How to invest in gold miners?

Glen_Clark

The thing about mining is there are massive fixed costs.
If commodity prices fall, there is very little cost savings to be made by reducing production.
To close, or even mothball, a mine is very expensive indeed. It can be costing you a fortune to pump the water out, but once you turn off the pumps the mine is ruined.
You keep going hoping your competitor is going to close their mine, so supply is reduced and prices rise.
When they are all losing money it gets like a game of chicken between mine owners, to see who will close their mine first.
This is why shares in mining companies are cheap - because if commodity prices drop a bit, some of them will be worthless.

amictus

Here's the best option I found when I looked into this:

http://www.etfsecurities.com/fund/etfs_fund_gold_gb_en.asp

As a global index tracker I thought this would allow exposure without the risk associated with investing in a single company.

Many people have warned about the risks associated with investing in gold miners which is quite right. It wasn't a nice feeling when I was down 25% a short while ago.

sabretoothtigger

going long in mining shares and short on gold? arbitrage.

Yes that is true but its also black magic to do such things. This is where investment banks live and work.

The argument why you really shouldnt do this is pretty simple in basis but complicated in effect. Volatility, instability, risk premium, FEAR and the unknown.

A block of gold is about as simple as it gets. A gold mine is not just the element price but oil, cost of labour, government taxes.

Its really dangerous to expect the risk premium on a mine operation to reduce in relation to a block of metal in your hand. So yea, in theory mines are cheap but in this incredibly explosive world now dont expect risk to reduce, expect risk to become gigantic.

We have before us total unknowns, this is what has the gold bugs rattling in their cages so much.

You know the news so you know things happen now that have not occured in decades or even the lifetimes of people who report them. Unpredictability is what drives option prices and risk premiums and all that kind of thing.
Uncapped leveraged is not something you want on your plate.

Study options trading and they go over all this kind of thing but my general take is the world is risky and getting worse which drives gold far more then actual companies even the guys producing gold. That'll probably continue, just owning a mine is risky enough.
I wont be shorting gold because its quite easy for the price to rise and the mine to become worth less. Until they actually pay a dividend and you got the return, you cant tell



Another example, POG . In 2009 this was 12 and gold was 1150. 2012 its 3.8 and gold is 1617. They make a profit, 4 PE and they pay a div of 3.75% Its on the Russia China border

A recent story for Arbitrage might be the case of JPM and them losing billions on a trade. Or even MF Global, I would guess that was arbitrage. Or the granddaddy would be LCTM bailed out by the FED, all about arbitrage. Im not sure they were wrong just not correct to assume risk is cheap or declining in its prospect

A whole Phd could be written on this dynamic, I think its quite clear risk is active in the market like a volcano smoking dont guess on it

grey_gym_sock

sabretoothtigger wrote: »

Yes that is true but its also black magic to do such things.

yes, good summary of the dangers.

i suppose one would counter the issue that miners use energy by adding "long on energy prices" into the mix.

but i agree one shouldn't actually do this. i was more questioning the argument for just buying mining shares. all the other dangers described suggest that that is pretty dangerous, too.