Best Gold Stocks to Watch
What are the best gold stocks to watch? Conservative investors might only like investing in the biggest gold stocks, while other investors like the untapped potential of an exploration gold mining penny stock. The fact of the matter is, there are thousands of gold mining stocks traded on various exchanges around the world.
Investors looking to leverage the rising prices of gold should know that gold mining stocks offer a lot more upside potential than physical gold bullion. Case in point: in 2016, physical gold prices increased 8.4% but the Market Vectors Gold Miners ETF (NYSEARCA:GDX) ended 2016 up 48.5%.
Why is that? If it costs a gold mining company $700.00 to mine an ounce of gold, and physical gold is trading hands at $1,000 an ounce, the gold mining company realizes a $300.00 profit.
But, if gold rises to $1,300 an ounce, the gold mining company makes a $600.00 profit on each ounce of gold. That represents a 100% increase in profits off a 30% increase in gold prices.
Not all gold mining stocks are created equal. The best gold stocks have low operating costs and big reserves that also grow, and they generate positive cash flows even when gold prices are low.
To find the hottest gold stocks with the lowest risk, investors would do well to pay attention to a number of different factors; all of which are outlined below.
How to Find the Best Gold Stocks
- Politically Stable Assets—Whether investors are interested in a junior gold mining company or one of the biggest gold mining stocks in the world, one of the first things they should look at is where the gold reserves are. Is the company’s gold in a politically stable country that is business-friendly? If the gold mining company has found the mother lode, but it’s in a country that has strict regulations on mining claims and foreign property ownership, investors might be out of luck. That’s why it’s a good idea to stay away from gold mining stocks with reserves in politically unstable regimes like Venezuela or the Congo, or in countries like Russia, which aren’t exactly known for respecting property rights.
For example, TriMetals Mining Inc is a junior gold mining company with one gold project in the advanced exploration stage along the Nevada-Utah border. The company also owns property in central Chile. However, it was the company’s Malku Khota project in Bolivia that gutted the company’s share price. In July 2012, the Bolivian government announced to the media its intentions to nationalize the Malku Khota property. (Source: “International Arbitration,” TriMetals Mining Inc, last accessed May 8, 2017.)
The Bolivian government did this after reading the company’s May 2011 “Preliminary Economic Assessment” study, which showed that the Malku Khota property has the potential to be one of the largest new silver, indium, and gallium-producing mines in development, with over 13.2 million ounces of silver production annually over the first five years.
In 2013, the company’s wholly owned subsidiary initiated international arbitration proceedings against the Bolivian government. The hearings finally ended in July 2016. The company expects to hear the results of the arbitration sometime in 2017.
Before the property was appropriated by the Bolivian government, TriMetals was trading near $2.50 per share and fell to as low as $0.04 per share in 2015.
Therefore, instead of waiting patiently for the outcome to any proceedings, investors might want to look for gold mining companies that operate in stable countries.
- Reserves—When investing in a gold mining stock, investors need to find out what their reserves are and how long the reserves are going to last. If the gold mining company has low reserves, it will need to keep exploring or making acquisitions. Neither of which is a sure bet.
Having strong reserves is great, but it’s better if the reserves are diversified, meaning that they aren’t dependent on a single mine. Most penny stock gold mining companies are in the development stage and only have one property. Their prospects for success are limited. Barrick Gold Corp (NYSE:ABX, TSE:ABX), on the other hand, has proven and probable gold reserves of 85.9 million ounces and 12 core operations. (Source: “About Barrick Gold Corp.,” Barrick Gold Corp, last accessed May 8, 2017.)
The best gold mining stocks have strong reserves, diversified holdings, a strong production base, and low production costs.
- Location, Location, Location—A gold mine stock might be in a politically stable country like the U.S., Canada, or Australia, but are its operations in a proven location? Look for gold mining stocks that have properties in areas with a long history of gold production. And, no matter how dull they are, make sure to read the drill programs and assay results.
- Show Me the Money—It costs a lot of money to get a gold mining company into production. It takes even more money to keep the gold mining company running and profitable. Look for well-financed gold companies with strong balance sheets and low debt. For investors looking at junior gold mining stocks, which probably won’t be as financially stable as a big gold mining stock like Newmont Mining Corp (NYSE:NEM), make sure it has a major partnership with a bigger mining company that has agreed to pay for the drilling or exploration costs in exchange for an interest in the property.
- Hype—The hottest gold mining stock might not be all that hot when it comes right down to it. Avoid gold mining stocks that are rising in price because of soaring investor sentiment about broader gold prices, or are climbing because of hype from some talking head on TV. Look for reasonably priced gold mining stocks with a long history of generating gold, low production costs, and a strong bottom line.
- Look for High Daily Volume—Larger gold mining stocks are actively traded, making it easy to both buy and sell shares. Goldcorp Inc.’s (NYSE:GG) daily volume is in excess of eight million shares. A lot of junior gold mining stocks and gold mining penny stocks can be thinly traded with, in some cases, just a few thousand shares trading hands daily. This will make it difficult to sell when it comes time to take profits.
- Dig for Dividends—Investors buy gold mining stocks because they are a hedge against inflation. But gold bulls who believe in the long-term potential of gold mining stocks might want to look for companies that pay a dividend. This provides a steady income stream and helps weather any roller coaster rides that gold stocks are known to take. Investors don’t need to stick with gold mining giants like Goldcorp Inc., Agnico Eagle Mines Ltd (NYSE:AEM), and AngloGold Ashanti Limited (ADR) (NYSE:AU) to get a dividend. Junior gold mining companies like Yamana Gold Inc. (NYSE:AUY) and smaller gold mining stocks like Caledonia Mining Corporation Plc also provide stable dividends.
Best Ways to Buy Gold
Many investors would argue that the best way to invest in gold is to look at the best gold mining stocks. But there are plenty of different ways for investors to add gold to their investing portfolio.
When people buy gold bullion, it costs a little more than what’s quoted online. That’s because there is a premium over the spot price. The best way to buy physical gold is in denominational coins and bars. The U.S. Mint, the Canadian Mint and Perth Mint are three of the more popular places to buy gold coins. It’s also possible to purchase gold bars in several weights. The most popular is one ounce, but there is also gold bullion that weighs less than an ounce. People can also purchase gold bars that are 10 ounces in weight, 1 kilo, 5 kilo, and 400 ounces.; whatever they can afford and carry.
Gold Exchange-Traded Funds
Gold exchange-traded funds (ETFs) are an excellent way to invest in gold. Gold ETFs trade on the stock market like an ordinary stock, but they provide investors with huge exposure to the gold market. Instead of owning just one gold stock, with a gold ETF, investors can take a position in a large number of gold mining companies all at once. It’s the best way to get access to a wide variety of stocks that may not otherwise be affordable as individual stocks.
Gold Options and Futures
Gold options and futures are great for seasoned investors who want to speculate on the future price movements of gold. If investors buy a “call,” they are long on gold, and they believe that the price will rise. When investors buy a “put,” they are short on gold, and they think that gold prices are going to fall.
Gold options are best suited for experienced investors. While it takes a lot of discipline to trade options, if you understand the risks and rewards, they can provide you with huge profits.