It has been years with stagnant gold prices, but now the metal is looking exciting again. While the benefits of investing in physical gold bullion are well known and stated, there are less publicized benefits to investing in the actual gold mining companies that produce the precious yellow metal.
Gold is man’s historical embodiment of money and many investors have a natural affinity for the shiny metal as it serves as a long-term store of value and asset protection. When wonder about the intrinsic value of gold, look no further than the lost purchasing power that many government currencies have encountered. Many experts recommend gold as a part of a balanced portfolio but rather than handle and deal with the heavy commodity, another way to get exposure to this natural resource is through gold mining companies.
The gold mining sector is filled with numerous mining companies that are publicly traded and their activity tends to correlate with the price of gold. These stocks are often considered a valuable diversifier for any stock portfolio, offering investors a way to own the commodity. They are also prone to holding their value and providing protection in uncertain economic and geopolitical situations.
If you are following the gold market and the price of gold bullion, you will see that they move up and down every day due to the nature of supply and demand. The major gold miners are the ones who determine how much supply is available. These mining companies want to reduce their costs of production as much as possible to take advantage of gold prices when they sell. For instance, if gold prices start trading at $1,500 an ounce, a miner will want to focus on producing that gold at $800 an ounce to make a nice profit. The gold miners that pay high production costs face many losses when the price of gold is falling. For this reason, it is imperative to find gold mining companies that have efficient operations going and are keeping their production costs low.
There is also some stability in the gold mining sector. Did you know that the gold mining Industry has outperformed both the S&P 500 Index and the Basic Material sector in a year’s time? The stocks in the gold mining industry have collectively moved 40.7% while the S&P 500 has fallen 4.6%. The basic materials sector had dropped 25.8%.
Another advantage of having gold mining stocks in your portfolio are that they lessen the blow when the overall market is down, and your other stocks are seeing big losses. Historically, gold mining stocks do not go up and down as much as the rest of the stock market during an economic strain. The VanEck Vectors Gold Miners ETF (GDX), has dramatically outperformed the broader market this year despite an economic fallout. According to YCharts, over the last 12 months, the ETF has seen a total return of 60.5% compared to the S&P 500’s total return of just 0.1%.
Gold is expected to be a valuable investment due to low interest rates and a global slowdown. Geopolitical uncertainty could keep pushing gold higher which will bode well for gold miners and their share prices.