Gold Stocks
This is a basic outline of the Australian equities concerned with the Gold market, and some of the factors that you should consider before looking at this area.
Firstly we should stress that Gold orientated stocks are highly volatile; principally the effect of the overseas gold price in USD$ (which is influenced by many short term global economic and political situations) and the AUS$ / USD$ exchange rate can cause the price of gold orientated equities to fluctuate overnight, frequently causing large gaps in the charts. Gold is an inflationary hedge mechanism and an alternative to buying Bonds and US linked assets in light of the US current account and trade deficits. Add speculation and the uncertainties of mining - a recent example being the tragic accident in Beaconsfield, Tasmania - and you can appreciate that trading in gold stocks can be fraught with difficulties.
Gold stocks can be split into two polar groups:
Exploration - companies that have a licence / lease to explore for reserves (The WA governments treatment of Cazaly resources should be a recent caveat). Exploration stocks offer the greatest potential returns provided they actually discover a worthwhile reserve, otherwise they will tend to devour capital during the exploration process.
Production - companies that have proven reserves and are producing ore. With Producing stocks there have been some recent differences in valuation, mainly because brokers were valuing the stocks on forecast gold prices, not spot prices. As the market has realised that Gold prices may be staying at this higher level for some time there has been a market re-evaluation of many of the gold stocks. Therefore the published reserves that each stock possesses can be re-priced, raising (or lowering) the value of the stock, but of course it is not as simple as that, there is the added complication of hedging.
Hedging:
Gold companies have long understood that they are dependent upon the gold price and are prepared to forward sell a % of their production, in times when the gold price is low they can guarantee an income to cover their costs, when the gold price is high they can forward sell a proportion of future production. However if they hedge too much at a low price then they cannot fully benefit from the high gold prices that follow.
Reserves:
Reserves are 'money in the bank' - or are they? Be aware that ore reserves are graded but they can be subjective as it is difficult to fully ascertain the complete quantity and quality of underground reserves, you may also find that a company may mine the premium grade ore initially - which looks very good for cash flow - and leave the lower grade ore for the future, but if the price of gold drops then the valuation has the potential to drop exponentially.
Gold companies: Following is a summary list of the main stocks to consider.
Beaconsfield gold (BCD), Bendigo Gold (BGD), Dominion Mining (DOM), Highlands Pacific (HIG), Kingsgate Cons (KCN), Lihir Gold (LGL), Newcrest Mining (NCM), Pan Australia Res (PNA).
