Investing in top Canadian gold mining companies can lead to resource-sector gains, but be sure to use our tips to choose wisely

All gold investments, even high-quality gold-mining stocks, are heavily influenced by gold prices. That’s why you should limit them to a reasonably small part of your portfolio—this is especially true of more volatile junior gold-mining stocks.

Canadian gold mining companies (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-mining firms.

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Avoid this mistake when investing in gold 

The first gold investing mistake you should avoid is gold futures or options. Rising gold prices can make trading gold futures and options look more attractive. However, you can only profit in future-linked deals by out-guessing other futures or options traders by a wide enough margin to cover commissions and other trading costs. When you dabble in commodity futures or options, you are betting against professionals who make a full-time occupation of studying these markets. They have better access to information than you do, and pay much lower commissions.

Most futures or options 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 or options 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.

Stocks of top Canadian gold mining companies will generate positive cash flow even with low gold prices

The best gold stocks have strong reserves, low production costs and are already producing gold. They may also have a range of development projects, but their strong base of production cuts the risk of relying on new developments alone.

Furthermore, we look for well-financed gold stocks with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests. The best junior golds often have a major partner who has agreed to pay for the drilling or other exploration or development, in exchange for an interest in the property.

Remember, the very best gold stocks all have strong balance sheets and low debt—as well as positive cash flow.

Watch for these four 4 characteristics of junior Canadian gold mining companies before investing

• Focus on stable political regions: We generally stay away from mining companies operating in insecure and politically unstable regions, such as the Congo and Venezuela, or in countries with little respect for property rights and the rule of law such as Russia. Mining is inherently a politically vulnerable business; you can’t move the mine to another country, and local citizens sometimes believe that a foreign mining company is robbing them of their birthright, even though they need the foreign company’s capital and expertise to get any value out of the ground.
• Look for steady production: Some of the most highly promoted mining stocks, including gold mining stocks, are penny stocks that have yet to produce an ounce of gold or any other minerals. Many must still add to their reserves, invest in mine feasibility studies, and raise a lot of money before they go into production. The prospects for most of these penny-mine properties, even though they may be in areas with producing mines nearby, are far from certain.
• Look for longevity and strength in reserves when considering mining stocks: When you invest in any resource stock, gold included, you need to look at how long the company’s reserves are likely to last. Those with low reserves need to have consistent success in their exploration programs to maximize the production of the mine and the surrounding area. That success is far from guaranteed.
• Seek low production costs and mines that are already producing: Good mining stocks have a range of development projects, but their strong base of low-cost production cuts the risk of relying on new developments alone. 

Use our three-part Successful Investor approach to find the best stocks to invest in—including Canadian gold mining companies  

1. Invest mainly in well-established, mostly dividend-paying companies;
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. Avoid or downplay stocks in the broker/media limelight. 

Would you still, despite our caution, invest in gold bullion or gold futures over Canadian gold mining companies?