I love gold.
I love panning for gold, I love metal detecting for gold. I love gold coins, I love gold jewellery. I think I must be an ancient Egyptian. Bury me with my gold.
I even love watching gold prospecting videos. Here is a good one from a fellow countrymen! We are a little nuts at times. Gold can do that to a person.
Get a load of this fella! Hahahah
(As a sidenote, WalnLiz are my favourite YouTube gold prospectors - always entertaining as well as really informative vids on gold prospecting in Australia, I hope to join them one day)
Let me boast about Australian gold, just for one moment first though...
Australia has mined the 2nd most amount of gold in the world since gold mining began. Not bad for a country of only 20m people. We have an astonishing amount of the yellow stuff in our backyard. In fact, the biggest nugget ever prospected was discovered not far from where I live at all - here is a photo of it (the worlds smallest)...
Holtermann with his "nugget". Discovered at Hill End in 1872, the Holtermann Nugget remains the largest single mass of gold ever discovered in the world, measuring 1.5 metres long and weighing almost 290 kg.
You have no idea how much I wish I was alive back then. I would loved to have been an old gold miner from back then.
Yea yea, enough boasting! Let's make me some money already!?
In this post, I want to talk about a particularly interesting characteristic of (good) gold mining stocks. This characteristic allows you to naturally 'leverage' any price rise in gold. If you are looking to invest, I urge you to read on, especially if you like gold as an investment vehicle anyway (like me).
You see, gold mining companies (and, well any mining company really) are really special. Especially well run, well managed, low production cost gold/silver mining companies.
Want to know why?
Ok, here is my little secret that I will share with Steemians :)
If you are bullish on gold, this is why you should invest in a gold or silver mining stock. It is very simple. Here is the secret.
The effect of only a 25% price rise in gold, actually represents a 50% rise in profit on the mining company makes on each ounce of gold for a (well run) gold mining company.
Read that again.
How will gold mining company XXX stock perform, when the next annual report states that profits have doubled and are up 100%?. This is an important question.
Do you see the power of that? The actual report in the paper would be something along the lines of "Gold mining company XXX profits DOUBLE". Not only that, it DID double.
That is amazing.
This is what you want. This is GREAT news for a gold mining investor and/or anybody that owns shares in a good gold/silver mining company.
How does this happen?
Ok, consider this...
Let us pretend as a basic example that it costs $800 to mine 1 oz of gold out of the ground (which, in some mines is about accurate - albeit this would be a high cost of production). That is, after production costs, oil, labour and electricity costs and so forth, the cost to the mining company of extracting 1oz of gold from the ground is $800.
Let us pretend in this example, that the current gold price is $1000.
This means, the gold mining company makes $200 on each ounce of gold it sells. That represents a profit for the mining company, of 25%. Not bad. I am sure the mining companies annual profit statement would be in a good place, and investors and shareholders would receive a nice rise in the stock price upon this news.
But guess what happens, when the gold price rises?
This is where the magic happens
Let us pretend now, that the gold price rises (which I believe it will) in this example from $1000 oz, to $1200 oz.
So the gold price has gone up 20% - awesome. Guess how much the profit of the gold mining company went up?
The profit off each oz of gold the mining company makes, goes up 50%, when the gold price has only gone up 25%!
Because (ProfitOnEachOunce/CostOfOunceProduction*100)
So, in this example, we have a 50% profit on each ounce of gold, because: 400/800*100 = 50%
Where as before, we only had 25% profit on each ounce of gold, because: 200/800*100= 25%
Nice. But we can take this further. This is where the really good news comes in. This is how you get news articles like this one: http://www.smarteranalyst.com/2016/08/19/gold-fundamentals-continue-improve-gold-stocks-ready-surge/
So in our basic example, let us say that the company in year 1 the company XXX, sold 1 oz of gold, and made $200 profit at the end of the year. In the second year though, the price goes up to $1200, and in this year, the company reports a total profit of $400 on its sale of the 1 oz of gold.
The profits in the company just went from $200 in year 1, to $400 in year 2. What percentage increase in profits does that mean? 100% increase in profits.
The newspaper headline now reads "Gold mining company XXX profit is up 100%
Count all your monies.
p.s - I particularly like Fortescue Metals Group (FMG) as a general mining stock, here is a chart (as you can see it is a nice looking chart that is steadily rising) and the company is run very well.
I hope you like my post, if you have any questions or comments I would love to hear from you! Especially about gold/silver mining companies you may have an interest in. Please don't forget to upvote if you find my content useful. Each and every upvote I get really does mean a lot, and is very much appreciated. Thank you.
If you liked this, you may like my other post:
What I am buying in terms of investments in 2016 and why
Kind regards,
Optimistic