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There are good and BAD gold investments -which ones are they?

by , 24 March 2022
There are good and BAD gold investments -which ones are they?
When war hits, inflation soars, and the economy struggles, investors seek out gold.

This is advice many investors have heard over again.

And considering the price of gold is up from $1,791 in January this year to a high of $2,043 - and still floating around $1,950 this is pertinent advice.

But here's the thing… There are good ways to invest in gold. And then there are BAD ways to invest in gold…

Take this investment for example…

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A movie theatre buys into gold!
The US based AMC Entertainment company, a Cinema giant in the US just invested in excess of R400 million for a 22% stake in a gold mining company.

That’s right – a movie business is now also a gold mining company.

When I read the news, I had a bit of a chuckle.

But because the gold price is sky high, you at least must give this decision of the company time of day…

AMC bought a mining company called Hycroft Mining (HYMC). Hycroft is a junior gold miner holding a 28,000 hectare deposit in Nevada USA.

Following the announcement, over excited retail investors piled into Hycroft Mining. AMC is up around 10% on their investment in Hycroft in a mere week.

But don’t ignore the fact that gold miners are high risk

Gold miners need to dig deep to find gold. They use dangerous chemicals to extract gold from the ore it is in. And it must have a lot of capital to start the mine in the first place.

That’s why, if you have a look at the JSE Gold index you’d see it is only up around 32% in the past decade!

Similarly, the Philadelphia Gold and Silver Index (XAU) is the benchmark gold miners’ index. It includes 30 high-profile precious metals miners.

In the last 35 years, this index has returned nearly 45%. Meanwhile the S&P 500 Index has soared more than 2,850%.

Now don’t get me wrong. You can make a lot of money in quality gold miners at the right time. I’ve myself made triple digit gains on gold miners like DRD
Gold and Pan African Resources more than once.

But most gold miners aren’t high quality.

In Hycroft's case, the company fell into a major liquidity crisis. It had only $12.3 million in cash... Yet it carried $159 million in debt. That's a big part of why AMC could buy so much of Hycroft so cheaply.

The situation Hycroft is in, is the highest risk in mining. The company doesn’t have an operational mine generating cashflows. It is still in the exploration and development phase. So, it is burning cash, without making any...

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MY favourite miners…
That’s why my favourite mines are the ones that are less capital intensive.

Think again about DRD Gold and Pan African Resources…

Pan Af has a combination of underground mines and surface retreatment dumps.

When it needs to expand underground all the infrastructure is already there – so limited spending on exploration into new areas can add gold reserves which it can then easily access using its existing infrastructure.

Both Pan Af and DRD have surface treatment facilities. That is, they process old mine dumps and extract every crumb of gold left over in the ore. These are old dumps that still contain gold because processing plants in the heyday of the gold boom in South Africa weren’t very efficient.

Instead of sitting with a pile of debt and cashflow issues, these mining companies can benefit from the high gold price by producing more of it and selling it quick!

Pan Af for instance grew its cash generated by operations by 54% in the past six months! The company also decreased debt by 56.7% and could be debt free by end of the year!

That’s where you want to invest when you invest in gold…

Not a struggling gold miner, that’s owned by a struggling cinema group.

PS. Our top five commodity plays are still great buys.  But the window to get in won’t last much longer. 
You can get a copy here.

PPS.  There's no better time than now to look local for some of your best defensive plays in a down market... Especially when it comes to dividends.  If gold doesn't interest you, then these five defensive stock plays may.



There are good and BAD gold investments -which ones are they?
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