Pros and Cons of Owning Gold Miners Shares

Hello there, this is tradingpedia.com here and we continue our series dedicated to gold. Slowly but surely, we come close to the end of this series. If there are any questions, feel free to send an email and get in touch with us as we will happily answer them.

Overview

We have covered gold for the retail trader and the ins and outs of trading CFDs and ETFs, how the ETF gives exposure to the actual price, and so on. Another way to gain exposure to gold is to actually own the shares of a gold mining company.

Basically, mining company will do well when the price of gold rises, and worse when it declines. While on the CFD one may speculate and the ETF represents a cheaper alternative, there is another way to gain exposure to gold. This chart comes from the TradingView platform and you can use its search engine for free to find a gold mining company to trade. One can also check the fundamental ratios, financial statements, and so on.

Gold Miners Shares

Let’s say that you find a company. The symbol GOLD belongs to the Barrick Corporation – a public company. As you can see, the price of Barrick shares follows the price of the ETF we have discussed in the previous video.

Look at the price of gold in 2020 and this was the dip on the monthly chart. The GDX ETF dipped in March and then the market advanced before correcting.

The same thing happened with the shares of Barrick gold. I’m not advocating here for buying Barrick shares, but just that it follows the price of gold. One of the main moves of Berkshire Hathaway during the pandemic was to buy shares in Barrick.

Why would you want to own shares rather than the actual commodity? One reason would be that the company might pay a dividend. If it is so, besides the capital gain or loss from owning the shares, you earn dividends.

Additional Things to Consider

Therefore, there are many things to consider when trading shares. It is a totally different thing then when trading ETFs. For one, it is much more expensive to trade shares. Also, it is more difficult to sell shares short than ETFs.

When you participate on the long side, you may want to trade on margin. Effectively, traders borrow money from the broker, and against a fee as interest rate, the traders may participate more to the upside, but also to the downside.

When traders own shares, they must know the dividend paying date, the ex-dividend date, and so on, as it creates volatility. Also, the annual meetings, the profit, the financial statements, the cash flow from operations, the gold reserves, recent discoveries, etc. – everything matters.

To gain exposure on gold is not only about CFDs, ETFs, and owning the physical product. Owning shares is just another way to do so. They are all tied to the gold as the underlying market.

Therefore, it is literally impossible to see the price of gold moving from $2,000 to $1,000 without the ETF to follow. The same remains valid with the shares of a gold mining company. No matter how profitable the company is, if the price of gold halves in the course of a year, the shares will underperform, regardless of the profitability.

In the next video we will discuss the correlations to consider when trading gold. Have a great day – bye, bye.