There are many ways to invest in gold. But we think the best gold stocks are your safest bet.
We recommend that gold investments only make up a limited portion of your portfolio’s resources segment.
However, if you want to hold gold shares, then here are some tips to help you pick the best gold stocks on the market.
Hidden value, explosive profits
Big gains often rise from hidden value. It shows up in well-known stocks that unlock the potential of their hidden assets. Pat McKeough shows you the secret in his exclusive report, Canadian Value Stocks: How to Spot Undervalued Stocks.
We feel that investing on the basis of price changes for commodity investments—such as gold—instead of in commodity stocks, is more of a gamble than an investment. For example, if you buy gold bullion, you don’t earn income, but instead consume funds for storage fees, insurance and so on, negating any potential gold returns you might have realized.
A far better way to profit from rising gold is by investing in gold 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 gold investments such as futures and options.
The smartest way to invest in the best gold stocks
If you want to invest in gold, we think the best way to do it is through gold mining stocks or ETFs. We recommend staying away from gold bullion, certificates representing an interest in bullion, and other gold bullion alternatives.
Exchange traded funds (ETFs) have gained popularity among investors in recent years, mainly because they offer low management fees. This includes ETFs that hold gold stocks. We recommend some of these in our Canadian Wealth Advisor newsletter.
Avoid gold futures when seeking the best gold stocks
Rising gold prices can make trading gold futures look more attractive. However, you can only profit in future-linked deals by out-guessing other futures traders by a wide enough margin to cover commissions and other trading costs. When you dabble in commodity futures, 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 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 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.
The best gold stocks operate in secure locations
We generally stay away from mining companies that operate in insecure and politically unstable regions like the Congo, Venezuela and Colombia. We also avoid those in countries with little respect for property rights and the rule of law, such as Russia or Mongolia. Mining is particularly vulnerable to political instability. You can’t move the mine to another country, and local citizens may sometimes get the impression that a foreign mining company is robbing them of their birthright, even though the foreign company’s capital and expertise would appear to be the best way to get any value out of the ground.
Two tips for adding the best gold stocks to your RRSP
If you want to own bullion, you can hold it in your RRSP directly: The 2005 Canadian federal budget made investment-grade gold or silver bullion bars eligible to be held in an RRSP. Bullion bars are eligible for RRSP gold investing if they are produced by a metal refinery that is accredited by the London Bullion Market Association. Accredited metal refineries include the Royal Canadian Mint and Johnson Matthey. You can also buy bullion bars from the Bank of Nova Scotia.
Hold gold and silver coins in your RRSP: To be considered eligible for RRSP investment, gold coins must be at least 99.5% pure, and silver coins must be at least 99.9% pure. As well, only legal-tender coins produced by the Royal Canadian Mint are RRSP-eligible.
Take a conservative approach to gold investing
Conservative investors should be very careful when choosing gold investments. Gold tends to have a particularly strong grip on some investors’ imaginations, so they tend to bid up gold-stock prices out of proportion to how much profit these companies can make from gold mining. If the gold stock you invest in pays a dividend, all the better.
Has gold investing gripped your imagination, or have you always been skeptical about investing in gold?
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