When choosing the best gold stocks, investors need to know the stock's production growth, cash costs, sensitivity to gold prices and price-to-net-asset value. These metrics are the most important factors, according to Jim Cramer, host of CNBC's "Mad Money."
The process of choosing gold stocks is different than valuing other investments because gold stocks have their own unique metrics, reports CNBC. One such metric, the earnings-per-share sensitivity, determines how well the stock withstands price volatility. The lower the sensitivity is, the more stable a gold stock is likely to be in the event of large swings in gold prices.
Another metric of gold stocks is the price-to-net-asset value, which indicates how low-priced the stock is in relation to the value of gold, explains CNBC. An indication of this is a multiple, such as 1.5, which would mean the stock is 1.5 times as expensive as the base gold equity value. The lower the multiple is, the less expensive the stock is.
A third consideration when choosing a gold stock is the company's production growth, which shows an increase in the amount of gold mined or otherwise produced, notes CNBC. A large growth would indicate a stronger company, which would create higher base value for the stock.