Risks and rewards of junior Canadian gold stocks

All gold investments, even large, multinational gold-mining stocks like Newmont Mining (symbol NEM on New York), are somewhat speculative, due to their sensitivity to gold prices and the difficulty of finding gold mines.

That’s why we recommend that you limit them to a small part of your overall portfolio — this is especially true of more volatile junior gold stocks.

(You can get our latest views on the outlook for gold, as well as our latest advice on lower-risk gold investing strategies, in our free special report, “Gold Investing: 7 Profitable Strategies for Investing in Canadian Gold Stocks.” Click here to download your copy now.)

Junior gold stocks range from companies that are currently producing gold and have strong potential to expand their reserves all the way down to the earliest-stage exploration companies.

Investment quality is especially important in junior Canadian gold stocks

Gold-mining stocks (especially juniors) face many unique risks. The main risk is that these companies are trying to find gold deposits that can be extracted at a profit, and such finds are rare. That’s why it’s even more important to look for investment quality in gold stocks, especially if you are investing in junior gold firms.

When we research junior mining stocks (including junior gold companies) to recommend in our investment services and newsletters, we like to see a mine-finding effort that focuses on geological probabilities and doesn’t simply attempt to piggyback on the popularity of areas that are in the limelight because of a recent rich find.

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Wait until junior Canadian gold stocks produce a series of strong drilling results

It is sometimes said that a single drill hole has a 1-in-1,000 chance of turning up an “anomaly,” or a drill result that could be a marker for a mineral deposit. However, the odds against finding a mine on any one anomaly are also about 1,000-to-1. So, the odds that a particular drill hole will lead to the discovery of a valuable deposit are about a million-to-one.

That’s why we never recommend junior gold explorers that have much or all of their value riding on a single drill hole. Instead, we want to see a series of promising drilling results, along with other encouraging development work.

Buying junior gold stocks is pure speculation. It can pay off extremely well when it succeeds, of course. But, in addition to the geological odds lined up against success, it’s much easier to launch and promote a junior-mining stock than it is to find a mine.

That’s why junior mining firms are so common, even though profitable mines are rare. It’s also why many junior mining companies fail, and why they should make up only a very small part of your portfolio.

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