The inside scoop on successfully investing in precious metals like silver and gold.
Investing in precious metals is very attractive to many mining stock investors. That’s in addition to investments in companies that produce or explore for other minerals, such as uranium, coal, molybdenum (which is used in steelmaking), zinc and copper
While sometimes risky, investing in precious metals can lead to strong performers when commodity prices move up.
Investing in precious metals: Convenient ways to invest in gold and silver mining stocks
If you want to invest in gold and silver, we think the best way to do it is through gold and silver mining stocks or ETFs. We recommend staying away from silver or gold bullion, certificates representing an interest in bullion, and other silver and gold bullion alternatives, such as so-called “junk silver” coins (these are common coins with no numismatic value that trade strictly on their silver content).
The real outlook for mining stocks
Mining stocks play an important role in your portfolio wherever commodity prices are. Pat McKeough tells you why in this special report—and gives you the outlook on gold, copper, uranium, and the remarkable story of Canadian diamonds.
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 and silver stocks. We recommend some of these in our Canadian Wealth Advisor newsletter.
Investing in precious metals: Stick with shares of gold-mining firms when investing in gold
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. These activities don’t earn income, but instead consume 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 capital gains and income. You also save on the higher brokerage fees and commissions associated with other types of commodity investments.
Even so, because of their volatile nature, we continue to recommend that gold stocks only make up a limited portion of your portfolio’s resources segment.
Many industrial uses of copper can give copper stocks an advantage over gold and other precious metal stocks.
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 and silver, which are thought of more as hedges against inflation). Copper is heavily used in the power-transmission and construction industries, in cables, wires and plumbing.
Stocks of firms that produce base metals, including copper, generally have higher dividend yields than gold stocks. As well, they’re usually much cheaper than gold stocks in relation to their earnings and cash flow. That means they potentially have less room to fall if markets fall. That’s just another way of saying they can be considered somewhat less risky than gold.
Copper should benefit not just from rising demand, but also from tightening supply. In the short term, labour problems and technical delays will continue to slow global copper production.
Over the longer term, ore grades are also 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.
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.
All in all, most investors’ portfolio should include 10% to 20% exposure to the Resources and Commodities sector of the economy, and that includes copper stocks.
Investing in precious metals: Lowering your risk on the mining investments you make
We continue to recommend that you cut your risk in the volatile resource sector by investing mainly in stocks of profitable, well-established mining companies with high-quality reserves. And as mentioned, resource stocks (and this includes oil and gas, of course) should make up only a limited portion of your portfolio—say less than 20% for a conservative investor or as much as 30% for an aggressive investor.
While we think you should maintain some exposure in resource stocks, you should still aim for balance among most if not all of our five main economic sectors: Resources & Commodities, Finance, Manufacturing & Industry, Utilities and the Consumer sector. You should always resist the temptation to load up on mining stocks, no matter how attractive they appear. If the market does go into a downturn, these stocks could suffer more than average.
Are you currently investing in precious metals? How have they performed in your portfolio? Share your experience with us in the comments.
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