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Gold Investing for the Small Timer

May 7, 2013

More and more people are starting to realize what their parents and grandparents have known for decades, gold is money! It is a store of value. So there are more people popping up selling gold right along with all those jewelry stores that have been popping up since 2010 buying gold.  At the same time a lot of people who are wage earners like yours truly has always been, well, our concern is how can we afford to invest in gold?

As the owner of Project Mambo Metals, I have been selling gold and silver, but mainly silver to small time investors for about a year now and I have learned a lot, although my business has yet to grow. Most of my sales have been done on ebay. I am going to walk you through some primary variables to look into when investing in gold, silver, copper or any commodity on the market.

* How much production is there worldwide?

There are 50 million troy ounces of gold produced worldwide in a year.

*How many tons of reserves are there?

There are 165,000 metric tons of gold that are in reserve worldwide.

*Is the production in areas that might experience turmoil?

Ahh! This is a very tricky question that may not always be all black and white and also involves some understanding of politics and answering this question I imagine is probably best suited for CIA agents considering they are the instigators of turmoil in just about anywhere in the world.

But lets try and answer that question by posting a graph of who the top ten producers of gold are in the world.

Rank Country/Region Gold production (kilograms)
 World 2,700,000
1 South Africa South Africa 370,000
2 Australia Australia 250,000
3 United States United States 230,000
4 Russia Russia 205,000
5 China China 170,000
6 Peru Peru 165,000
7 Canada Canada 102,000
8 Indonesia Indonesia 95,000
9 Uzbekistan Uzbekistan 90,000
10 Ghana Ghana 89,000
11 Mexico Mexico 87,000

I pulled the above graph from wikipedia and found that South Africa, Australia and the United States are the top three with Russia and China coming in at third and fourth place respectively. So the question is will these production areas experience turmoil? To answer this question you would have to research each country. For example, through my own research I know that South Africa went through a political transformation in the 1990s and South Africa is the largest and most industrialized economy on that continent to date. I am not going to go into a whole analysis of each country, the point here is you must do your homework which also entails knowing some basics like geography and if you cant even point to South Africa or Australia on the map, you need not be concerned with buying gold but teaching yourself geography 101.

*Are the reserves rich with gold or only marginally productive?

To answer this question you definitely have to do your homework. Learn who are the gold mining companies set up in South Africa, reach out to them, try to subscribe to any newsletters they may have for potential investors. If you are just starting out, you have a lot of studying to do.

*What are the existing inventories?

Again you have to do the research on this. My own research led me to Stock Analysis On Net which offered an easy to read graph of Barrick Gold Corporations inventories and you can see an increase from 2010 through 2012, but will that increase continue for 2013? And in what regions do Barrick Gold Corporation mine? Well, I personally know that Barrick or ABX for its initials on the NYSE is the largest gold mining company in the world. So I am going to guess that they do operate in South Africa and then check whether I am correct. If you check out their interactive website at African Barrick Gold or ABG you will find they operate in Kenya, Tanzania and South Africa. A bit overwhelming all this research isn’t it? Investing is hard work.

*How many gold mines exist worldwide?

The total number of mines in the world are huge. There are differences of opinions as to how a mine is defined and which gold mine should be ranked number one. If small-scale mines are excluded (of which there are 8,300 in China alone) and only industrial-scale operations are counted, there are some 2,500 metal producing operations. If you go by production, some say the gold mine in Muruntau, Uzbekistan should be ranked number one. This also answers the question of which gold mine is rich in reserve and which one is only marginally productive even though in our graph above from Wikipedia Uzbekistan is ranked at number nine. Occasionally there is difficulty in obtaining yearly production figures. One of the reasons this is so is because mining production data are not all standardized and they don’t all use the same calculation dates. So now you’ve been educated on some of the challenges with wanting to invest in gold.

*How productive are these mines?

With over eight thousand mines worldwide you got your work cut out for you in obtaining the answer to this question. And as we have sort of answered this question above, it all depends on what data you feel comfortable relying on since there isn’t a standardized system of productivity data on gold mining.

*What is the potential supply over the next ten years?

This is an excellent question and it seems that Thomson Reuters GFMS has the answer but you would have to purchase their Ten Years Outlook.

*Are there new sources of gold supply?

I haven’t come across any information that there are new sources of gold supply. I do know that it usually takes ten years for a new gold mining source to be up and running and it is usually to take the place of the old one that has dried up.

*Old gold mines expanding? When? How much will this cost? How much more gold with this produce? How long will it take before additional supplies go to market?

Gold mines don’t usually expand, it is an industry that’s inelastic because it really has to do with how much gold mother nature decides to want to give us or allow us to find with our technology. But these are important questions to ask of this or any other commodity.

*Are there new potential supplies? How much? How expensive to develop and then produce? How long before these new sources will be available? When will the new supplies get to market?

I haven’t come across any information in regards to new potential supplies in gold but again it looks like you might want to check in with Thomson Reuters GFMS or with individual mining companies and see what they say.

So there you have it, this is the kind of research that will give you a good sense of how much gold (or any other commodity) there is likely to be over the next ten years–barring unpredictable events, such as strikes, which South African miners have been known for, fires or other natural disasters, political problems in that country, and so on.

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From → Economics

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