If you’re looking at buying gold penny stocks then you need to know the risks—and these tips on spotting the best of them
Some of the most highly promoted gold mining stocks are gold penny stocks which have yet to produce an ounce of gold. Many must still add to their reserves, if they have any yet, 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 production from existing mines nearby, are far from certain.
Meanwhile, 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 like well-financed gold stocks with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests.
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Gold prices are subject to many factors
Unlike stocks, which represent a share in a profit-seeking enterprise, gold is a commodity, and a highly specialized one at that.
Gold is the only commodity that rarely if ever gets permanently lost or consumed. This means that virtually every ounce of the metal that has ever been produced may one day come back on the market. That’s why it’s a mistake to try to predict gold prices as you would wheat prices, for example, by comparing estimates of supply and demand for the coming year.
Gold mining production is somewhat predictable, like the production of any commodity: It varies with how miners react to operating costs and market prices. Still, gold demand also depends in large part on investor psychology. Investors may choose to buy or sell gold, depending on how they feel about the outlook for the economy or inflation.
Use caution when investing in gold—including gold penny stocks
We like the long-term outlook for gold. Rising gold would mainly be driven by investor fears that still-low interest rates and government stimulus spending will spur inflation.
Conservative investors should be careful when making gold investments, as they would be with any commodity investment. For these investors, gold should only make up a small part of the resource segment of their portfolios.
Regardless of what happens in the gold market, speculative and promotional gold stocks will make significant gains from time to time in hopes of a gold discovery. However, that’s always true of any sort of speculative or promotional stocks. Keep in mind that most investors who dabble in them still wind up losing money.
We watch for these 4 factors when looking for the best gold penny stocks
We want to see experienced management with a proven ability to develop and finance a mine.
- We look at environmental constraints where the junior miners are looking for minerals. In Europe and certain parts of the U.S., pennies need a particularly rich find to justify the costs of overcoming environmentalists’ objections.
- When we recommend penny stocks exploring for minerals, we prefer those that operate in an area with geology that is similar to that of nearby producing mines.
- We think you should avoid stocks trading over-the-counter, where such things as regulatory reporting are lax.
Note, though, that you should always resist the temptation to load up on mining stocks, no matter how attractive they appear. If the market goes into a downturn, these stocks could suffer more than average.
We recommend that investors diversify their portfolio across most if not all of the five major sectors, including Resources.
Consider investing in mining ETFs if you want to hold a range of gold stocks
Although gold stocks will likely remain volatile, they may move up even further over the longer term if inflation or global political and economic instability hurt key currencies, such as the euro or the U.S. dollar. If you want to hold a number of gold or silver stocks, many exchange traded funds offer top-quality global miners and low fees.
Make gold penny stocks a small portion of your diversified portfolio
As mentioned, ultimately, gold penny stocks should always be a small part of any diversified portfolio. And you should only buy the most speculative of them with money you can afford to lose. Subscribe to our Power Growth Investor to find top growth investment opportunities.
Use our three-part Successful Investor approach to build your overall
Hold mostly high-quality, dividend-paying stocks.
- Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
- Downplay or stay out of stocks in the broker/media limelight.
Do you hold any gold penny stocks in your portfolio? How haver they performed?
