Gold Mining Companies

Gold mining companies are an investment method for gold. These do not represent gold at all, but rather are shares in gold mining companies. If the gold price rises, the profits of the gold mining company to rise and the share price may rise. However, there are many factors to take into account and share price may not rise when the gold price increases. Mines are commercial enterprises and subject to problems such as flooding, subsidence and structural failure, as well as mismanagement, theft and corruption. If serious, such factors can lower the share prices of gold mines. Unlike gold bullion, which is regarded as a safe haven asset, unhedged gold shares or funds are regarded as high risk and extremely volatile. This volatility is due to the inherent advantage in the mining sector. For example, if you own a share in a gold mine where the costs of production are $300 per ounce and the price of gold is $600, the mine's profit margin will be $300. A 10% increase in the gold price to $660 per ounce will push that margin up to $360, which actually represents a 20% increase in the mine's profitability, and potentially a 20% increase in the share price. Conversely, a 10% fall in the gold price to $540 will decrease that margin to $240, which actually represents a 20% fall in the mine's profitability, and potentially a 20% decrease in the share price. The amplification of gold mining profits during periods of rising prices can cause a gold rush in mining exploration. To reduce this volatility, some gold mining companies hedge the gold price up to 18 months in advance. This provides the mining company and investor with less exposure to short-term gold price fluctuations, but reduces potential returns when the gold price is rising.

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