Gold At All-Time Highs; Are Gold Stocks Next?

Gold price reached a record level in March, breaking above $2,200 per ounce.

It was a nominal all-time high for the safe haven asset.

However, adjusted for inflation, gold is not nearly as expensive.

In real terms, gold was trading at over $3,370 per ounce in 1980 and over $2,450 in 2011.

Considering that, gold still hasn’t broken historical records. And it is certainly not overpriced.

It’s the value of the US dollar that has diminished, pushing prices of goods and services higher.

We all saw that over the last couple of years when inflation rose above 2%.

It’s certainly better now, but still not ideal.

This is one reason gold keeps rising. We believe it’s only the beginning, and we’ll see higher prices going forward.

What does that mean for investors, and how should they take advantage of the gold rally that we’re in?

Leverage

Gold is a volatile commodity, but it’s not the most hot-tempered asset out there.

A mere 10% gain in the price of gold is a big deal for investors. That’s what we saw when the metal’s price went from $2,000 to $2,200 per ounce.

But it’s not the gain the most high-risk-tolerant investors are looking for.

Luckily, the gold sector is more than just physical metal or price-linked exchange-traded funds (ETFs).

These will provide direct and unleveraged exposure to the price of the yellow metal. However, some assets can multiply gold’s performance.

Moreover, some still have not responded to the new nominal all-time gold price highs.

We’re talking about gold stocks. These still have the potential to gain in this gold rally.

Four Main Types of Gold Stocks

The universe of gold stocks is massive. Investors who are new to this space may get confused by the vast number of companies in the gold sector.

While all of these are sensitive to the change in the price of the underlying metal, they have key differences that investors should be aware of.

1. Major gold producers. These are the largest companies in the gold sector. Usually they produce over two million ounces of gold per year.

These stocks have solid trading volumes. As the largest companies in the industry, they attract most investors and closely follow the price of gold. However, major gold producers provide little leverage to the price of the underlying metal.

2. Mid-tier gold producers and developers. These will be next in line for investors looking to take advantage of the current gold rally. The companies producing from half a million to two million ounces, or those developing world-class assets, will be in this group.

These are often easy to access for individual investors but can be too small for brokers or large funds. At the same time, this group has a reasonable risk-to-potential-reward ratio.

3. Junior gold stocks. These companies are mostly focused on exploration, searching for new gold projects, or expanding known deposits. These are the smallest companies in the gold universe, and they often fly under the radar for most investors. Large funds can’t invest in these due to their limited liquidity and size, but individuals can take advantage of that.

It’s worth noting that these companies have the highest leverage to the gold price, and the highest level of risk. Investors should know that before making an investment decision.

4. Royalty and streaming stocks. These typically do not produce, develop, or explore for gold but hold rights to receive a share of output from gold assets owned by mining companies or advanced-stage developers. These assets can be either active mines with existing cash flows or early-stage gold projects that may or may not deliver revenue in the future.

This “asset-light” approach limits the risk but also relies on execution by third parties that own the potentially cash-flow-producing assets. Royalty and streaming stocks can be different in size and liquidity. Large players will be on the radar of most investors and provide lower leverage to the gold price. Meanwhile, smaller and more speculative stocks will have lower liquidity and may expose investors to higher risks and potential rewards.

Conclusion

It’s not too late to take advantage of this gold rally and position your portfolio for potential gains.

As expected, major gold producers have already started responding to the gold rally. Next, we should see other groups catch up as investors begin digging deeper into the mining universe looking for yet-undiscovered opportunities.

This is where we see the most potential. However, finding the right stock to invest in is not easy.

The Canadian Mining Report covers the entire universe of gold companies. We start from the top of the pyramid with major gold producers and end at the bottom with the most overlooked stocks.

We provide unique research to our readers, aiming to highlight the best stocks in the gold sector.

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