Gold stock investing can be risky but if you follow some basic guidelines and do your homework you can make some good money as well. The following tips will hopefully make you a little money but, more importantly, help avoid some of the common pitfalls that can lead to steep losses.
The following tips will hopefully make you a little money but, more importantly, help avoid some of the common pitfalls that can lead to steep losses:
1. Don’t be a victim: Rick Rule, Chairman and Founder of Sprott Global Resource Investments, famously coined the phase, “In this business you are either a contrarian or a victim.” No wiser words were likely spoken. He and his partner Eric Sprott made many millions buying resource stocks when they were unloved and then sold when many of the retail investors piled in, afraid they would miss out on the big gains.
2. Love those low-cost producers: Even with gold prices hovering around US$1260 an ounce, select miners are still a good bet if you pick those with all-in sustaining costs (what one ounce costs to get out of the ground and to market) for producing an ounce of gold of less than US$1,000 an ounce. Companies that fit this criteria include Alamos Gold Inc. (TSX: AGI), Agnico Eagle Mines Limited (TSX: AEM), New Gold Inc. (TSX: NGD), Yamana Gold Inc.
(TSX: YRI), Rio Alto Mining Limited (TSX: RIO), and Goldcorp Inc. (TSX: G).
3. Grade is king: And will always rule the mining world. Unfortunately, gold grades among new mines being discovered have been declining in recent years, so much so that it is now averaging about one gram of metal for every tonne of ore (rock) being dug out of the ground. Higher grade projects are always in demand by big-money investors. It can be mined economically even in a falling gold-price environment. Examples of companies currently developing high-grade deposits include Pretium Resources Inc. (TSX: PVG) and Roxgold Inc. (TSXV: ROG).
4. Manage your expectations: Grade may be king but management is key. A little Internet research will go a long way in learning about the people running the company you are considering investing in. Stick with experienced teams that have previously developed projects that were either sold to a larger company or taken into production.
5. Beware of the share(s): This applies to the junior and small cap miners. You are more likely to make money by investing/speculating in a gold stock that has 40 million shares outstanding than one that has 400 million – for the simple supply and demand reasoning that it takes many more buyers to move the stock price.
6. Take it to bank: A Bankable Feasibility Study is a “comprehensive study of a mineral deposit in which all geological, engineering, legal, operating, economic, social, environmental and other relevant factors are considered in sufficient detail that it could reasonably serve as the basis for a final decision by a financial institution to finance the development of the deposit for mineral production.” Institutional money will often wait until a Bankable Feasibility Study is completed on a project before deciding whether or not to invest. Doing the same will also help the retail investor reduce their risk in a particular gold stock.
7. Consider royalty firms for novice and more conservative investors: Companies such as Franco-Nevada (TSX: FNV) and Royal Gold, Inc. (TSX: RGL) have done well for long-term investors in the past with their business model of buying future gold production from other miners at a significant discount to the current market price of the commodity. Royalty firms reduce investor risk by putting their money into many different projects in various countries.
8. Invest like a venture capitalist: This is especially true for the riskier junior and small cap miners. By holding a basket of these names, it only takes one big winner to more than make up for what likely will be many more losers.
For more small-cap gold investing ideas please following the weekly Ubika Gold 20 index reports as well as watch interviews with our gold investing experts.
