Gold mining stocks: everything you need to know

Among investors, gold mining stocks are a popular choice. They provide diversification in the investment portfolio and they can be profitable in the shorter term. We give you more insight into what gold mining shares are, how they differ from gold Exchange Traded Funds (ETFs) and physical gold, and what risks are involved.
 

What are gold mining shares?

Gold mining stocks are the shares of companies that engage in gold mining. Because gold production is an expensive operation, there are only a few major mining companies. Costs are incurred for mine excavation, personnel, special machinery and permits, among other things. 
 
Gold mining companies depend on the difference between the current gold price and the cost of production. To make a profit, they need to increase production as cheaply and efficiently as possible. 
 

Difference between gold mining shares and gold ETFs

Gold mining shares and gold ETFs are both a form of indirect investment in gold, but there are important differences. By investing in shares, an investor becomes a co-owner of the company in question, while with ETFs, investors invest in the value of an index, product or industry. This is why ETFs are often called trackers. 
 
Gold mining stocks are actively managed. This means that a fund manager tries to outperform the rest of the market. Investors pay a management fee for this. Gold ETFs, on the other hand, are passively managed because only the value of gold needs to be tracked. As a result, management fees are a lot lower. 
 

Difference between physical gold and gold mining shares

The most obvious difference between physical gold and gold mine shares is that physical gold is a real product and a gold mine share is proof that an investor is a co-owner of a gold mine. For investors, the differences in the securities of physical gold and gold mine shares matter.
 

Protection of assets

Physical gold is seen as the way to protect your wealth and counter the effects of inflation. Since the value of gold mining shares is partly determined by the gold price, it is said that gold mining shares can also protect your wealth. In this, gold mining shares are less effective because there is a finite amount of gold to be mined so gold mining shares will not remain a safe investment forever. 
 

Physical property

When investing in physical gold, you actually get to own gold. A gold mine share is not tangible and you are dependent on multiple parties when you invest in it. This makes physical gold a safe long-term investment. 
 

Risks of investing in gold mining shares

Investing in gold mining shares has some risks. Gold mines are capital-intensive so a lot of money goes into exploration, infrastructure and staff costs. In the mining industry, accidents also happen and technical problems occur that shut down production. In addition, the geopolitical climate can affect the value of shares, as can the volatility of the market itself. 
 

Geopolitical environment

The geopolitical environment has a significant impact on gold mining shares. This is because gold mines are often located in areas of political unrest such as Russia, China, South Africa and South America. Sanctions, war or natural disasters can cause gold mine production to drop significantly, which also reduces the value of the gold mine.
 

Market volatility

Gold mining shares are much affected by market volatility. If the gold price rises by 1 per cent, the value of gold mining shares can rise by as much as 4 per cent. In contrast, if the gold price falls slightly, the value of gold mining shares can fall exponentially. As a result, gold mining shares can therefore be very profitable, but on the flip side, they can also produce large losses. By investing in physical gold, there is less risk of losses.
 
Disclaimer: The Silver Mountain does not provide investment advice and therefore this article should not be considered as such. Past results do not guarantee future results.