Risk of Buying Gold Stocks

Gold has long been prized for its beauty, scarcity and industrial uses. Cultures through the ages have minted gold into coins as a medium of trade. Investors buy gold bullion and coins as a hedge against inflation. You can always purchase stock from gold mining companies to get some gold in your stock portfolio, but exercise care; not everything that glitters is gold on the stock market -- not even the gold.

Price Fluctuation

An investment in a gold stock is not the same thing as an investment in gold bullion. You are investing in a company that mines for gold. At least a portion of every gold mining company's assets is the gold that it produces. A drop in the price of gold will have a corresponding affect on the price of the gold mining company's stock.

Stock Market Fluctuation

Multiple factors beyond the price of gold will cause the price of gold stock to fluctuate in the open market. Gold mining companies frequently operate in remote regions of the world where unsettled conditions may include natural disasters, political upheavals, wars and labor unrest. These conditions can disrupt a mining company's normal mining activities and cause the price of its stock to fluctuate independent of the price of gold.

Production Costs

Mining for gold is an expensive proposition. Barrack is one of the largest gold mining company's in the world, and has some of the industry's lowest operating costs. Even so, according to a company report, it cost Barrack an average of $460 to produce a single ounce of gold in 2011. A dip in the price of gold, or an unforeseen increase in production cost, could put the price of your gold stock into a tailspin.

Inexact Science

A portion of a gold stock's value is derived from an estimate of the in-ground gold reserves of its mines. These estimates are determined from a combination of geological science and past production. But estimates are exactly that -- estimates. If they're wrong, the result could be a significant downgrade in the value of the stock.

Considerations

The risks of owning gold stocks may be outweighed by their rewards, and you can reduce your risk by investing in a highly rated gold stock mutual fund. This gives you the benefit of professional management of your investment dollars and a diversified portfolio of gold stocks.

About the Author

Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.