It’s not an understament to say that gold and silver stocks are historically cheap. The correct way of looking at it, is to measure the value of the leading gold stock indexes by one ounce of gold. Below are long term charts of two gold stock indexes: the HUI and Barron’s Gold Mining Index. They are both measured in gold based on the spot price of September 7th, 2012. Chart courtesy: Sharelynx.com
Both charts tell the same story: only on exceptional occasions during the current powerful gold bull market have we seen such low valuations of gold and silver stocks. Sounds like an opportunity to pick undervalued gold shares? Yes indeed it its … but exactly picking the right stocks is the key challenge.
One of the most prominent and successful resource stock investor in the world, Rick Rule, commented recently that “I think we’re definitely coming into a period of opportunity. I see this market as presenting a lot of opportunities and some danger. Suffice it to say, stock pickers who are patient will do extremely well in this market, and people who have large portfolios of juniors, but weren’t selected on a qualitative method still have a lot of money left to lose.”
This article contains valuable tips by well respected thinkers and practitioners David Morgan and Rick Rule. These tips apply to today’s economic environment and market conditions.
What is the type of mining company you can expect the best reward for the lowest risk? The answer to that question seems crystal clear for David Morgan. He identifies the mid-tier mining companies and the top-tier juniors that are already producing, as the sweet spot for gold stock investors. The matter of the fact is that those companies have the highest growth potential. It’s no secret that the senior gold and silver miners are struggling with finding new deposits. Exploration companies on the other hand are operating in a very risky environment in which financial resources have become extremely hard to find.
One of the key tips that David Morgan shares, is to avoid falling in love with your stocks. In fact, it seems to be a major pitfall for most investors. The minority of investors that avoid making this mistake, are the ones who are really profitable. You need to take a critical look at your portfolio, have the guts to sell the losers and accumulate the winners. Even if it requires taking a loss, it’s better to cycle the money into a better company.
Mr Morgan believes that most investors tend to overspeculate. They focus too much on juniors or exploration companies that are going into production in several years. It’s not wrong to invest in those kind of companies, but you shouldn’t do too much.
There it gets interesting, as Rick Rule makes the same point and elaborates on it. The matter of the fact is that investing in junior mining stocks is a dangerous game if you didn’t prepare your decision in the correct way. One of the key success factors of junior mining and exploration companies is to have the right management team in place. Rick Rule states the following: “The stronger teams will still be able to attract capital, and discoveries will still get funded … Discoveries backed by good people will still do well in this market, so the first thing that you need to find is people who are recognized by the market as being strong performers and people who are doing precisely the same type of thing that they built their reputation on.”
More criteria to take into account in assessing if a gold or silver mining company is worth investing in, have been described in this white paper from Casey Research: The Eight P’s of Resource Stock Evaluation.
The potential rewards from companies that have everything in place to perform well, are mind-boggling. Let’s have a look at some examples. The classic case is First Majestic Silver (AG or FR.TO). The share price went from less than $4.00 to more than $23.00 in a year. As the silver price doubled between April 2010 and April 2011, the share price of First Majestic made a sixfold move up in the same period.
In the junior mining field today, we see even more extreme cases. What would you think about an investment in a company like GoldQuest (GQC.V). The shares of the miner rose from $0.06 in mid-May of this year to $1.70 today. Or take Reservoir Minerals (RMC.V or RVRLF): the shares jumped from $0.50 in July of this year to $3.50 today. That’s a sevenfold increase in two months!
This is what Rick Rule has to say about investing in silver junior miners: “While there are probably 100 or 120 pretenders in the silver space, there are only 7 or 8 contenders in the silver space.”
Do you think you have the knowledge to understand exactly which criteria to assess in gold stock picking? Then you are one of the very talented but exceptional investors. Are you looking for professional advice by contrast? Then it’s highly recommended to contact Sprott Global Resource Investments. The team led by Rick Rule is highly skilled and knows exactly what to look at. An easy way to get in touch with the company is to request a review of your current portfolio. You will get for free a ranking for each stock you currently have. The only thing you need to do is to fill out the contact form and mention that you came via “Gold Silver Worlds”. The professional staff will take care of the rest.