How Mining Stocks make a difference

Learn everything you need to know in 'The Complete Guide to Mining Stocks' for FREE from The Successful Investor.

Best Canadian Mining Stocks TSX: Plus Gold Stocks, Canadian Diamond Mines and more.

Topic: Mining Stocks

Maximize your gains by picking the right precious metal stocks to buy now

Choosing the right precious metal stocks to buy can give a big boost to your portfolio when gold and silver prices move up.

When we consider top mining stocks—including precious metal stocks to buy—we look for stocks with a history of earnings, or at least cash flow, that will provide long-term value for investors. Here are more tips for maximum gains:

How Mining Stocks make a difference

Learn everything you need to know in 'The Complete Guide to Mining Stocks' for FREE from The Successful Investor.

Best Canadian Mining Stocks TSX: Plus Gold Stocks, Canadian Diamond Mines and more.

Resource stocks for your portfolio include precious metal stocks to buy—and a lot more

Metal stocks are shares in companies that explore for, mine and refine metals such as copper, nickel, zinc, gold and silver. Some metal stocks are unique because they are represented in a couple of industries: mining and energy. One example is uranium, which is a radioactive metal, and yet is included in the energy industry for its power-generating ability.

While sometimes risky, investing in metals can lead to strong performances when commodity prices move up.

Precious metal stocks to buy: avoid bullion, instead buy stocks

We feel that investing on the basis of price changes for gold (or silver for that matter) 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 (including the ones we see as buys) only make up a limited portion of your portfolio’s resources segment.

Use these nine tips when picking precious metal stocks to buy for maximum gains

  • Location: We generally stay away from mining companies that operate in insecure and politically unstable regions. We also avoid those in countries with little respect for property rights and the rule of law. 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.
  • Environment: We look at environmental constraints where companies are looking for minerals. In Europe and certain parts of the U.S, they need a particularly rich find to justify the costs of overcoming environmentalists’ objections.
  • Geology: We prefer mines that operate in an area with geology that is similar to that of nearby producing mines.
  • Financed: We look for well-financed mines with no immediate need to sell shares at low prices.
  • Low debt: We like mining stocks with strong balance sheets and low debt. Debt can be a big problem for a miner with no cash flow.
  • Profitable: When we recommend mining stocks, we want to see positive cash flow, preferably even when commodity prices are low.
  • Really profitable: Even better, we like to see mining companies that have cash flow from an existing mine that is sufficient for, or at least contributes to, the cost of developing a second mine.
  • Well-managed: We want to see mining firms with experienced management with a proven ability to develop and finance similar projects by working with other junior mining companies.
  • Too expensive: We avoid mining stocks that trade at unsustainably high prices because of broker or media hype or investor excitement about the underlying commodity (such as gold). Instead, we focus on reasonably priced mining stocks with favourable geology.

Find precious metal stocks to buy that offer lower risk and more stability

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. Resource stocks (and this includes oil and gas, of course) should make up only a limited portion of your portfolio.

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.

Use our three-part Successful Investor with all investments to make better selections

  1. Hold mostly high-quality, dividend-paying stocks.
  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. Downplay or stay out of stocks in the broker/media limelight.

Some investing analysts do not consider precious metal stocks to be investments. Instead, they consider them to be speculations. What are your thoughts?

What is your opinion on precious metal stocks like gold and silver? Do you think they are worth the potential volatility?


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