Are you looking for ways to diversify your portfolio and leverage high return investments? If so, gold mining stocks might be your next portfolio purchase. Gold mining stocks in Canada offer a variety of benefits, from stability to market appreciation. In this article, we’ll cover why gold mining stocks are shining investments in a portfolio, touching on the diversification potential and the common risks and rewards.
Unearthing the Shine: What Are Gold Mining Stocks?
When you think about investments in gold, what comes to mind? Is it a bar of gold? How about a collection of gold coins? Too often, investors narrow their view of gold investments and neglect to consider gold mining stocks.
Gold mining stocks provide a plethora of benefits, from portfolio diversification and protection against inflation to appreciation and sustained socio-economic development. To fully understand the advantages of gold mining stocks, let’s look at the lifecycle of gold production.
- Exploration – Here, the gold mining company will search for a location that can produce a mine. [AB1] This is often one of the most challenging phases of the lifecycle of gold. A significant amount of resources are needed, from time exploring different sites to money spent on geology, engineering, drilling and chemistry to determine if the deposit is economically viable.
- Development – Now, the company will construct roads and buildings to support mining activities. [AB2] This stage of the lifecycle of gold generally takes a few years, especially as contractors are in high demand. Permitting and licensing can also take several years. The mining company will also need to conduct due diligence on the long-term impacts of the structures they are building.
- Operation – The company will begin extracting ore and turning it into metallic alloy, which generally contains between 60% – 90% gold. The type of mining activities found in this stage is dependent on market conditions. If gold prices are high, the company might choose to extract low-grade ore in higher quantities. However, if prices are low, the company might shift its efforts to extracting high-grade ore that’s more profitable.
- Decommissioning – Once the ore is depleted, the company will switch to decommissioning to ensure there are no adverse environmental changes. This includes dismantling any infrastructure and monitoring the site for a few years to track environmental changes.
- Post-Closure – The company will then conduct environmental remediation procedures to return the mine to its pre-mining state. It’s not uncommon for gold mining companies to retain ownership of the mining site for a decade. The post-closure process can be tedious, with stringent regulations from various authoritative bodies.
In each of these stages, there is earning potential for investors. In the exploration and development phases, stock prices might be lower since the company is in the initial stages of formation. This opens the door to appreciation opportunities. Once the company moves into the operation phase, there is potential for further appreciation and income payouts. Each step in the mining process can be financially beneficial to an investor.
Diversification Beyond Bullion: The Appeal of Gold Mining Stocks
Both gold bullion and gold mining stocks have a seat at the table. Gold bullion refers to coins and other physical gold investments. An advantage of gold bullion is that it’s not correlated to stock market fluctuations. However, appreciation is limited, with historical returns lower than stock market investments.
Gold mining stocks add another layer of potential to a portfolio, matching, if not exceeding, the average stock market return of 10%. There are two ways that gold mining stocks appeal to investors: stock appreciation and regular dividend payments. Unlike gold bullion, gold stocks pay their shareholders’ income, which is generally in the form of dividends. Even if gold mining stock doesn’t pay dividends, investors should see returns of investments in the form of market appreciation[CV3] .
Gold’s Resilience and the Mining Advantage
The attractiveness of gold mining stock extends beyond market appreciation and income payouts. In fact, gold is one of the most resilient investment types, withstanding recessionary periods, inflation, and market uncertainty. Take 2022, for example. In the past year, the stock market saw negative returns on investment. This isn’t the case for gold mining stocks, with some large gold companies seeing double-digit returns.
Furthermore, when you invest in gold mining stocks, you can take advantage of the operational success of the mining company. If the mining company strikes 10% more gold than they were expecting, you receive a portion of these profits. Moreover, gold mining stocks allow you to achieve portfolio diversification, as gold stocks are seen as an alternative investment outside blue-chip equities and bonds.
Investments in gold do not guarantee operational success and financial profitability. Like anything, there are risks involved. For one, fluctuations in gold prices can result in investment depreciation. However, the market traditionally bounces back stronger after periods of depreciation. Holding your gold mining stocks through these turbulent times will help you minimize losses. In addition, regulatory changes, geopolitical instability, and operational risks all have the potential to negatively impact your investment.
Enhancing Portfolio Resilience: The Role of Gold Mining Stocks
When you invest in a gold mining stock, you are benefiting from the appreciation of gold prices and the operational success of mining companies. Not to mention that gold mining stocks are a great way to diversify your portfolio, especially during turbulent market times. Who knows, gold mining stocks like Troilus Gold Corp. might be your next investment opportunity!
