Investing in gold miners

There are multiple reasons why investing in gold miners may be the smart thing to do. Here I will give a number of examples why now is the moment to invest in gold miners.

If you own a portfolio of stocks

Since 2009 financial markets are in a bull market. Thanks to central banks stimulation policies and a growing global economy markets kept on rising. Despite the fact that markets still could go higher we might ascertain that the biggest gains are behind us and that risks are accumulating.

Gold mining stocks kept going down between 2001 and 2016. The last couple of years we saw a more sideways movement. Gold mining stocks often move in opposite ways of stocks of normal companies.

With stocks of general companies however returns are lower when stocks are rising whereas with gold mining stocks returns are considerable when the market moves their way.

If the gold price rises gold mining stocks will increase strongly. When risks are getting higher it would be wise to add some gold mining stocks to the portfolio.

Exactly what percentage depends on the other stocks in possession. At this moment in the market a 25% portion of gold mining stocks may be the smart thing to do.

If you really are after high returns

Since 2011 the price of gold went down. For some time the gold price has bottomed out however but we still are awaiting a real upward trend. Whenever that upward reaction materializes things may evolve quickly.

If you want a safeguard against inflation

Inflation has been very low for many years. At this moment however inflation is on the rise. Generally speaking central banks will increase interest rates when inflation will exceed 2%.

There are limits of interest rate increases however. The debt ratio for consumers, companies and especially governments is much too high. By a rapid increase of interest rates these debts will be unsupportable.

When they cannot increase interest rates in the pace they need to they cannot contain inflation. Interest rates therefore probably won’t rise as strongly as inflation itself.

This danger of inflation is a strong buying signal for gold. Whenever the gold price is going up share prices of gold mining stocks will rise even faster.

If you want to buy gold

Buying golden jewels makes no sense. The percentage of gold is too low and the cost of making jewels is too high. The gold price should really explode in order to make a profit. Sorry ladies!

Gold bars and gold coins are a better option. But here too the making of the bars and coins is calculated within the price of coins and bars. The difference between the price of gold and the buying price of gold bars and gold coins is often 10%. That takes away a nice part of the proceeds.

Then there are the costs of conserving and storage and of course the risk of theft. Add to that the fact that returns on gold mining stocks are often 3 to 20 times higher than that of the price of gold. 

If you want to save for your pension

Since many centuries the price of gold is on the rise. But that cannot be said for each single year. This rise is materializing in large steps that take place during a couple of years. So the gold price goes up the ladder in some sort of a bumpy ride.

For years the price of gold may move sideways. Then momentum takes over and the price is pushed forward. This acceleration finally goes to hard and then the gold price goes down again.

It goes a bit like this: sideways, with 2 steps up the ladder, 1 step back, sideways, and the process starts all over again. At this moment we are in the sideways movement. We will have to wait for the jump ahead.

These market movements of the gold price are very well suited for long term investors. What you should do is getting in when the price moves sideways.

You should exit the market after a large increase and buy in again on a lower level when the price starts to move sideways again. If your investment horizon exceeds 15 years you may even decide to hold your stocks during the slumps.

If you foresee bad times ahead

You might say that the world right now is not in calm waters. Question is when, where and how things may make a turn for the worse. But it seems that this eventually will happen. At that moment the gold price will pick up and so will the stocks of gold miners.

The demand for gold is rising

Many central banks decided to begin buying gold again during the last few years. There is also a large demand from the jewelers industry. And you should not forget the demand from industry. Gold is an excellent conductor and it is present in lots of electronics products.

The supply of gold does not go up

Many years ago a gold mine would last for over 50 years. With modern technics however one can extract gold of gold mines within 10 years. So one has to exploit new gold mines. Large gold miners always are looking for new mines to exploit. That will take time and money.

When the price of gold is too low there is not much budget to invest in the exploration of new gold mines. When demand is rising, supply will not keep pace. Only after a very large increase of the price of gold people will start to bring gold on the market. The lack of supply will boost the price of gold even further as well as the share price of gold mining stocks.

A large part of the gold supply is not transferrable

Think of the gold that is being held by central banks. Think of the gold that consumers hold in the form of jewelry, coins and bars. Most of the existing gold will not be traded again. The gold for sale is really a small part of the gold in possession. That is why the price of gold may go up very hard.

The only ones to be able to supply gold are the gold miners. When a shortage of gold is expected for the making of jewelry, coins, bars and industrial use share prices of gold mining stocks go up like a rocket.