Page 51 - Introduction to investing in Gold

The Beginner's Guide to Investing in Gold
For my medium-term investments, I like producers. These are mining companies that have not only discovered what they’re looking for, such as gold, silver, uranium, copper etc. but are actually producing it.
Providing the value of the commodity they’re mining is above their costs (they often mothball projects if that’s not the case), they’re generating cash, which can often mean dividends.
Advantages
Often (but not always – you need to check), they pay dividends. Depending on the commodity, there can be a particularly short supply chain to create value. For example, in the case of gold, a lot of value is created once it has been found, extracted, and processed. The same cannot be said for many other products (such as mobile phones), which contain a lot of different components. In many cases, these need to be sourced from different locations across the world.
There’s the potential for the company to discover more of what they’re mining – prolonging the mine life and, in turn, cash flow from the asset.
Disadvantages
There could be a problem with the mining or processing, resulting in the company producing less than they forecast.
The price of the underlying commodity could fall.
The costs of extracting and/or processing the commodity could rise.
There’s also the political risk. I like to focus on what I would view as safer mining jurisdictions, such as Australia, Canada, and the US.
When looking at producers, you not only need to be aware of the gold price but also their All-In Sustainable Costs (AISC). As a very general rule of thumb, a lot of miners have AISCs of around $1,200 per ounce. Keeping things really basic, if the gold price is $1,700 per ounce, that’s a profit of $500 per ounce.
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