Gold and other precious metals have long been viewed as a hedge against inflation. Some investors like to own physical gold in the form of coins or bullion, while others prefer stock in gold mining companies. Both types of investments offer benefits and risks. For example, the price of gold stocks can fluctuate for reasons that might have little to do with the price of gold.
Price of Gold
While owning gold stocks is not the same as owning physical gold, the price of these stocks is influenced, at least in part, by the market price of gold. A portion of a gold mining company's assets is typically made up of refined or raw gold, so a change in the market value of the metal will affect the value of the gold the mining company owns. A change in the value of the company's assets can affect its stock price.
A portion of a gold mining company's value is determined by its estimated gold reserves. The key word here is "estimated." Gold mining is an inexact science, since there is no foolproof way to determine exactly how much gold a particular mine holds. A change in a mining company's estimated reserves can affect the market value of its stock.
Some of the world's in-ground gold reserves are located in areas with volatile political climates. Wars, civil unrest and political upheavals can threaten a gold mining company's ability to remove the gold from its mines. Political changes can result in increased operating expenses for a company, which can affect profits and share prices.
Gold stocks don't exist in a vacuum. They are affected by the same types of circumstances that affect the rest of the stock market. These include national and international events, rumors and the economy as a whole. Gold mining companies may have other assets and business interests outside of the precious metals industry that can affect their stock value.
- Hemera Technologies/AbleStock.com/Getty Images