Investors often ask “why do gold stocks often move at a much higher rate on a percentage basis than the price of gold itself. The fact is that Gold stocks can give investors 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 in gold 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 see 1000% to 1500% moves up. 

That enormous difference in the returns is the reason why successful gold investors buy the gold stocks instead of the actual gold bullion (or gold ETF’s). Yes, that is the primary reason that makes many of the gold stocks so attractive when the price of Gold bullion is rising.

                                           Here’s an example of how it works…

Producing gold mining companies generally have a fixed cost to 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 an ounce…..But if the price of gold climbs to $1500, the company  will make a $300 profit per ounce. That’s a huge 200% jump in profits for the mining company, even though the gold itself went up 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 selling 100,000 ounces and making $50 per ounce for a $5,000,000 profit. That would be a .05 cents per share profit. (that is the $5,000,000 profit divided by 100,000,000 shares). If the XYZ Mining is selling at .50 cents per share, it would 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.