Investors often ask"why do gold stocks often move at a much higher rate on a percentage basisthan the price of gold itself. The fact is that Gold stocks can giveinvestors much greater upside "leverage" over the price of gold bullion.
For example, if the price of Gold moves from $1200 to $1400,the return is approximately 16%..Not bad! But with the same $200 increase ingold a $4 gold stock can rise to $12 or more, that is a return of 100% to 200%and often it is much more. In a small cap "junior" we can often see1000% to 1500% moves up.
That enormous difference in the returns is the reason why successfulgold investors buy the gold stocks instead of the actual gold bullion (or goldETF's). Yes, that is the primary reason that makes many of the gold stocks soattractive when the price of Gold bullion is rising.
Here's an example of how it works...
Producing gold mining companies generally have a fixed costto produce (the all-in cost). It doesn't matter if gold is selling at $900 or$1400 or at $1500 an ounce... the mining company's costs generally stay the same.
Now if a mining company is producing gold at $1200 an ounce...and the gold price is $1300 an ounce... the company makes a profit of $100 anounce.....But if the price of gold climbs to $1500, the company will make a $300 profit per ounce. That's ahuge 200% jump in profits for the mining company, even though the gold itself wentup only 25%.
The Math is easy to understand
For example...Suppose that "XYZ Mining Company" has 100,000,000 shares outstanding. Then suppose that XYZ Mining produces 100,000 ounces of gold at an "all in cost" (total cost) of $1450 with gold selling at $1500. That's a $50 per ounce profit.
So they are selling100,000 ounces and making $50 per ouncefor a $5,000,000 profit. That would be a .05 cents per share profit. (that is the $5,000,000 profit dividedby 100,000,000 shares). If the XYZ Mining is selling at .50 cents per share, itwould be selling at ten times earnings per share.
But suppose that the gold price rises to $1600 with the 100,000 ounces of production; that increase brings the profit to $150 per ounce- or .15 cents per share. That could bring the price of the XYZ stock to $2 to $3 dollars per share or more if the company can increase their resources.
The leverage is enormous...so pay attention.