Investing In Gold And Silver For Capital Preservation And Appreciation

How to Invest in Gold

To begin with, I do not think price-to-earnings ratios are particularly purposeful . Gold stocks are not your Warren Buffet sort of value stock which can be analyzed using classic metrics.


To begin with, I do not think price-to-earnings ratios are particularly purposeful . Gold stocks are not your Warren Buffet sort of value stock which can be analyzed using classic metrics.

The important thing to focus on is the fact that when you buy shares of a gold company is that you are purchasing is gold in the earth. You must consider, do I want to buy gold bullion, or do I want to buy gold in the earth via a gold stock?

As an example right this moment the cost of gold bullion is about $1850 yet one can purchase a gold producer that may extract the gold for under $1200. Essentially, you can purchase gold for $1200. Naturally you will find significant pitfalls in exploration that make it entirely possible that you still throw money away.

We know what the price of gold bullion is. It’s offered on a regular basis. Yet determining the value of a mining company’s gold in the ground is, at at any time in time, not so clear. Proven and probable reserves are pretty good estimates which also are a function of the price of gold. Often, a mine will discover its proven and probable reserves go up as the price of the commodity rises. That is because there is a cost associated with yanking these materials out from the ground, as well as the higher the gold price, the more “higher-cost” ore may be excavated. When the gold price declines, this process works in reverse.

To offer a clear example, Barrick (ABX) currently trades at a price of $53 and one can essentially pay just below $1000 an ounce for its proven and probable reserves. The estimated cash cost for Barrick’s gold production is about $450 an ounce, which means that any time you “buy” the reserves and combine that with the cash costs to mine the metal, you are basically paying something on the order of $1400, plus or minus, for an ounce of gold. Nonetheless, the analysis cannot stop there, because in fact, cash costs are not the only expenses related to mining. There are exploration costs, the charges for amortizing equipment, not the least of which is the mill, etc.

However on the other hand, you have a land package. Every mine and its adjacent land package will vary. One has to make a mental trade-off between those noncash costs, as well as the valuation of the land package and whatever exploration may go on. This is something of an oversimplification however it’s helpful nonetheless.So, the decision today is, do you want to buy Barrick at an imputed price of say $1400 an ounce, plus or minus, or do you want to buy gold at $1850 an ounce?

Now, there is absolutely no point in acting as though these types of estimates for Newmont or another corporation are exact, because they’re not. Also, there is no rule which says you have to insist that the imputed per-ounce price be less than the spot price of gold, although obviously, the situation is more compelling when it’s.

However, doing the math offers a framework for further analysis, and it can help you to get a greater sense of which corporations seem cheap and which look high-priced vs. each other. I’d just note that regarding smaller corporations or exploration plays, in particular, the estimates obviously go out the window, because you can’t determine what you’re going to get. Those companies might be wildly overvalued and attract plenty of hype, sort of like we saw with small cap stocks.

If you’re wondering about how to invest in gold you can visit our site that has a ton of information about gold stocks.

,