Stock picking now is much more difficult than it was just a month ago, as commodity prices have somewhat deflated (particularly in precious metals) and investor attention has moved to economic news while earnings season winds down. Even though mining producers are experiencing extremely good margins for their ore, these stocks still trade commensurate with the spot price of the underlying commodity. This never changes.
Investing in gold is typically a feast or famine type of endeavor. Either the trading action is good, or it’s the other way around. To be very honest, in this type of market where it’s a slow growth economy and there’s no big sectoral catalyst to trade (like during the craze in Internet or solar stocks), the single most attractive sector to focus on for capital gains is the mining business. As an investment theme, this would be my focus in terms of speculating for big returns. In doing so within the mining industry, an investor has to focus on those companies exploring for new discoveries.
This is what you want in a speculative mining investment in my view. You’ve got a known company with respected management that’s already in production with a solid plan for increasing production over the coming years. The business is already well financed, but it’s spending money exploring for more precious metals on its properties. If it hits a big discovery, then it will be easy for the company to raise the money to mine it. So, you kind of want to be an investor in an established business that’s prospecting as well. At this level, it doesn’t matter if the price of gold dropped $50.00 an ounce the day before; if gold is over $1,000 and there’s increasing mineral reserves, then the business is highly likely to make good money.
Institutional gold investors fall into two main groups. There’s the hedge fund speculators like George Soros, who buy and sell gold trusts based on their outlook for spot prices. Then there’s money managers, who pick and invest in individual stocks based on a miner’s property and its prospect for increasing production and reserves. It’s easy to be both; a speculator in the spot price and a prospector for properties. As always in the investment business, the key is to be well-informed and to know what you’re doing.
This is where working with an investment bank that finances junior mining companies can be advantageous. It gives the investor the opportunity to gain lots of information from research analysts who visit the actual properties being analyzed and it provides the opportunity to participate in private placement financings that don’t incur commission costs when taking on shares.
Regardless of how you play it, speculating in mining stocks remains the most attractive sector of the equity market for risk-capital money at this time.