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Investing in Gold and Silver Miners

Updated on April 3, 2014

Investing in Gold and Silver Mining Stocks and Shares

Investing in gold is all the rage at the moment. The gold price has increased dramatically as the weakness in the dollar has boosted the prices of assets priced in dollars and money has flowed into safe haven assets. Buying gold could still be a good investment, but it seems a shame to join the party now when so much gain has been missed. Gold miners have so far (at time of writing) in general, still not gone up in price by anywhere near as much as the physical asset itself. If the gold price stays high then gold mining shares could go up in value by a lot, but how do you value a gold miner and how do you buy the shares. This article looks at some of the issues involved and the pros and cons of owning physical gold versus miners. Silver has also not gone up in value by as much as gold, so silver and silver miners could be a good bet if gold prices stay high.

Big mining companies such as Rio Tinto and BHP are perhaps the most obvious choices, with good research available from many analysts or the Russian gold miner Petropavlosk, formerly know as Peter Hambro Mining (LSE: POG) and smaller players such as the London listed Silver and Zinc miner, Minco (MIO) which has silver mines in Mexico.

Disclaimer: Information in this and other linked articles is unregulated and for general information only and is not intended to be relied upon in making specific investment decisions. Appropriate independent advice should be obtained before making any such decision.

Investing in Gold and Silver Stocks

Pros and Cons of Gold versus Gold Miners

Gold has been a store of wealth for thousands of years and has been used as currency for a long time before fiat currency (paper money, notes or bills) was used. Silver has similarly been used for coins for many centuries in many countries around the world. Gold coins still have a similar value now in real terms to what they had years, decades and centuries ago (i.e. you could still buy a broadly similar amount of food or property now as you could in the past, while the dollar value of such items appear to increase as the dollar sinks) Gold and silver prices are however very volatile and do not pay a dividend (in fact they cost money to store)

Gold or silver mines are a far riskier proposition (hence the warning in the famous quotation attributed to Mark Twain: "A gold mine is a hole in the ground with a liar on top."), but a profitable mine may even pay a dividend, or spend profits on expansion, potentially making you a profit above that of the inflationary increase in the gold price.

How to Value a Miner

Valuation of Miners

Valuing a gold mining share is difficult and prone to error or assumptions, so this kind of investment can be very risky, especially in the case of small miners which will not be as well researched as the bigger mining companies, for which the amount of gold in the ground and the costs of extracting it are easily available in many financial publications. Investing in small miners can however result in big gains (or losses) because you are speculating on big gold discoveries. Small miners are also usually last to start growing in size during a gold price or mining boom, because of lack of media exposure, analysis or research.

The usual method of valuing a gold mining company is to assume a cost of gold production of $650 per ounce, so as the gold price rises above this value the value of future production of the mine increases at a faster rate and with the gold price at close to $1200 (at time of writing) miners look very profitable.

As much of the increase in gold price is because of the drop in the value of the dollar the local production costs and pay for workers etc. will increase eating into the profit. Another problem is the use of derivatives, by the gold mining company, to hedge for future gold prices, so the existence or use of such contracts needs to be understood to fully determine the influence of the gold price on the share price.

Gold and Silver Miners

Gold and Silver Miners

There are many companies that make at least some of their money from gold mining: The big companies such as Rio Tinto and BHP are perhaps the most obvious choices, with good research available from many analysts or the Russian gold miner Petropavlosk, formerly know as Peter Hambro Mining (LSE: POG) and smaller players such as the London listed Silver and Zinc miner, Minco (MIO) which has silver mines in Mexico.

More Gold Investment Option

Gold Coins or Gold Miners. Which is Best?

Gold Coins or Gold Miners. Which is Best?

Gold and Silver

Gold and Silver
Gold and Silver

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    • Andy-Po profile image
      Author

      Andy 6 years ago from London, England

      Merryn Somerset Webb announced in MoneyWeek that she selling some of her gold after holding it since 2001 and she is not alone, with quite a few market commentators turning into gold bears. Could this be the end of the gold bull market (Merryn is often right about a lot of things)? I am still hanging on to most of my gold and silver and gold mining shares for now, given the uncertainty in Europe, for now.

    • profile image

      waltergivensvig 6 years ago

      Hello there again Andy, thanks for sharing this lens. For precious metals investments and information, please visit our website http://www.verticalintegrationgroup.com/ for more information!

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      anonymous 6 years ago

      Andy, I want to know more...great page! Come check out the Mexican Gold Backed Mining Bonds on my squidoo page. You might like that! I love old coins and your site rocks! If you like coin, stamp and 1800's gold backed bonds take a second to visit my Squidoo Page CLICK HERE

    • ElizabethJeanAl profile image

      ElizabethJeanAl 7 years ago

      Now days investing in anything to do with gold and silver makes sense.

      Thanks for sharing

    • WindyWintersHubs profile image

      WindyWintersHubs 7 years ago from Vancouver Island, BC

      Very Informative Lens. I would love to have some Gold Stocks.

    • SandyMertens profile image

      Sandy Mertens 7 years ago from Frozen Tundra

      Very nice! I would love to invest.