Are you considering investing in gold mining stocks as the price of gold rallies? There are several reasons why now might be a good time. First and foremost, they can provide a quasi-form of leveraged exposure to gold prices. If the price of gold rises, gold mining stocks may rise even more.
But that’s not the only reason. Many gold mining stocks offer dividends, providing a source of income in addition to potential capital appreciation. Investing in gold mining stocks can provide diversification benefits, as they often have a low correlation with other assets, such as stocks and bonds.
Why Gold Mining Stocks Are Heating Up
I think a large part of the move in gold is due to its safe-haven status during times of geopolitical uncertainty, which can lead to increased demand for gold and gold mining stocks. If gold is indeed sending a warning, then mining stocks stand to benefit, particularly since investors have largely ignored them in this AI-fueled market.
The VanEck Gold Miners ETF (NYSEARCA:GDX) offers quick, broad-based exposure to the gold mining industry without the need to pick individual stocks. This ETF focuses on established gold and silver mining companies with stable cash flows, making it suitable for the core of a gold allocation.
Just keep in mind that gold mining stocks are inherently volatile. As gold prices rise or fall, the profitability of mining companies is directly impacted, leading to corresponding movements in their stock prices.
Investors must also consider the operational risks associated with mining companies, such as higher production costs, which can erode profitability and lead to lower stock prices. Changes in government policies, regulations, and taxation in the countries where mining operations are located can also significantly impact the performance of gold mining stocks. None of this may matter in the here and now, but it is worth keeping in the back of your mind if you’re looking to make a longer-term allocation.
The Bottom Line
I like the space here. The only real complicating factor however is oil. Because mining operations are very energy intensive, surging oil prices can negate the impact of surging gold prices. The ideal scenario would be oil falling while gold continues to run. I think this is a distinct possibility.
Some would argue it’s better to just go direct and access gold itself rather than play with the stock side. I don’t disagree this is cleaner. But gold mining stocks are cheap, unloved, and have done nothing for some time. There’s an opportunity for momentum here, and I think it’s a good time to consider positioning as investors finally come around to my thesis that there is the potential for a reverse carry trade dynamic from Japan.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
