Investing in gold does not necessarily mean buying gold bars by the dozen and storing them in a impregnable safe tucked away behind a portrait of the Mona Lisa, although that is an option and according to most gold bugs, it’s the best way to invest in gold, there are investors who prefer to take a much more indirect approach towards investing in the shiny yellow metal. They do it by investing in gold mining company stocks; however, before you take the leap into this realm, there are some things that an investor should essentially know if he or she is going to use this approach to invest in gold.
The good thing about gold mining stocks is that gold mining stocks are rather easy to buy or sell hence if the situation arises whereby you need instant cash you would be able to sell your stock immediately and in comparison to physical gold bullion that you have stored in a safe, the process may take a tad bit longer as it goes through the assaying process and getting a buyer who would be willing to pay a reasonable price for it.
On the flip side however, if at all the gold mining stock that you own belongs to a company that is embroiled in some kind of issue that may range from low production, lack of funds, pollution or land acquisition issues, it may not be quite as easily traded. Always remember that by buying a gold mining stock, the investor is actually buying a portion of the company that is mining the gold and although there is potential for additional upsides the downside risks are more often than not equal.
For instance, gold mining is capital intensive meaning that it requires a substantial amount of cash to develop and operate a mine, hence buying into a mining company that has a sound financial background is one of the most vital aspects. Gold mining companies are also known to play the market by lowering production when gold prices are low and increasing production when prices are favourable to maximise profits, thus gold mining stocks may tend to undergo massive price swings making patience a key component in being successful with gold mine investments.
Nevertheless the main thing about investing into gold mining companies is in being able to identify good gold mining stocks and this obviously would take a significant amount of research. Most seasoned investors go for value-plus proposition which in layman terms mean that if the price of gold rises significantly they expect the mining company to be able to offer a 1x plus gain as an additional profit potential, because if that is not in the option, then the investor might as well invest in physical gold and as mentioned earlier store it in a safe hidden behind a DaVinci painting.
It is also imperative that the gold mining company has distinct qualities that make them good investments such as effective management, competent with environmental and political risks and also has the ability to obtain finance at the drop of a hat.