When one invests in gold and other precious metals, as a rule, the amount invested therein must not exceed ten percent of one’s total investment portfolio.
While investing in gold mining stocks, the precious metal investors consider the history of the company whose stocks they wish to invest in; whether its management team is strong enough; whether the production is flourishing and whether it is financially robust. Added to all these factors, there is every necessity for the spot price of gold to be on the higher side.
There is a long business cycle involved in the mining process of gold. There is the mine-searching, drilling for exploring possibilities, the examining of the viability of mining procedure and then the actual production; all in all, a considerable amount of time is needed, in addition to capital requirement.
Gold stocks perform well when the prices of gold escalate. The reason is that more capital becomes available to the companies of the gold mining stocks that do well and they can avail that much more amount for expanding their businesses. With such bright-looking cash balances of the mining stocks, the precious metal investors look no further. In addition, even if the picture of the stock market presents a low spot price of gold, they are interested in those gold mining companies that remain unaffected by the same and continue to perform well.
As the stock market lists a relatively small number of trading gold mining companies, it is very essential to get the timing right for taking on new positions in the stock market and with the consolidated spot gold price, to find a good company that delivers substantial profits on account of a continued progress in production, revenues and earnings.
But the current scenario is that the gold stocks; though having recovered from their recent correction, are still lagging the recovery in the spot price of gold. The performance of the silver stock in the stock market is also similar to that of gold; in fact, its value is lower than that of the yellow metal. Therefore a situation of speculation in gold stocks has been created and accordingly, if one believes that the spot price of gold will climb, it seems safer to buy gold in the physical form. Historically, when the stock market is going down; the U.S. dollar is declining in value and the possibility of near recession is looming high, the precious metal investors would be inclined to buy gold stocks and expect quick capital gains, provided that the spot price moves higher.
With the improvement in the fundamentals for higher gold prices and the gold stocks below the spot price, it is the time when speculative precious metal investors will be interested in the gold mining stocks. Added to this, is the anticipation of fresh monetary stimulus from the Federal Reserve. The junior gold mining companies too have received considerable capital inflow. So, one of the ways to protect oneself from the oncoming economic slump would be to physically own precious metals like gold and the right set of junior mining stocks.
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