alongside gold from gold-bearing ore.

However, there are some mining companies that get a large portion of their revenue from metals other than gold. There’s nothing inherently wrong with that, but if your primary goal is to benefit from favorable conditions in the gold market, then you might not want the ancillary exposure to metals other than gold. On the other hand, if you like the idea of diversification beyond gold, then a company that mines multiple types of metals might be attractive to you.

South Africa has extensive natural resources, so it’s been one of the most popular areas in which gold mining companies operate. However, South Africa has gone through economic difficulties that are different from what you see in certain other countries with extensive gold reserves, including the U.S., Canada, and Australia. Because of that, South African gold mining companies have a political risk that those in other areas don’t always have.

In particular, investing in South African miners creates the risk of working in an economy that relies heavily on natural resources. That’s fine when commodity prices are healthy, but the extreme volatility in the gold market and in other important commodities has wrought havoc on the South African economy. Mining companies in the country now routinely have to deal with labor actions and government regulation, and the rising costs of operating in South Africa have led some companies to consider simply exiting the area. 

The most prominent gold mining stocks that you’ll typically find in exchange-traded funds almost always have existing mines that are already in production. But there are plenty of tiny mining companies that don’t have producing mines, and their entire value depends on their ability to get projects out of the development stage so that they can start pulling gold out of the ground.

Finally, as we mentioned above in our discussion of gold mining ETFs, investors have to decide whether they want to invest solely in companies with active gold mining operations or if they want to include gold streaming companies. The fortunes of streaming companies are linked to those of miners, but the nature of their exposure is quite a bit different.