Gold mining shares are widely misunderstood. Myths abound and many investors lose money. However, investors can protect their stake if they understand a few basic truths about gold and the companies that mine it.
Trying to work out which gold explorer is likely to see explosive growth is not for the faint-hearted. It takes considerable years of experience. You need to understand markets, currencies, metallurgy, as well as understanding who is who in the gold mining game.
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Buy the breakout not the speculation
Instead of trying to pick winners before the event, invest in gold mining shares during the event. The investing community is filled with very smart and knowledgeable people. When they move, you should consider moving, too. In other words, the point where a gold mining share starts to rise is, perhaps, the perfect time to buy-in.
For example, within 1 month of its low point on 16 March, Gold Road Resources Ltd (ASX: GOR) had risen by more than 118%. At least double most other S&P/ASX 200 (INDEXASX: XJO) gold miners. Recognition of the company's value as the newest producing gold company on the ASX.
Bellevue Gold Ltd (ASX: BGL) likewise burst forth from its COVID-19 low on 19 March to be 100% up within 1 month. The Bellevue share price, in particular, has risen another 71% up to last Friday. I personally expect Bellevue to be one of the great ASX performers over the next decade.
Gold mining shares go up when everything goes down
Between 8 January 2010, and 10 January 2010, the ASX 200 rose by around 41% in a nearly continuous upward trend. During this exact same period, the gold price rose by 84% despite the absence of a sharp or prolonged downturn.
In fact, the best-performing ASX investment of the decade was Northern Star Resources Ltd (ASX: NST). The Northern Star share price rose by 375 times the initial investment between 10 January 2010 and 2 January 2020. The core truth here is that a good company is always a good company regardless of the commodity prices.
Over 90% of the world's gold has been mined
This is definitely true given what we know of the disclosed gold reserves. Unfortunately, though the exact location and trading of most above-ground gold is a bit of a mystery. In addition, there are signs that several large central banks have been building their positions in gold recently.
As investors turn their interest to gold as part of a more balanced portfolio we will see more and more money chasing lower and lower levels of available gold. In addition, it pays to remember that gold doesn't come from the earth.
Foolish takeaway
For me, physical gold is savings not investing. When I want to invest in gold I buy gold mining shares. The facts above should help to understand the gold market. For instance, buy the breakout, not the speculation. A good company is always a good company. Lastly, gold is becoming increasingly rare with much of it coveted and held by institutions and central banks.
