Gold company stocks are a better investment than many gold investors realize

All investments come with a mix of risk and potential reward. The greatest danger comes when you understand the mechanics of an investment, but you’re missing some of the details. Your understanding of the potential reward can make you greedy, while the gaps in your knowledge limit your natural, healthy sense of skepticism.

A smart way to profit from rising gold is by investing in gold company stocks. That way, your gold investing benefits from increases in production, as well as the price of gold, and you give yourself the potential for capital gains and income. You also save on the higher brokerage fees and commissions associated with other types of commodity investments.

How to profit from gold company stocks

1. Look for well-financed companies with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests.
2. Another key ingredient is an experienced management team with a proven ability to develop and finance a mine.
3. We always look at the market cap of gold mining stocks versus the estimated value of the mineral resource they have in the ground.
4. We generally stay away from gold mining stocks that operate in insecure and politically unstable regions, or in countries with little respect for property rights and the rule of law.
5. Avoid stocks that are trading at unsustainably high prices as a result of broker hype or investor mania.
6. Avoid stocks that trade “over the counter,” where such things as regulatory reporting are lax.
7. 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.
8. 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.

Stick with shares of gold-mining firms when investing in gold

We feel that investing on the basis of price changes for gold in the form of bullion, instead of in shares of gold company stocks, is more of a gamble than an investment. Bullion doesn’t earn income, but instead consumes funds for storage fees, insurance and so on.

As we mentioned above, a better way to profit from rising gold is by investing in the stocks of gold-mining companies. That way, you benefit from increases in the price of gold, and you give yourself the potential for capital gains and income. You also save on the higher brokerage fees and commissions associated with other types of commodity investments.

Even so, because of their volatile nature, we continue to recommend that gold stocks only make up a limited portion of your portfolio’s resources segment.

A mistake you should avoid when investing in gold company stocks

You have to learn a lot of things to become a successful investor, and few people learn them all in any logical progression. Instead, most of us move from one subject of interest to another, with a lot of zigs and zags in between.

That’s why some investors go through a phase when they know just enough about a particular investment to be a danger to themselves and others.

A gold investing mistake to avoid is structured investments. Brokers sell various structured products for investing in gold and other commodities, while supposedly limiting risk. Most participants will ultimately lose money in these investments, as well. Or they will make a poor return in relation to their risk.

The difference between structured products and gold futures trades is that the losses won’t happen so quickly. However, more of the money you lose will flow into brokers’ fees and commissions, while you’ll typically lose less on the commodity investments themselves.

Also avoid taking an overly optimistic view of speculative investments

Some investors generally put too high a value on speculative ventures. They want to believe that innovations will succeed, and that they’ll get a fair chance to profit from investing money in these companies. Their innate politeness stops them from asking tough questions of smooth-talking promoters. Excess optimism plus a shortage of information leads them to pay too much.

Are you currently holding gold company stocks, or have you held gold stocks in the past and have since sold them? Share your experience with gold investing in the comments.