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
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
, 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
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
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.