Friday, February 18, 2011

Gold or Gold Miners?

I am bullish on gold and view it as a perfect portfolio hedge against all ills ranging from inflation to yet another financial panic. I also have shares of gold miners in my portfolio because they should appreciate even faster than gold itself. Profits of gold miners that do not hedge their output tend to swing much more than the price of gold because their expenses do not have relation to gold price but their profits do. If you are not bullish on gold or you are sensitive to large swings in share price you should not own shares of gold miners.


Example: Let's assume a hypothetical gold miner "A" can extract gold from ground with average "cash cost" of $700 per troy ounce of gold. In addition, let's assume that all other costs related to the ongoing mining operations (depreciation of assets, etc.) are $200/oz. With an average gold selling price of $1300/oz the company makes pre-tax profit of $400 per ounce. If the price of gold changes 10% in this hypothetical case (i.e. $130, up to $1430 or down to $1170) the profit changes 33% (i.e. $400 plus/minus $130).

..The rest of the article can be read only from Seeking Alpha:
http://seekingalpha.com/article/253292-gold-or-gold-miners

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