Gold mining stocks are the best investments for investors looking to hold gold in their portfolios.
At TSI network we recommend that you focus your gold investing on gold mining stocks, and avoid buying gold bullion, gold coins (unless you collect them as a hobby) or certificates representing an interest in bullion.
That’s because these investments have hidden costs that cut their value over time. For instance, gold bullion and coins require insurance and storage, which will be a continual drain on your cash.
10 Stocks to Buy and Hold Forever
Many investors sell their best stocks too soon and miss out on their biggest gains. These stocks are the perfect answer. They’re made to last—they have the ability to withstand market setbacks and they’re usually first to move up when the market recovers. And they’re all in one free report.
Gold mining stocks, on the other hand, let you profit from increases in the price of gold without these costs. Plus, dividend-paying gold mining stocks have the potential to generate income.
Even so, because of their volatile nature, we continue to recommend that gold mining stocks only make up a limited portion of your portfolio’s resources segment.
What’s a mining stock?
Mining stocks are investments in companies that produce or explore for minerals, such as uranium, coal, molybdenum (which is used in steelmaking), copper, silver and gold.
Mining stocks can generally be broken up into two categories, majors and juniors. Majors are mining companies that have been in the mining business for many years and more often than not they operate on a global scale. Majors have proven methods for exploration and mining, and have consistent output year over year.
Junior mining stocks are mining companies that are new or have been in business for a decade or less. They are usually smaller companies and take on risky mining exploration. If a junior mining stock is successful at finding a deposit, and then building a mine, it can mean huge returns for investors.
Penny gold mining stocks are just as vulnerable
Investors often think that the way to make big profits in gold is to buy penny gold mining stocks.
However, gold pennies suffer from all the usual penny-stock drawbacks. They trade on hopes and expectations, rather than realistic financial projections. Few, if any, will ever find a mineral deposit that can support a profitable mine. When that failing becomes obvious, or possibly long before, they can plunge to a fraction, possibly a tiny fraction, of current prices.
9 ways to profit from gold mining stocks
To profit in gold mining stocks, you should look for well-financed companies with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests.
High-quality gold mining stocks should have strong balance sheets with low debt. Junior mines should have a major partner who can finance a mine to production.
We think you should avoid stocks that trade “over the counter,” where such things as regulatory reporting are lax.
We also recommend avoiding stocks that are trading at unsustainably high prices as a result of broker hype or investor mania.
Another key ingredient is an experienced management team with a proven ability to develop and finance a mine.
We generally stay away from gold mining stocks that operate in insecure and politically unstable regions such as the Congo and Venezuela, or in countries with little respect for property rights and the rule of law such as Russia or Mongolia. Mining is inherently a politically vulnerable business; you can’t move the mine to another country, and local citizens sometimes believe that a foreign mining company is robbing them of their birthright, even though they need the foreign company’s capital and expertise to get any value out of the ground.
We always look at the market cap of gold mining stocks versus the estimated value of the mineral resource they have in the ground. Sometimes, a company’s marketing efforts are so successful that they drive the stock up too high in relation to the size of its ore body. We like a gold mining stock’s market cap to be no more than half the value of the gold. We assume that the company will be able to expand its ore reserves after the mine opens, but if the mineral reserves are double the gold mining stock’s market cap, it provides a margin of safety.
Be careful when investing in a new issue of a gold mining stock. If they lack sound operating history, or a strong management team, you may be wasting you money.
What gold mining stocks are you invested in? Have they been profitable for you? Share your experience with us in the comments.
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