Keep metal stocks to only a limited part of your portfolio and you can profit in the right market without excessive risk

Metal stocks are shares in companies that explore for, mine and refine metals such as copper, nickel, zinc, gold and silver. Some metal stocks are unique because they are represented in a couple of industries: mining and energy. One example is uranium, which is a radioactive metal, and yet is included in the energy industry for its power-generating ability.

While sometimes risky, investing in metals can lead to strong performances when commodity prices move up.

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How to profit in precious metal stocks

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

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 both capital gains and income. You also save on the higher trading fees and commissions associated with buying physical gold.

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

Invest in copper metal stocks and realize advantages over precious metal investments

Traditionally, investors have bought copper stocks as a way to profit from general economic growth. Copper has a wide range of industrial uses (unlike gold, which is thought of more as a hedge against inflation). Copper is heavily used in the power-transmission and construction industries, in cables, wires and plumbing.

Gold stocks have appeal, but we don’t see gold as essential to a sound portfolio. You should have some Resources & Commodities exposure—but rather than focusing solely on precious metals, we think you are better off getting some of that exposure through oils and base-metal producers as well, including copper producers.

Copper should benefit not just from rising demand, but from tightening supply as well. In the short term, labour problems and technical delays will also likely continue to slow global copper production.

In addition, over the longer term, ore grades are falling at many major mines around the world as producers use up the easy-to-mine ore zones in their copper deposits. Environmental issues are also making it harder for companies to acquire permits for new mines.

The best way to profit from that is to invest directly or indirectly in copper mining stocks.

To sum up, we like copper’s long-term prospects. But as always, stay out of promotional penny mines that are merely drilling for copper. Also stay out of investment vehicles (like options or futures) that will only make money for you if copper keeps going up in the short term.

As mentioned earlier, we think that most investors’ portfolio should include some exposure to the Resources and Commodities sector of the economy, and that includes copper stocks.

Watch for these pluses when investing in metal stocks and make more money from your investments

Some of the best metal mining stocks come from companies that have been producing for years. For the mining component of the resources segment of your portfolio, the focus should be on firms with positive cash flow and high-quality reserves. Resource stocks overall (and this includes metals, of course) should make up only a reasonable portion of a Successful Investor portfolio.

“Majors” are typically mining companies that have been in the mining business for many years, and more often than not they operate producing mines on a global scale. Successful majors have proven methods for exploration and mining, and have consistent output and cash flow, year over year. On the other hand, “juniors” typically have negative cash flow since they’re spending money in hopes of finding a mineable deposit.

When we recommend top metal stocks, we want to see positive cash flow, preferably even when commodity prices are low. Even better, we like to see mining companies that have cash flow from an existing mine that is sufficient to cover, or at least contribute to, the cost of developing a second mine.

Use our three-part Successful Investor approach to lower your overall portfolio risk, including investments in metal stocks

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

We continue to recommend that you cut your risk in the volatile resource sector by investing mainly in stocks of profitable, well-established companies. And to reiterate, resource stocks (and this includes metal stocks, of course) should make up only a limited portion of your portfolio.

What do you feel is the best way to profit from metal stocks? Have you invested in them directly, or have you preferred to invest in them indirectly through other sources?