Tuesday, July 16, 2013

The Difference investing in Gold mining companies and Gold?

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The Difference investing in gold mining companies and gold


Another factor that many investors tend to overlook is that investing in gold mining companies and gold are two different things. There is a low correlation between the two. The prices of shares of gold mining companies are driven by earnings by company-specific factors such as company's gold reserves, cost structures, profitability and efficiency of gold mining. In a rising gold price scenario, if there is a halt in production due to an environmental issue or labour unrest, which is common in gold mining industry, how do you expect a company to make money. Things become tougher when the gold prices fall. Also the prevailing sentiment in the equity market further magnifies the movement in share prices. In a falling gold price scenario, the investor sentiment may turn bearish and hammer gold companies' shares, and the other way round. Investors thus are taking risks beyond the price of gold. Any adverse movement in currencies and detrimental business environment can effectively mean poor returns or losses.


If the rupee depreciates further and equities rally, investors may get an opportunity to exit on a rally. However, before that, ask yourself why you would like to invest in these schemes.


This is because experts say there are two sets of investors who have exposure to these funds. First, investors keen to invest in gold. And second, investors keen to invest in dollar assets.


If you are keen to invest in gold in sync with your asset allocation, you can consider investing in gold exchange traded funds or e-gold. This ensures that you take exposure to gold prices in rupee terms, and that are not subject to vagaries of the equity market. If you are keen on dollar denominated investments, consider investing in FT India Feeder Franklin US Opportunities Fund.

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