There is a big difference between investing in shares of gold mining and gold bullion. Shares are ultimately speculative, and require good timing to be profitable. In recent years gold mining has become more complicated and risky. This is why many experts feel that purchasing physical gold is far safer and cost effective than mining shares. Below are some ways in which gold shares influence gold bullion, making it more attractive.

Understanding Gold Hedging

Some firms will choose to sell the gold they have before it has actually been mined. The advantage of doing this is that it allows them to guarantee a specific price. It is called hedging because it lowers their risk by allowing them to know in advance what price they will get. However, there are dangers associated with gold hedging, especially in a bull market.

When a specific price is locked in, and the price of gold rises, you must sell it for the original, lower price, which means you lose the gains of the bull market. Due to the bear markets which occurred in the 1980s and 1990s it was common for miners to practice gold hedging, continuing the practice into the 2000s, which of course became a mistake because gold then entered a bull market, going from around $350 to $800 an ounce. However in a bear market it works, because if a miner locks in the price of gold while it is $800 an ounce and then it falls to $600 they will earn a profit.

Physical Gold Has Outperformed Mining Shares

One responsibility of gold miners, aside from getting the stuff out of the ground, is giving leverage to the price of gold. This is the main purpose of speculation. Should gold rise by a certain amount, say 20 percent, anyone who holds mining shares should see a fifty percent gain ideally. Think about it, when investing in a mining company you are assuming the risks which are associated with it, which include politics, operations and management. Unfortunately, over the last decade or so this has not been the case.

Rather than investing in mining companies, it would have been better to simply buy physical gold coins or bars. The risks would have been lower and the gains greater. Much of this has to do with the people that manage mining firms. Many mining companies are run with incompetence, and it is not specific to one enterprise, but has become common throughout the sector. Decisions are routinely made which are in the interests of the managers, as opposed to the shareholders.

But there are additional factors to consider. Gold mining has become tougher. The grade or quality of gold being extracted from the ground has been in decline. Throw in political issues, such as environmental protection, asset seizure by governments or unexpected taxation and the risks involved with gold mining have increased dramatically.