What are the Dangers of Investing in Gold Mining Stocks?

For those who are interested in gold and gold IRAs as an investment vehicle, there’s almost always a temptation to get in on the ground floor, so to speak, and invest in gold mining stocks.

The logic is simple: if gold is coming more valuable, why not invest closer to the source and buy stock in the companies that are mining it?

It’s a logical approach, but there are some serious traps in the logic. behind it. Let’s break some of them down and take a closer look at some of the inherent risks in investing in gold mining stocks.

gold mining stocks

Physical Gold vs Gold Mining Stocks

The return rates on gold and gold IRAs have been anywhere from solid to spectacular for the last couple of years. Their growth mirrors what happened in the decade before the 2008 subprime crisis, when gold grew consistently and eventually reached a value of $2,000 an ounce in 2012.

In 2020, gold provided a return rate of approximately 33 percent for investors. There were brief leveling-off periods, but a similar peak of about $2K per ounce was attained during the pandemic, with gold prices now ranging from $1.5-2K as pandemic uncertainty continues to influence investors.

Now let’s look at the gold mining industry. It was hit hard by the pandemic, which put the production of over 8 million ounces of gold in serious jeopardy. The recovery has been a slow grind, and projections for 2020 had the industry growing by 5-6 percent in 2021. Overall, the growth rate for gold production is expected to be 2.9 percent by 2024, with over 120 million ounces being mined.

While that kind of growth rate might result in even higher prices for gold, we’re clearly talking about two different entities here. Mining gold isn’t the same as selling gold stocks, and while the tail does wag the dog to some extent, betting on gold mining stocks obviously comes with a higher level of risk in the short term.

Gold Mining Companies

Now that we’ve charted the overall growth rate to some extent, let’s take a closer look at who mines the most gold, where the companies are located, and what the financial outlook is for those companies.

This breakdown might surprise you to at least some extent. As of 2020, China was the world’s biggest gold producer, accounting for 11 percent of the world’s output, with Russia coming in second and Australia rounding out the top three.

That will probably raise some eyebrows, but some of the key players when it comes to gold mining companies are actually located in Canada. These include the Barrick Gold Corporation, Agnico Eagle Mines and several other prominent players.

These companies do represent some excellent investments, although all the numbers aren’t in just yet for 2021 as a whole. They were expected to generate revenue of $50 billion in 2021, compared to $38 billion the year before, and Barrick Gold is an enticing possibility given that the company’s revenue increased by over 25 percent in 2020.

The Risk Rundown

But there are risks. The price of gold mining stocks tends to fluctuate more than the actual price of gold itself, and these companies often do their mining in remote areas where the combination of natural disasters, political instability, labor unrest, etc can completely disrupt or even shut down a mining company’s entire operation.

Moreover, there are the production costs. Gold mining can be an expensive proposition, but companies like Barrick Gold basically have it down to an exact science—consider the fact that in 2011, it cost Barrick approximately $460 to produce an ounce of gold. That cost isn’t as stable as the price of gold is, though, so you need to project accordingly when making your investments.

Finally, there’s the source of the gold itself—the actual mines that these companies are working. Their yield is determined by a combination of geological exploration, scientific projections and past production, but these are estimates that may be off a little or a lot, and their accuracy becomes even trickier to project as the pandemic continues.

So what’s the ultimate conclusion? If you’re going to invest in gold, a gold IRA is definitely the most stable choice, and if you are going to consider investing in gold stocks, you should probably pick a highly-rated stock like Barrick. For those who prefer a more conservative approach, however, the best choice may be to use gold stocks as a riskier element of your gold portfolio and balance that risk by going with a gold mutual fund.