| Story Views | |
| Now: | |
| Last Hour: | |
| Last 24 Hours: | |
| Total: | |
Two Key Measures for Picking the Right Gold Producers
Daily Gains Letter publishes daily updates on personal finance, investment strategies and financial planning related topics.
My good old friend, Mr. Speculator, is at it again. This time around, it’s not the housing market or technology stocks that he thinks will see significant gains—it’s the gold producers. His argument is very simple: gold prices are down, and if they bounce back, gold producers will be able to provide maximum gains to investors’ portfolios, compared to holding physical metal.
There’s some merit to Mr. Speculator’s argument. Gold producers’ stock prices can certainly profit heavily as gold prices increase, providing significant gains to an investor’s portfolio.
There is no rocket science behind it. If a gold producer is able to take out gold from the ground at $1,000 per ounce with all costs in, and if the price of gold is at $1,300 an ounce, then that gold producer will profit $300.00 per ounce, or 30%. Now suppose the price goes to $1,400; his profit will jump to 40%, a 10% increase, as the price of gold only goes up by 7.7%. The phenomenon eventually reflects the stock price.
Sadly, the biggest question haunting gold investors these days is if the gold prices have bottomed, or if they are headed for more scrutiny. Keep in mind that gold producers are highly correlated to gold prices.
Jim Rogers, one of the most famous commodity traders, said gold will see a “complicated bottoming process.” In his interview with Business Insider, he also said that the yellow metal may go down to $1,000, or even $900.00. (Source: Badkar, M., “JIM ROGERS: Gold Will Bottom When The Mystics Are In Despair, And It Could Take $900 Gold To Get There,” Business Insider, July 6, 2013.)
Despite all this, if an investor continues to add gold producers to their portfolio, they need to do a significant amount of research, and must consider the following two measures of strength in relation to the company.
Cash on Hand and Working Capital
This is the hands down most important asset a mining company needs when the price of the commodity it extracts from the ground is depressed. When a gold producer has cash on hand, they are able to stay in operation for a longer period of time—call it an insurance policy that keeps them away from scrutiny in the short term.
If a producer has an anemic cash position, their existing operation can become questionable, as they are unable to produce and pay for expenses.
Cost to Produce
This measure of strength affects a company’s profitability at the very core. If the gold producer’s price to extract the precious metal from the ground is higher than the spot price of gold, they will face troubles; with every ounce of gold they dig out from the ground, they will face a loss. This can only go on for so long, and eventually the stock prices of the company will reflect these costs.
Investors who are bullish towards gold producers still need to utilize proper risk management techniques. Looking at the two measures mentioned above gives them a fighting chance to grow their portfolio, but they have to do more than just that. Investors need to allocate only a certain amount towards one sector, and never be overexposed.
The post Two Key Measures for Picking the Right Gold Producers appeared first on Daily Gains Letter.
Visit http://www.DailyGainsLetter.com for details.
Source: http://www.dailygainsletter.com/wealth-management/two-key-measures-for-picking-the-right-gold-producers/1263/
