Why I invest in 7 gold miners

Because of COVID-19 central banks had to lower the interest rates and print more money. This is of course good news for the gold price. 

Will a higher inflation not induce higher interest rates?

Higher interest rates hamper economic growth. As long as economic growth remains poor interest rates may not go up. But there is still another reason why interest rates may not be pushed higher than they are.

The global debt pile has never been higher than right now. If interest rates will go up consumers, companies and governments will face serious problems. The only way to manage this mountain of debt is strong economic growth, low interest rates and high inflation.

Interest rates are still low. Economic growth is weakening though. Then inflation must go up. Sharp rising inflation will be excellent for the price of gold.

Are there more reasons why the price of gold could rise?

Global conflicts, falling currencies, especially the US Dollar, recessions, bear stock markets or stock market crashes and all other issues that incite fear to loose savings are a boon for the gold price. If the price of gold starts a strong upward movement speculators will step in boosting the price even higher.

Is there a large demand for gold?

Since the middle of 2018 demand has gone up strongly. In the third quarter of 2018 the sale of gold coins and gold bars in the US went up with 74%. Even more importantly, central banks have started buying up gold again. In the first half of 2020 because of high demand it was almost impossible to buy gold coins and bars.

In 2018 central banks bought up a record amount of gold

Since 1967 central banks didn’t buy that much gold. That is a significant sign. In over 50 years central banks did not buy more gold than they did in 2018. In 2018 global central banks bought 651,5 tons of gold compared to 375 tons in 2017.

Central banks are no traders in gold. Once bought they keep it in their vaults for tens of years to come. These large market take outs will make the remaining gold more scarce.

Looking back at historical data, central banks always buy in gold when the price is low and they expect a rise.

How to invest in gold?

- Buying physical gold like coins and bars

- Investing in gold mining stocks

Are there disadvantages in buying gold coins and gold bars?

Yes, to start with, there is a large gap between the buying price and selling price of gold coins and gold bars. That will set your return back with almost 10%. Then there is the chance of theft.

The biggest disadvantage however is that the price of gold bars and gold coins rise in a similar way with that of the price of gold. That may sound like an advantage but it is not!

Why invest in gold miners?

When the price of gold rises the share prices of goldminers rise much harder. Gold mining stocks may rise 3 to 20 times harder than the gold price in itself.

Why are gold mining stocks able to rise so sharply?

By definition, a gold mine has much gold beneath the surface. It is expensive to get it out of the ground. At low rates of the gold price gold mines are often not profitable. Then the expenses of extracting it from beneath the surface is higher than the proceeds of bringing it to the market.

In essence all the gold that is deep in the ground is worthless when the gold price is too low. The same goes for the gold miner itself. Whenever the gold price goes up and extracting it would be profitable then all this gold under the surface is suddenly worth a lot. It is a simple calculation:

The worth of all the gold in the ground minus the cost of extracting it determines the net worth of a gold mine.

Let us make a calculation with a gold mine containing 100.000 kilograms in the ground, operational expenses are 33.000 euro per kilogram.

Situation A: Gold price is 32.000 Euro per kilogram
Extracting it would give as loss. The gold in the ground is worthless at this moment. The share price of a gold miner is at a very low point.

Situation B: Gold price is 35.000 Euro per kilogram

Extraction will make 35.000 – 33.000 = 2.000 Euro per kilogram. The net worth of all the gold in the ground will be 100.000 kilogram x 2.000 Euro = 200 Million Euro. The gold mine is profitable and the share price of the gold mining stock has risen considerably. Share prices will immediately go up by 200% to 300%.

Situation C: Gold price doubles from 32.000 Euro to 64.000 Euro ( do not forget: between 2008 and 2011 the price of gold more than doubled)

Extracting it from the ground will make 64.000 minus 32.000 Euro = 31.000 euro per kilogram. The net worth of all the gold in the ground will be 100.000 kilogram x 31.000 Euro = 3,1 Billion Euro. A very profitable gold mine that can hand out nice dividends.

Because of the gold under the surface the gold mine has reached a value of 3,1 Billion Euro. The gold mining stock went up with 500% to 2.000%. In 2011 many gold mining stocks had 10 to 20 times higher share prices than the year before.

When to buy gold mining stocks?

There are large currency fluctuations, the stock markets are at very high levels with a high risk for a downward movement and the physical demand for gold is going up. Besides that there is more economic and political instability in the world, all reasons for getting into gold mining stocks.

When not to invest in gold mining stocks?

If you need the money you would like to invest in the short term. Investing in gold mining stocks is speculative and volatility is high. You must be able to live without the invested money for at least more than a year.

How long should your investments in gold miners run?

A bull market in gold generally lasts 5 to 7 years. The current bull market has started in January 2016. The first 3 years of a bull market you will generally see a more sideways movement lifting the price up slowly higher.

The last 3 years of a gold bull market are the years that the gold price really moves upwards. So starting from now you may calculate with attaining the maximum return within 2 to 4 years.

When to sell gold mining stocks?

Just before the top has being reached. When will that be? Looking at the gold price chart you will notice by then that the price movement upwards will be steeper and steeper. Another indication will be when everyone is talking about investing in gold.

If gold buying shops pop up and people are really into gold it will be time to take your profits.

Which gold mining stocks should you buy?

I made that selection for you. It is smart policy to buy shares of different gold miners. Very large gold miners offer less risk but the returns are lower.

I always mix return and risk. I always invest in medium large and somewhat smaller gold miners. Besides, I always invest in gold miners who can profit from extra advantages apart form the movement of the price of gold. That makes for even higher returns.