The best Canadian gold companies will generate positive cash flow even if gold prices retreat

Most Canadian gold companies’ shares will continue to be heavily influenced by the direction of gold prices. Meanwhile, though, the best gold stocks will generate positive cash flow even with low gold prices—and also offer rising production outlooks.

Investing in the stocks of gold-mining companies lets you benefit from increases in the price of gold—and can sometimes give you both capital gains and dividend income. You also save on the higher brokerage fees and commissions associated with direct investment in gold—such as by buying bullion.

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Stocks in the best Canadian gold companies will generate positive cash flow even with low gold prices

Some of the most highly promoted gold mining stocks are penny stocks which have yet to produce an ounce of gold. Many must still add to their reserves, invest in mine feasibility studies, and raise a lot of money before they go into production. The prospects for most of these penny-mine properties, even though they may be in areas with production from existing mines nearby, are far from certain.

However, the best gold stocks have strong reserves, low production costs and are already producing gold. They may also have a range of development projects, but their strong base of production cuts the risk of relying on new developments alone.

Furthermore, we look for well-financed gold stocks with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests. The best junior golds often have a major partner who has agreed to pay for the drilling or other exploration or development, in exchange for an interest in the property.

Remember, the very best gold stocks all have strong balance sheets and low debt.

Take a conservative approach to gold investing

Conservative investors should be very careful when choosing gold investments.

That’s because gold has a particularly strong grip on some investors’ imaginations, so they tend to bid up some gold-stock prices out of proportion to how much profit these companies can make from gold mining.

Buying gold as an investment: seven guidelines we use for investing in Canadian gold companies

• To increase your gold returns, 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 stocks should have strong balance sheets with low debt. Junior mines should have a major partner who can finance a mine to production.
• Another key ingredient is an experienced management team with a proven ability to develop and finance a mine.
• 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.
• Compare the market caps of the stocks with the estimated value of their assets or future earnings streams. Some need to quickly find a mineral deposit and begin production to justify the current share price and avoid collapse.
• Above all, you should automatically rule out investing in companies that promote themselves too aggressively, or do so misleadingly. Success is more likely if the managers focus on finding or developing a mine, rather than touting their stock.

Mistakes you should avoid when investing in Canadian gold companies

The first of the gold investing mistakes you should avoid is gold futures or options. Rising gold prices can make trading gold futures and options look more attractive. However, you can only profit in future-linked deals by out-guessing other futures or options traders by a wide enough margin to cover commissions and other trading costs. When you dabble in commodity futures or options, you are betting against professionals who make a full-time occupation of studying these markets, who have better access to information than you do, and pay much lower commissions.

Most futures or options traders start out with a planned limit on how much they are willing to lose before they quit. In six months or so, most lose that amount, and quit trading. What’s more, because futures or options traders tend to trade often, a surprisingly large number find that the total brokerage commissions they pay during their trading career is close to the total losses on their commodity investments.

Do you hold investments in Canadian gold companies? How have they performed for you? Share your thoughts with us in the comments.