Following the so-called “Brexit,” global markets slipped into mayhem and investors flocked to the safest harbors they could find. This rush caused gold to skyrocket 8% to $1,358 an ounce, the biggest one-day jump since 2008.
The transition from the risky world of stocks to the often-safer world of precious metals like gold can be confusing for investors who are less familiar with the commodity. Simply put, the business of discovering, producing, and selling gold is complicated and takes time to understand.
Of course, one of the most important aspects of gold trading is the actual mining of the product. Gold mining takes many forms, and mining companies can come in all shapes and sizes. For investors looking to get into gold, it’s essential to understand the mining industry and how it affects the price and availability of the yellow metal.
For investors looking towards gold after the Brexit, or for those just looking to become a bit more familiar with the mining industry, we’ve highlighted five of things every investor needs to know about gold mining below.
1. Know Your Type
There are two main types of gold mining. Placer mining is the discovery of gold as it accumulates through gravity during the sedimentary process. Typically water is involved, and placer mining includes techniques like panning and dredging. This is typically not a large commercial practice and only makes up a small piece of the gold mining industry.
Most of the world’s gold supply comes from hard rock mining. Instead of looking for gold in loose rocks or sand, hard rock miners literally chisel or detonate actual rocks to remove the gold. A lot of hard rock mines are underground and consist of elaborate tunnels and vents, but aboveground mines, called open pit mines, are also a source. Gold can also be produced as a by-product from hard rock mines that are focused on other minerals.
Gold mining companies are typically separated into three categories. The first is called an exploration company. As the name implies, these companies search for and discover new gold deposits. They typically don’t have many assets and own only what it takes to drill for and find gold.
In 2015, the gap between the global demand for gold and the supply of the resource from mines was 1047 tons, up from 663 tons just a decade earlier. As the world’s existing mines shrink and demand climbs, the need for exploration companies grows. This group of companies is tracked by the Global X Gold Explorers ETF GLDX.
After the discovery of gold, the next step in the process is for a development company to come in and set up a mine. Sometimes exploration companies attempt to turn into development firms, but development companies often just buy the proven deposits from discoverers. The key here is that development companies will only set up shop on land that is known to have gold.
The final category of companies are production companies. These are the big boys of the industry and include giants like Barrick Gold ABX, Goldcorp , Newmont Mining NEM, Polyus Gold OPYGY, and Newcrest Mining NCMGY, among others.
These massive companies basically do it all and will extract, produce, and sell gold. Again, mining companies come in all sizes, but some of the most frequently traded are going to be these blue chip stocks.
5. Gold Survey
Similar in manner to a farmer’s almanac, the GFMS Gold Survey is followed closely by gold investors. This manual includes the latest information on mine production, scrap recovery, price outlook, bullion trade, fabrication demand, and official sector demand (another way of saying how much banks and financial institutions are buying).
Other Things To Note
As mentioned above, banks and other financial institutions will buy up gold, and it’s important to note that gold is considered an international currency. In other words, a bar of gold should be worth the same price in the United States and Hungary, for example.
It’s also important to note what gold is used for. The majority of gold that is actually produced into something goes towards jewelry. Tooth fillings, computer parts, and other miscellaneous memorabilia also make up a large chunk of the industry.
Finally, investors interested in gold should go into the market with a clear plan. Some highly ranked gold mining stocks right now include B2Gold Corp. BTG and Pretium Resources PVG, which both have a Zacks Rank #1 (Strong Buy). You can also check out our guide on Gold ETFs.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>