The following is my latest contribution to the Australian Financial Review. Click here to read the article on their site.
Gold has been a store of value that has lasted an age. Prized for its beauty and non-corrosive elements, gold is an investment that, despite price volatility, is often viewed as a defensive investment.
In the current environment where fears of macro economic implosions, geopolitical melt-downs and asset bubbles, many investors have sought the safety of glittering gold.
Beyond buying physical gold and storing it at the Perth Mint, or holding the GOLD ETF, many investors have added gold stocks into their portfolio as a hedge against possible catastrophe.
One key mistake that many investors make when investing in gold stocks is believing that they are buying into the same properties as the physical commodity itself. It is true that in the short-term, share price will be governed by the change in the price of the gold. However, over the long term, investors must realise that what they are actually investing is a physical business. One that generates sales, pays expenses, makes profits and ultimately is at risk to many of the same factors which can affect any business you invest in.
So what should you look for when investing in a gold or any mining business? The complete answer to this question is multifaceted, but here are basic principles to determine whether your gold stock is the quality business.
Fundamentals – given the very cyclical nature of the gold price, unless the company is sound fundamentally, particularly from a cash flow perspective, then it is at risk of not only failing but also needing to perform on-going capital raisings which could dilute the interests of existing shareholders. Gold explorers who are not yet producing or cashflow positive do not exhibit the safety properties investors may be seeking..
Resource size - Knowing the amount of gold a company sits on is something investors should be aware of, including the estimated mine life. Without it you really don’t have a mining business. As an added focus, look for reserve upgrades so that resources can be replenished, because once the commodity comes out of the ground, it’s gone. Therefore, reserve upgrades from existing sites or new projects is important for a gold miner’s long term viability.
Good production profile…
