What does the recent gold mining unrest mean for gold investors?

Gold Mining Unrest - Advantage Gold

Last Wednesday, AngloGold Ashanti (JSE:ANG) (NYSE:AU) became the latest of  major gold mining companies to announce a major restructuring. Their shares dropped 16% in the wake of the announcing the need to raise $2.1 billion in a rights issue to spin its international assets into a new London-listed company. This move follows mining giant BHP Billiton’s (ASX:BHP) recent decision to split some of its less profitable assets into a new Australian-listed company. Fellow gold miner Gold Fields (NYSE, JSE:GFI) also split its South African assets into a new company called Sibanye Gold (JSE:SGL )(NYSE:SBGL) in 2013.

Barrick Gold (TSX, NYSE: ABX) and Newmont Mining (NYSE:NEM), the two largest gold producers by output, held talks earlier this year over a potential merger, which would also have seen them spin off lower earning international assets to concentrate on their combined holdings in North and South America. AngloGold’s price drop serves as a perfect example of the risks associated with investing in gold mining companies in comparison to physical gold.

Physical gold has forever been the leading safe haven investment for investors eager to protect the value of their assets during times of political and economic upheaval. Gold mining stocks on the other hand are typically very volatile amid political unrest and can be sensitive to corporate turmoil. Some may argue that gold mining stocks offer investors an opportunity to invest in the gold market. This is INCORRECT.  Investors must remember that they are investing in gold mining companies, NOT gold.

The Risks of Gold Mining Stocks

There are significant risks associated with investing in a gold mining company. While gold shares in general tend to go up due to market sentiment, investors still have to pick the right companies! When there is a potential market correction on the horizon, or political turmoil increases, like it has in the recent months, gold mining shares typically go down. There are many variables involved with gold mining stock investing. The one thing mining companies share is they are all involved in the business of getting physical gold out of the ground.  When you place a bet on gold mining shares, you incur the same risks associated with any stock. As the rising labor costs for mining companies continue to increase, overall costs of production also increase. Many mining companies have been forced to cut production and some have already shut down their operations. Many mining stocks have tanked in recent weeks meaning they will produce less gold than expected. Gold mining companies can and have gone bankrupt. They can and have been nationalized. They can and have miscalculated their gold. They can and have had accidents. There are literally hundreds of variables that could destroy these miners.  Mining unrest in South Africa is putting major pressure on gold mining companies. Taking these risks into account, clearly an investment in a gold mining company is not the same as investing in a gold coin or bar.

The Advantages of Owning Physical Gold

Gold offers a far more comfortable ride for investors seeking to protect their portfolios from global economic events. It is resilient to hard knocks. Gold actually enjoys bad news. Savvy gold investors recommend 20 percent allocation of physical gold in a diversified portfolio. This should be enough to act as a natural hedge against other asset classes and currency debasement. Gold has certain traditional strengths that both these investment forms share. Gold serves investors as a traditional store of value, a source of liquidity and refuge in times of economic uncertainty. Many investors have taken advantage of gold rollover opportunities by setting up gold IRA and 401(k) accounts. Gold also has a strong industrial demand and is often used for jewelry. These traditional strengths of gold never change. Physical gold is very liquid. That’s not much of an advantage because gold mining stocks are also liquid. However, the great thing about physical gold is that it reflects the market’s sentiment against economic downturns much faster than gold mining stocks. You don’t have this variability when you are investing in physical gold. The appreciation of physical gold is more stable, more constant and it’s across the board.

In conclusion, we are watching gold mining stocks show why they are an ineffective and risky way to invest in the gold industry. Physical gold continues to prove itself as the best way for investors to hold physical gold in their portfolios. Diversification is extremely important for all investors especially retirement investors. Many are rolling over IRA and 401(k) accounts into physical gold investments to ensure safety amidst this period of economic and political turmoil. The most important aspect of gold investing is getting proper advice from professionals who are experienced in gold investing and immersed in the day-to-day market. We take pride in educating first-time, novice, retirement and experienced gold investors. Our GOLD GUIDE helps investors get a better understanding of the market and is free to those who call. We continue to serve our clients by providing clear, concise, objective advice without any obligation. To learn more about adding precious metals to your retirement account, call our specialists today at 1-800-341-8584.

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