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Gold Mining Shares
Jan 10 2012 05:28
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For centuries,
gold has been coveted for its unique blend of rarity, beauty, and near
indestructibility.
Perhaps more importantly, in the past few
years, gold has finally been treated as an asset class that investors must keep
as part of their portfolios. Investment in gold can be in the form of physical
gold bars (nuggets), paper gold, gold company shares, gold investment funds
(mutual fund), gold futures and options.
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Gold Mining - Stocks
Gold Mining stocks are a popular way of investing in gold - albeit indirectly.
Advantages of gold mining shares
The perceived advantage of investing in gold mining shares is that their value is usually more sensitive to the price of gold than even a gold bar. This is because gold mining shares are valued on the basis of their anticipated profits through the life of the mine, and these depend on the reserves, and on the relationship between gold mining production costs and the anticipated value of the gold extracted.
Suppose a gold mine has 1,000,000 ounces underground and the above ground value is $1,000 per ounce. If the production cost is $800 per ounce the mine will make $200,000,000 over its life. But if the gold price rises by 20% to $1,200 the mine will make $400,000,000 overall. This demonstrates a 'gearing' effect of 4 times - i.e. for a rise in bullion of 20% the share will rise by the 20% plus another 4 times 20%, i.e. 100% (all other things being equal, which they rarely are).
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