Investing in the Miners
As the price of gold continues to rise on a daily basis, many investors wonder if they have missed the ship. Gold has been on an upward trend for over a year now and shows no signs of slowing down. Other precious metals, including silver, have also been doing well. The reasoning behind this is the fact that most investors are a bit worried about the potential poor economic environment that might be ahead of us. With jobs in the private sector not strengthening and the new information about the over a million discouraged workers in the United States, even the eternal optimist is thinking twice on staying optimistic.
This is probably the most logical reason why the price of gold has been doing so well. Ever since the beginning of time investors have put their money into gold when economic times got rough. This current explosion in price is only one more example to add to the list.
As precious metals rise with fear, other metals and commodities will usually move lower on the possibility of a weakening economy. If the economy is weak there will be little growth. Most of the miners extract raw materials that are used to build anything from cars to buildings. If the demand for building materials falls, then the prices of raw materials will move lower. This will hurt the bottom line and put pressure on the stock of the companies that mine for what the earth has to offer. When investing in mining stocks, do your homework and see what types of materials and metals these companies are mining for. Depending on what the company is extracting from the earth, the stock will rise and fall with the price of the underlying commodity. There are also Exchange Traded Funds that will follow the mining sector and mining companies. A few of these include: SPDR S&P Metals & Mining (XME), Market Vectors Gold Miners (GDX).
Researching these two ETFs will lead the investor to conclude that the overall mining sector has been down over the past six months. The XME, which tracks the overall mining sector, is down near its low that was formed in the beginning of the year. This is mostly due to China tightening up its lending to reign in new development, the U.S. and Europe still facing debt issues, and a lack of available funding for projects. However, looking at the GDX, which tracks the gold miners, you will find that the ETF has held relatively steadythroughout this recent downturn in the market. Since the price of gold is reaching new high almost daily. The gold mining sector and those companies that mine the precious metal are continuing to show better than expected profits.
The miners will stay profitable and their stocks will rise as long as the price of gold stays high. This should continue as the economy is not showing any signs of strong growth. Investors can use Forex indicators to help predict where the prices of commodities are headed. Generally if the U.S. Dollar weakens the prices of commodities and raw materials will rise. This will lead to the mining sector ETFs to rise as well. Paying attention the currency markets will act as one of the indicators needed to trade and invest in any company involved in mining of raw materials. Knowing the relationship a strong or weak currency has on certain types of sectors and industries is extremely beneficial when deciding on new investments.
Investing in the mining sector will be a good investment if inflation numbers start to strengthen. At the moment the inflation numbers have remained low, but with all the money that the government is pumping into the system, this can not last long. If inflation starts to show up in the economy, the prices of the raw materials that the miners extract will also start to inflate. I believe that it is always good to invest in hard assets like metals and real estate. Many of the materials that are used to build homes are mined all around the world by the companies included in the mining ETF. As the prices rise in all materials, investing a percentage of your portfolio in the mining sector should be considered. Most miners and mining ETFs have been beaten down and buying here could be a good idea if you feel raw material prices have nowhere to go but up.
Jennifer Gorton is the content manager of ForexIndicators.net. Her main task is to make sure all the articles on her site are very educational and useful while also planning out new sections for more advanced trading tool information. She has recently expanded her knowledge on the mining industry and is quite thrilled to share the information she's discovered.