Gold Mining Stock Strategies

Having decided upon the level of exposure to gold in your portfolio that you feel comfortable with and looked at the merits of holding a proportion in physical gold, it is time to look at gold mining stocks.

This market has two sub sections –

Senior Mining Stocks

A short and simple definition of Senior Mining Stocks are those miners actually producing viable amounts of metals, minerals, coal etc. in volume and having quantifiable reserves.

Most will have mining operations in more than one location.

They will have met the criteria to be listed on one or more major stock exchanges and pay dividends when times are good.

They are likely to be mining a combination of precious metals and base metals.

Junior Mining Stocks

Broadly speaking Junior Mining Stocks are those miners that have some exploration rights with varying degrees of potential or are producing limited quantities.

They will have a low capitalization and either show annual losses or no significant profit record and be traded on a secondary exchange.

In a gold bull market, and it is worth noting that other precious metals tend to follow suit, gold mining stocks can be expected to be a more profitable investment than physical gold.

The cost of production does not rise in line with the price of gold, so any increase in the price the miner sells gold for goes directly to the companies pre tax bottom line.

Great news for profitable miners but a gold bull run can also turn around previously unprofitable producers resulting in a significant rise in their stock prices.

This leverage effect on senior gold mining stocks will often cause their price to rise in percentage terms compared to the gold price by as much two to three times.

An even more dramatic rise in stock price occurs with the pick of the juniors. Here prices can rise by as much as ten times the percent rise in gold.

If the market turns and gold drops then the leverage effect reverses and prices of seniors and juniors can plummet.

Senior mining companies are subject to the same scrutiny and compliance as other companies listed on major exchanges.

Their balance sheets, annual and quarterly performance, CEO´s and other officers utterings are widely publicized and pored over by brokers, bankers, the media and a host of investment pundits all ready to give or charge for their advice.

As we constantly advise there is no substitute for doing your own research.

The Internet can now give us all access to instant information on publicly quoted companies that was previously only available to the privileged few, they have become almost an open book with the exception of insider knowledge.

Junior miners present a very different picture

There are literally thousands of them vying for investment money to finance exploration, lease acquisition, test drills and all the other multitude of start up situations and directors remunerations that confront them.

Huge problems confront would be investors/speculators in appraising the potential of junior mining stocks and huge rewards can be expected if they get it right.

To start with many of the mining and exploration activities will be in countries and locations where it is impractical for stock market authorities to check on progress and fiscal compliance.

Some will have company officers that may not have a suitable track record. In virtually every case their prospectus will need a mining expert to correctly interpret the mining jargon, let alone be in a position to visit and physically inspect and quantify the results of test drillings, etc.

To reduce the risk look out for those juniors who have an association with one of the major players.

For example, senior miners may provide some finance in exchange for stock in the junior so clearly with the expertise at their disposal they consider the possibility of a successful outcome worth the investment.

Carry out research in depth on all the company directors in any junior that takes your interest.

Those officers that have a record of past successes with other mining projects are likely to have the necessary experience to bring in a viable mine.

They probably will not want to tarnish a good reputation by being associated with questionable practices.

Be aware of any political considerations in the areas of operations.

Government takeovers of businesses that become successful through the efforts of its directors and deprives shareholders of their investment are not unknown.

With the bull run in gold likely to continue for the time being and the demand for gold outstripping current mining output, a successful junior gold mining company will be a takeover target.

The opportunity to make massive profits lies in this sector but it is highly speculative.

Carry out due diligence before risking a cent, spread your available speculative capital across as many juniors as is practical, and be very aware of share pushers masquerading as expert mining tipsters, this market is a happy hunting ground for scammers and crooks.

For sake of safety keep the allocation of your gold investment monies in senior mining stocks and keep an eye on the price and prospects for gold.

For those that are in a position to risk and maybe write off some capital then juniors can at worst add some excitement and at best give you a colossal bang for your buck.