Investing In Gold Stocks

Investing In Gold Stocks - Crystaline Gold

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Investing in gold stocks is one of the best financial planning moves you can make at this point in history.  We are facing the coalescence of an unprecedented number of variables that are contributing to the sustained bull market in commodities generally, and precious metals in particular.  In the universe of precious metal stocks, the three main groups to choose from are the exploration companies, developers, and producers.  There is sometimes a bit of overlap with developers, as explorers will sometimes begin developing their own discoveries.  Similarly, large producing companies may take over a key find, and develop the mine to fruition.  In any event, the smaller exploration companies, often referred to as the “juniors,” are where the phenomenal wealth can be made when things play out as planned.

Investing In Gold Stocks As An All Or Nothing Proposition?

While junior mining stocks offer mind-blowing upside, they are also the source of greatest risk.  It’s actually a pretty simple dichotomy.  These explorers either find an economically feasible deposit or they don’t.  However, investing in gold stocks doesn’t really have to be an extreme win or lose situation.  Exploration companies that are characterized by sound management will be constantly working to bring diverse projects on line in various parts of the world.  Through joint ventures with larger, better funded companies, they can do what they do best and seek out the next great deposit of precious metals or other valuable minerals.  Though it’s true that not every attempt will pan out, bight companies that keep a buffet of irons in the fire stand a great chance of hitting pay dirt eventually.

Investing In Gold Stocks And The Liquidity Factor… Or The Lack Thereof

Investing in gold stocks of the exploration variety requires some key understanding about the role of liquidity as well.  A junior resource company might only have a few dozen million shares outstanding.  However, you might see only a fraction of a percent of these shares trade on your average day.  In fact, a tenth of a percent of these shares changing hands might be perfectly normal.  So, with only 20,000 or 50,000 shares moving around, liquidity can be a factor.

Illiquid stocks affect your purchasing.  If you wanted a hundred thousand shares of Apple, that would be easy to accomplish.  Any company with billions of shares, like oil giants, Microsoft, and the like can accommodate.  You’d have to buy every available share for an entire week to fill that size order with some of the small gold stocks.

Investing In Gold Stocks In Light Of The Resulting Volatility

The skinny trading volume translates into volatility.  To cut to the chase and put things in perspective, I’ve personally been responsible for an immediate 200% increase in the share price of a stock.  I purchased a large number of shares in a company that had been mercilessly sold off.  The stock was selling for $0.0002!  After my purchase, the price jumped to $0.0006.  So, as you can see, when you know how to play it, these can be the best stocks to buy.

The take home message when investing in gold stocks is to understand how these price swings happen so you are not inordinately impacted by this movement.  You don’t want to get swept up in an exuberant buying spree.  If a lot of people act on a “hot tip,” they can run the price up.  Smart money that arrived before the fun began can then cash out and take advantage of irrational prices where a stock gets ahead of itself fundamentally.

For example, in early 2011 I personally bailed out of three rare earth stocks when things looked top-heavy.  Buzz about rare earths and political factors driving prices higher sent the shares of non-producing companies to uncomfortable levels.  I hit the exit button.  As more profit taking had its way with the rare earth sector, my profits were already safely on shore.  I later bought back those same three companies at a discount.  That’s significant, because I can now profit a second time as the stocks move from where they are back to those exit points as the fundamentals support it.

Investing In Gold Stocks Using The Discipline of Limit Orders

When investing in gold stocks, the key is to make volatility work for you.  Even if your position sizes are not large enough to justify the transaction costs of selling and later buying again, as I did with the rare earth companies, there are ways to win.  You can use oversold situations as opportunities to average down or take an initial position in a company you’ve been watching.  In fact, that’s one of my favorite share market tips.  In any event, you’ll want to use limit orders.  When you set a maximum amount you’re willing to pay to take a position, you’ll not fall victim to market makers exploiting large bid-ask spreads.  You’ll also not get caught up in the frenzy of some guru publicly pitching some company that get the masses suddenly investing in gold stocks.