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The difference between gold and gold mining companies

MenInTights

not a plastic bag
Lets say that Andrew and I both wanted to buy some gold when it was $250 an ounce. Andrew buys one ounce of gold for $250 and ounce plus a 6% buyers fee. I buy $250 stock of a gold mining company, plus $10 for the trade. In a few years, gold selling at $500. Andrew has doubled his money minus the buyer and seller fees.

How has my gold stock done? Well, when I bought it, the company could mine for gold for $225 an ounce and were pulling 10 tons a year out of the mine. So, they were making around $8M per year($25 profit per ounce). Lets say the stock was $10 and they were making $0.50 share for a PE=20.
Now gold is $500/ounce and the company is still mining gold for $225 an ounce. That means, they are making $275 per ounce! A 11 fold increase. Holding everything else common, they are now earning $5.50 per share. That translates into a stock price of $110.00. That is if the company doesn't run a second or third shift or buy any more properties.

This is the beauty of gold. It's not as exciting as internet companies, but if gold is rising, its a good safe place to be.
 

Mirage

Secret Agent
Staff member
V.I.P.
The other important difference is that gold mining companies can go out of business. Not likely, but hey, it's more likely than gold losing a lot of value..
 

MenInTights

not a plastic bag
lol.

Or they can dilute the stock to a point where its worthless. Happens frequently in gold stocks. Solution is to check insider ownership and compare FCF to debt and cash on hand.
Or, they could operate in a hostile environment. 2 days ago Hugo Chavez said he was going to nationalize the gold mine that KRY had a contract operate. The stock tanked and rebounded today when KRY stated it was a misunderstanding. right. Solution is to not invest in countries that are run by dictators.
 

stockbroker

Registered Member
Gold will have value because people like it, stocks won't. Silver is the metal to hold, it is rarer than gold and is being artificially kept at lower prices. It is even said that there is not enough silver to cover all the silver shorts...

Up up and away my friend
 

IslandGuy

Registered Member
stockbroker said:
Gold will have value because people like it, stocks won't. Silver is the metal to hold, it is rarer than gold and is being artificially kept at lower prices. It is even said that there is not enough silver to cover all the silver shorts...

Up up and away my friend
I find that really interesting, because I've always had this feeling that silver should be trading at a lot more than it does. Thinking back on all the history classes I took at university (and there were a lot!), gold was always considered THE metal of choice, although the Spanish settled for a heck of a lot of silver out of Latin America in the 16th and 17th centuries when they discovered there wasn't a lot of gold in Mexico and Peru :lol:

Little known fact - pieces of eight - called that because a Spanish gold coin, called a reale, could be broken into eight pieces if necessary to "make change"

Anyway, to get back to your comment, where did you hear that there may not be enough silver to cover all the silver shorts? Of course, I'm kind of a skeptical guy anyway and have always wondered if there's enough gold, silver, etc. to cover all the currency that's printed anyway ...
 

stockbroker

Registered Member
IslandGuy said:
I find that really interesting, because I've always had this feeling that silver should be trading at a lot more than it does. Thinking back on all the history classes I took at university (and there were a lot!), gold was always considered THE metal of choice, although the Spanish settled for a heck of a lot of silver out of Latin America in the 16th and 17th centuries when they discovered there wasn't a lot of gold in Mexico and Peru :lol:

Little known fact - pieces of eight - called that because a Spanish gold coin, called a reale, could be broken into eight pieces if necessary to "make change"

Anyway, to get back to your comment, where did you hear that there may not be enough silver to cover all the silver shorts? Of course, I'm kind of a skeptical guy anyway and have always wondered if there's enough gold, silver, etc. to cover all the currency that's printed anyway ...
Oh man, I have no idea where I read that it's been such a long time. A quick search on google might yield something.
 

IslandGuy

Registered Member
Googled "silver shorts" and got some pretty interesting results .... did you know that a lot of clothing companies make silver shorts (as in the kind you wear) :)

Anyway, once I refined my search I found some pretty good info and some intriguing theories about the silver situation. The one I liked that I learned a fair amount from is at http://www.zealllc.com/2005/silvercot.htm. Unfortunately the Zeal Intelligence newsletter that comes out only once a month costs money to subscribe to, so I don't think I'll go that way, but the article was kind of interesting, if you want to revisit the issue, stockbroker.
 

stockbroker

Registered Member
Good find. I may have to look into this again. If the market moves up and wipes out the shorts, the upside would be great.
 

leopard22

Registered Member
Spence, you were right. Gold is up there at something like $600 an ounce now that it's the end of April.

I have a question for you. I've got a bunch of gold that my dad bought about 50 years ago at $140 an ounce. Does it make sense to sell it now, or do you think it will go higher? More importantly, is gold still a good commodity to have on hand? I think people bought it years ago partly fearing that the world was going to the dogs and the Ruskkies might nuke the world, destroying economies as well as countries, and that gold would always be a valuable means of exchange. I'm thinking that stockpiling food and water would make more sense in that scenario, but that may be immaterial.
 
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