Gold and China — the Two Best Ideas Going

“Ahead of the Street” Column, by Mitchell Clark, B. Comm.

It’s a stock-picker’s market and individual stock selection is the only way to make any decent money in an environment where the broader market has no conviction. Given that all stocks, both large and small, are high-risk investments, I can’t imagine a properly built equity portfolio that doesn’t include some gold.

Gold producers are just now reporting their latest quarterly earnings and, so far, the numbers have been really good. Even if the price of an ounce of gold doesn’t go any higher, most established gold producers have solid plans to increase their production of gold equivalent ounces over the next several years. This means that earnings will increase commensurate with production. It also means that any further increases in the spot price of gold will be the icing on the cake.

For a risk-capital or conservative portfolio of stocks, you pretty much have to have some gold-related investments. The fundamentals for this commodity play are just too compelling. For a speculator in stocks, the best group continues to be U.S.-listed Chinese stocks.

The other day, I had a compelling conversation with a very wealthy investor who was musing about whether to invest in several small-cap companies. These businesses were small and at an early stage of development and investment risk was at a maximum. After a lengthy analysis, we both agreed that the best course of action was to consider these small-cap businesses, but to do so in China. Why not invest in a similar type of business in China where growth rates are much higher, profitability is much higher and you can do so in U.S. dollars?

At the end of the day, there are a number of compelling stocks that are attractive in this market right now. For the most part, however, they represent very specific investment themes that aren’t well reflected in the broader market.

It’s an exciting time to be a speculator in stocks, but, as is always the case — only the right ones.