If you are wondering what investment field is perhaps the most undervalued and unloved right now, it is probably the gold and silver exploration and junior mining companies. These stocks are typically micro-caps companies, aka "Penny Stocks," so they are technically risky because they are thinly traded. However, if you do your due diligence and invest wisely, it is not uncommon to make 1,000 percent gains, known as a "ten-bagger," in this field!
What Is a Gold Exploration or Junior Mining Company?
These are the little guys. They are trying to find gold and silver in the ground with the hopes of one day either construction a mine or selling themselves to a major gold company. Many of these companies have a market cap of less than $100 million. Some own large land packages that are highly prospective for gold and silver and other minerals; some may own a past producing mine and are trying to bring it back up to speed. There are many different types of gold explorers and juniors out there.
In the photo below you will see the typical life cycle of a mine of a gold company. The hope is that the confirmed deposit is a good one and will either lead to production or sell-out to a major company (at a much higher price!). If you are patient in this space you can make big money.
What is the Key to Success?
1) In my opinion, management is very important. You want to be a shareholder of a company that you can trust, especially since these companies are so small. You need to do a full background check on management starting from the CEO, the CFO, etc.
2) What is the total insider ownership percentage? If it's high, that is a plus. You want to be on board with an explorer whose management has a personal stake in the company. Some gold explorers out there have insider ownership of 10-15 percent - that is definitely a positive sign!
3) Where is the property located? This is the same for all gold and silver stocks - you must invest in safe regions! There are some countries that are very risky politically. For example, Africa (Ghana), Russia and parts of South America are considered risky jurisdictions because of the potential of a country nationalizing the mines. I typically only invest in companies whose operations are in Canada and Mexico, which are considering the two friendliest mining countries. The USA and Australia also seem like a safe bet. Canada, pictured at left, is probably the #1 best place you can invest!
4) What is the property potential? You want to invest in an explorer that has a highly prospective mine or land package. How many ounces of gold does the company expect to find after drilling programs? An explorer will usually give you a good sense of this in the corporate presentation. Obviously, they could always been untruthful on this part, but that is why you must have trust in management.Credit: amudu-gowripalan.blogspot.com
5) How do you find the explorers to invest in?
This is probably the hardest part of investing in the field because there is not much info out there on micro-caps in general. I recommend visiting the site Stockhouse.com, which has a message boards. They regularly cover the gold and silver microcap space, and you'll see many good tips from the boards there.
Tips and Thoughts
You must place "limit" orders when trading these stocks because they some are so thinly traded. You must be patient with a company if they do not succeed immediately. This is a high-risk field and not every company makes it. Therefore, you shouldn't expect every exploration stock you own to be a winner. Rather than going all in on one stock, it is wise to spread your money out in 5-10 different explorers. That way, if 3-4 of them go bust, it won't matter, because you WILL have at least one big winner in the bunch. And trust me, when you do, it will make all the difference in your investing portfolio!
So by now you should be at least a little excited at the prospect of making money in gold and silver explorers. After all, this is fun, kind of like hunting for treasure! When a gold explorer you own hits the big one, you'll be pretty darn excited to see the gains you've made.Credit: Yahoo! Finance
This is a chart of Great Panther Silver (GPR.TO), a silver mining company. The company went from an explorer to a producer, and you can see what that did to the share price here - it went from under $1 in July to just over $4 only months later!
In my opinion, gold is going to $5,000 an ounce sometime this decade. There is big money to be made in precious metals and the inevitable further currency debasement continues across the world. I do like the idea of holding physical gold and silver, especially in the form of coins. But I strongly believe that the most money will be made in the explorers and juniors!
Remember this - gold is MONEY. Gold has been used as money and held its value for thousands of years. Guess what the one thing that has NOT done that is? Every paper currency in existence! Today, every single currency in the world is Fiat, meaning it's not backed by anything. I do believe that they will all one day go to their intrinsic value - ZERO.
Here are my top 3 microcap gold stocks for 2012.
Best of luck and remember to do your own due diligence when investing. This is just for informational purposes and not and personal investing recommendation.