Investing in gold: A must-read value chain analysis

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Sep. 23 2014, Updated 4:01 p.m. ET

Processing and selling gold

After ore is extracted by one of the two methods, as we discussed in the last part of this series, by gold companies like Goldcorp Inc. (GG), Barrick Gold Corp. (ABX), Newmont Mining Corporation (NEM), Agnico Eagle Mines (AEM), and Yamana Gold (AUY), it goes on to be further processed and ultimately sold. We’ll now discuss these processes in detail.

Processing gold

  • Cyanidation: Gold Cyanidation is the method for extracting the majority of mined gold from its ore. Under this method, gold is converted into a water-soluble complex. Once in solution, gold is normally separated from the liquor by adding zinc powder. While cyanide bonds naturally with gold, it bonds even more readily with zinc, letting gold to filter out of the solution.
  • Smelting: The gold extracted from ore is further purified by smelting. A chemical flux mixes with metal, which is then melted in a furnace at over 1,000 degree C. This process causes gold to separate from its impurities, like zinc, copper, and iron. The molten gold is then poured into a mold and allowed to cool. The resulting bar is known as “doré,” which is 92% pure gold.
  • Refining: Mines then send doré bars to refineries, where the remaining impurities are removed to create gold of 99.5% purity or higher. Gold of even 99.99% purity is created my more complex and expensive electrochemical processes.

Retailing gold

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Retailing gold has shifted east with growing demand for the metal from China and India. India has traditionally been the largest market for gold jewelry in the world, absorbing 746 tons of gold in 2010. China contributed 400 tons. But, from 2011 onwards, China took over India as the largest gold consumer. It remains the fastest-growing market for gold jewelry in the world.

It’s also important to note that ETFs like the SPDR Gold Trust (GLD), which tracks spot gold prices, and the Gold Miners Index (GDX), which replicates the NYSE Gold Mining Index, are also a good way of investing in gold and gold stocks.

In the next part of this series, we’ll discuss the demand and supply dynamics of gold.

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