Physical Gold and Silver vs. Gold and Silver Stocks

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Dave Engstrom When it comes to precious metals, an often discussed topic is whether one should own precious metal stocks or the actual physical metals.  Here's some things to ponder if you are considering placing money into either. 

Let's ask the question.  Why does one own metals' stocks?  Answer?  Because they expect metal prices to rise.  Any answer you give after this, takes second place, third, fourth, whatever!

Why does one own the physical metal?  Answer?  Because you expect metal prices to rise.  Basically the same answer.

Here's the catch.  Rising metal prices do not guarantee rising stock prices.  There's a multitude of variables to weigh, not the least of which is that the more of a given metal you take out of a mine, the closer you get to depleting it.  I don't care what mine you own, every ounce of gold taken from it brings you that much closer to the last ounce it can produce.

This brings up the next point.  If one mine produces more profit than the next, which stock would you buy?  Naturally, the one that produces at the least possible cost for the highest possible profit should get the nod.  Hence, a rising metal price does not guarantee all corresponding metal stocks will rise in lock-step.

Look at it this way.  If a given metal goes down in value, it can put a mine out of business.  But, the metal itself, will never be worth zero.  There are many variables that can affect a stock value beyond just the price of the metal it mines.

Barrick Gold, said to be the largest gold mining company in the world, may serve as an example that the value of a gold stock is, in many regards, subjective.  A Reuters release , reported Barrick stock fell 6.73% the day it announced its intent to purchase Equinox Minerals, an Australian Copper mine.

" Barrick explains the move down," said Francis Campeau, broker at MF Global Canada in Montreal.  "I'm wondering if the gold players are going to steer away from Barrick to get to a more gold play."

Another variable affecting the price of precious metals and metals' stocks is inflation.  On one hand, inflation and inflation fears help drive metal prices higher.  On the other, inflation means higher mining costs and a strain on profitability.  Let's call it the Doctor Dolittle "pushmi-pullyu" effect. 

Other factors that could adversely affect the price of mining stocks, may include, worker strikes, safety shutdowns, accidents, profit forecasts and PR.  Here, factors that slow production, even if for a short time, could help to drive metals' prices higher.  Granted, the effect may only be "transitory," but present, nonetheless.  As for PR, that's just a beauty contest.  May the prettiest ads win.

The bottom line is, rising metals' prices are guaranteed to increase the value of a metals' portfolio.  But, when it comes to stocks, there is no rule that says rising metals' prices must raise the value of related stocks.




The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Commodities

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