How To Invest In Gold Now – Buying And Selling Gold, Coins, Bars, Shares, Mining, ETFs

To start with, I do not think price-to-earnings ratios are especially purposeful . Gold securities are not your Warren Buffet sort of value stock which can be analyzed employing traditional measurements.

What is important to concentrate on is the fact that once you purchase shares of a gold company is that you are buying is gold in the ground. You have to consider, do I want to buy gold bullion, or do I want to buy gold in the ground via a gold stock?

As an example at this time the price of gold bullion is about $1850 however one can buy a gold producer that will extract the gold for under $1200. Effectively, you can buy gold for $1200. Not surprisingly you will find important risks in mining making it possible that you will still lose money.

We know precisely what the price of gold bullion is. It’s quoted on a regular basis. Yet figuring out the value of a mining company’s gold in the earth is, at any moment in time, not so clear. Proven and probable reserves are pretty good estimates that also are a function of the price of gold. Often, a mine will discover its proven and probable reserves go up because the price of the commodity increases. That is because there’s a cost connected with yanking this stuff out from the ground, and the higher the gold price, the more “higher-cost” ore may be mined. When the precious metal price drops, this process works in reverse.

To offer a clear example, Barrick (ABX) currently trades at a price of $53 and one can essentially pay less than $1000 an ounce because of its proven and probable reserves. The estimated cash cost for Barrick’s gold production is about $450 an ounce, meaning that if you “buy” the reserves and combine that with the cash costs to mine the metal, you are basically paying something on the order of $1400, plus or minus, for an ounce of gold. Nonetheless, the examination cannot stop there, because in fact, cash costs are not the only expenses related to mining. There are exploration costs, the expenses for amortizing equipment, not the least of which is the mill, etc.

However on the other hand, you have a land package. Every single mine and its adjacent land package will vary. One has to make a mental trade-off between those noncash costs, as well as the value of the land package and whatever exploration may go on. This is something of an oversimplification but it is helpful nonetheless.So, the choice today is, do you want to buy Barrick at an imputed price of say $1400 an ounce, plus or minus, or do you want to buy gold at $1850 an ounce?

Now, there is no point in acting as though these estimates for Newmont or any other firm are highly accurate, because they’re not. Also, there is absolutely no rule saying you have to insist that the imputed per-ounce price be lower than the spot price of gold, although clearly, the situation is more compelling when it is.

However, doing the math offers a framework for further analysis, and it can help you to get a greater sense of which corporations seem cheap and which look high-priced vs. each other. I’d just note that regarding smaller corporations or exploration plays, in particular, the estimates obviously go out the window, because you can’t determine what you’re going to get. Those companies might be wildly overvalued and attract plenty of hype, sort of like we saw with small cap stocks.

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