After the gold rush: mining stocks also hit

A stellar period of gold production was reached in mid March when global demand pushed the price through the $US1000 barrier for the first time to $US1033, but the rot had already set in for many gold explorers and producers whose share prices were plummeting.

Historically, when investors see fluctuations in the equities and commodities markets, combined with rising oil prices and geopolitical tensions, they will seek gold bullion as a "safe haven" investment in which to "park" cash until markets settle.

Bullion, which has a starting price set each day at the London Metals Exchange by consensus, can be bought through brokers or gold coins can be bought from New Zealand Mint.

However, it is rarely held by the investor and attracts no interest.

Shares in gold companies are considered high risk.

The investor generally goes without dividends, instead relying on share-price gains when expensive exploration moves to production, or the exploration company and its permits are sold.

When gold began its stellar run, the emerging Chinese and Indian economies began buying up all metals for expansion, boosting the number of new start-up exploration companies in Australia to record levels.

Established miners reaped vast returns on existing production.

When the extent of the United States subprime crisis emerged, many of the major gold companies got out of their forward contracts to sell gold at a predetermined price and instead went to rising global spot gold prices - riskier but more lucrative.

However, while demand for gold was rising, so were production costs in the form of labour, transport, fuel and energy.

Suddenly, the fallout from subprime issues made investors averse to "high-risk" stocks, and mining shares fell, as did profit margins.

The prices for most metals showed mega-gains during this period, similarly inflated by intense demand from China, but this thirst has diminished somewhat and subsequently made producing these commodities less economic.

The small, "junior" exploration companies now have major trouble finding investors to back the high cash-burn exploration programmes of their geologists.

 

 

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