It’s always the same story and that will always be the case, even if as we believe, we will soon see superb returns for a good percentage of the junior mining stocks. Why do investors generally end up losing when they invest in gold exploration and gold mining stocks?

Well, “Grainger’s Rule on Gold Investing” was first written in 1993 for a private New York investment newsletter. What it said then still stands today: “It makes no sense but the vast majority of investors in mining stocks buy them well after they have already moved up dramatically or when they have already made an obvious top. They will too often also invest when the gold stocks are moving down before they are at potential support levels. Investors rarely invest when mining stocks are selling at or near their multiyear price lows.”

Worse yet, after having successfully invested in a gold stock that has provided a superb return, they cannot bring it upon themselves to sell, yes, they refuse to sell! Technical analysis can help and it is worth the effort.

The fact is that in the precious metals markets, approximately 90% of all investors in mining stocks will end up losing. No, I do not want to suggest that they will lose their entire investments, rather that they will be lucky to get out without a loss on their original investment. Yet, if prudent and proper steps are taken, that can be changed-dramatically! At first, it may seem ridiculous to suggest investors can only expect poor results, but let’s look at how many investors think and “behave” while investing in gold stocks. Let’s see if we can understand at least some of the contributing factors to the public’s consistent “failure” and not fall into the same trap.

Note the enormous price ranges (highs and lows) and take advantage of them!
To begin with, investors must realize that the average 52 week price range (variation) for the average gold mining stock ranges from 28% to 116%.(believe it or not!) That’s correct, for example, a stock, junior (small cap) XYZ has been as low of .21 cents and has traded as high as .64 cents. Do your math and you can see the enormously wide price range of the gold mining stocks ON A PERCENTAGE BASIS. Moreover, in many low cap junior stocks it is a regular occurrence to see price percentage appreciations of 100%, 200% and 300% and more! And conversely, it is a common occurrence to see stocks go down 50% to 90% in price in very short periods of time due to drilling results disappointments, failure to acquired exploration projects, management changes, overall market conditions or any of a variety of reasons.

Then why do investors suffer through consistent failure particularly in the low cap junior mining group?

The answer is simple. The fact is that investors do not do the necessary analysis when all of the most important information is readily available on the internet. Examine a stock’s chart and review the price range over the last periods which would be the last 52 weeks and the last three years. Look for the price to be close to the multi-year low or at least the 52 week low if at all possible. Historically, that is the time to consider accumulating a stock if the fundamentals might suggest that the stock may offer capital gains potential.

And never forget that exploration is a very difficult, tedious, time and capital consuming enterprise. It is not easy. Again, there must be solid fundamental reasons to invest in any mining stock which in itself still does not eliminate the high risk nature of discovering potentially large reserves. An enormous amount of exploration and drilling is needed before adequate results are obtained. Patience is required. “He that has patience can have it all.”

Do not overlook the “flow through shares” factor!
For those, particularly US investors who are not familiar with a “flow through” investment, an explanation is required. A “flow through” is an investment in the common stock of a Canadian mining company by Canadian residents that is used exclusively by that company for exploration. It creates an enormous amount of the financing for mining exploration. The investor benefits by being able to write off approximately 120% of the amount of his or her flow through investment directly against his or her income tax. However, the investor must hold the stock for a minimum of four months.

After that holding period is up, the flow through investor can sell his or her shares and qualifies to take the tax write off. Often four months after a flow through has been done, a large amount of the shares can come (and often does come) to the market for sale. At that time, one can often find flow through shares being sold into the market as many investors do flow throughs primarily for the tax benefits.

The sale of the “flow through shares” may offer a great opportunity to accumulate shares at low prices. Much of a stock’s price decline can be due to “flow through” shares coming to the market for sale. Again, and as always, too few investors take advantage of the “sales” that are going on as some stocks are literally being thrown away. When a seller says “sell this stock and just get me out of it, it has been a dog”, at the same time, a patient value oriented investor, after having done the required research may be saying “look at this stock, what a great opportunity to pick up this stock at such a low price.” Think about that!

How to play the market in declines….
One has to do the required research regularly-as always! One method is to invest in “dollar cost averaging” which entails reinvesting in stock after they have suffered severe declines. In essence, what you are trying to do is see if you can “catch the bottom” of a stock. As I have mentioned before, investors must realize that since there are no longer market makers as in the past, they must expect far more volatility and price plunges to levels far below where most stocks have bottomed previously. Many stocks often “sit and rot” at prices that eventually turn out to be “steals”. So do your homework, pick your undervalued favorites after you do your research and allow your analysis the time to work. And do not be afraid to “dollar cost average” if a company’s fundamentals justify investment in it.

And another point worth considering; if your diligent analysis and research finds an overlooked stock (stocks),  do not share it with many people. Keep your mouth shut, whether it be in English or in French.