Among the more popular alternative gold investments lately are gold mine stocks. Posted by James Randolph on December 20, 2010
The siren song of gold mine stocks.
December 20, 2010 – Among the more popular alternative gold investments lately are gold mine stocks, which are being heavily promoted as having a multiplying effect on rising gold prices. Assuming everything else remains constant, an increase in the gold price does translate to a greater percentage increase in profits, but that is a huge assumption that rarely holds true.
Gold mining is anything but certain. When prospectors seek funding for a new mine they present the mine’s potential reserves in the most favorable light, and their forecasts for profits over the mine’s life factor in anticipated increases in the price of gold. Profit gains realized by increased prices will be reduced by forecasted price increases, which is built into stock prices and there is a strong possibility that the mine’s total yield will be lower than the original estimates. Consequently, heavy investment in mines in response to rising gold prices can quickly cause the stocks to become overvalued.
Mine operations are unlike those we are most familiar with – manufacturing and retail. Besides being closed ended, which in itself makes their financials all but incomprehensible to most of us, there are several risks inherent to the industry that we rarely encounter elsewhere.
Unanticipated technical complications in ore extraction and refinement can cut deeply into profits, especially in very new and very old mines. Because mines are frequently located in underdeveloped regions they are often run by inefficient and ineffective management – a situation that might not be at all apparent to investors. Furthermore, operational expenses are apt to be tied to currencies that are unstable relative to the gold price making profits equally unstable and unpredictable. Finally, political instability in many gold producing nations presents a constant threat of nationalization.
For the long haul investor there is no need for alternative gold investments – the best bet will always be certified gold.
Senior Staff Writer – Certified Gold Exchange