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Home » Investments
How to Invest in, Buy, Sell, Store and Insure Precious Metals in Canada (3/4)
Category :- Investments

Author :- Art Smith 
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Posted on April 3, 2014, 1:39 am
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3 Investing in Mining Companies

  Companies that are in a precious metals business are mainly mineral exploration companies, mining (production) companies and royalty companies. As the name implies, exploration companies (also called ‘junior mining companies’) explore but often do not find gold/silver. Of all mining companies, they are the riskiest type of investment. Mining (production) companies are companies that have already found precious minerals and mine for them. Royalty companies sponsor developing precious metals mining producers in exchange for a royalty on future production. They have less exposure to production and that is why they are the least risky.

  There are several ways to invest in mining companies. You can buy:

-Shares (common or preferred)/Warrants/Rights/Bonds;

-Mutual funds;

-ETFs.

3.1 Individual Shares, Warrants, Rights and Bonds

  Common shares (also known as shares/equities/stocks) are a form of ownership of a corporation. Holders of common shares control the company and have voting rights; they also may or may not receive dividends. In general, prices of shares of mining companies are correlated with precious metals prices: when prices of precious metals go up/down prices of shares of mining companies go up/down, respectively.

  Preferred shares are generally considered a hybrid between common shares and bonds. Holders of preferred shares do not usually have voting rights but (normally) receive dividends.

  If a mining company has issued both common and preferred shares, all preferred shares holders should be paid dividends in full (including payments in arrears) before common shares holders can be paid dividends.

  Since prices of shares of each given mining company may fluctuate significantly, it might be a good idea to consider investing in (precious metals) ETFs or Mutual Funds where diversification minimizes the risk.

  Bonds are debt investments: investors lend money to corporations (or government) for a period of time, normally at a fixed interest. A typical bond pays interest on a monthly or quarterly basis; occasionally, bonds can skip interest payment. Bonds can be bought or sold prior to their maturity, and their price may fluctuate.

  Warrants are securities that give the holder the right to buy a particular number of securities at a certain price before a due date. These securities are usually the company's shares but sometimes they allow the purchaser to buy the stock or bonds of another entity.

  Rights are a short term privilege granted to shareholders to purchase additional shares directly from the issuing company.

3.2 Mutual Funds

  Most precious metals Mutual Funds own shares and/or bonds of different mining companies. The price of a Mutual Fund is determined once a day and it is the same price whether you sell or buy it.

  Some Sprott Mutual Funds may hold physical gold/silver bullions as well as mining shares/bonds (e.g. Sprott Gold & Precious Minerals Fund and Sprott Canadian Equity Fund). Thus, Sprott Silver Equities Class invests mostly in silver mining companies and silver bullions. Also,Dynamic Strategic Gold Class and Dynamic Strategic Resource Class funds hold physical gold in them.

You can review the full list of precious metals funds at the Fund Library site

  One disadvantage of precious metals Mutual Funds is that the MER (see description below) is high as compared to other types of Mutual Funds and ETFs. Moreover, precious metals Mutual Funds do not usually pay any dividends.

3.3 ETFs

  ETFs are similar to Mutual Funds but they are traded on stock exchanges (unlike Mutual Funds that are offered by financial institutions) and their price may fluctuate significantly even during the same day. They are also defined as indexes that represent the precious metals sector, such as the BMO Junior Gold Index ETF (symbol ZJG) which invests in Junior Mining companies, and the iShares S&P/TSX Global Gold Index Fund (symbol XGD), which invests in global mining companies. Both abovementioned ETFs are traded in Canada.

  Two of the most popular ETFs traded in USA are the Market Vectors Gold Miners ETF (symbol GDX), which invests in a diversified blend of primary gold small-, mid- and large- size companies world-wide, and the Market Vectors Junior Gold Miners ETF (symbol GDXJ), which invests in small- and medium- size companies in the gold/silver global mining industry.

  Some disadvantages of ETFs are:

- You have to pay commission to a broker when you buy or sell ETFs (and it is very expensive in Canada comparing to the USA). There are only a few ETFs that you can buy/sell commission-free, e.g. iTrade offers 50 such ETFs. Most brokers do not offer commission-free ETFs.

- You still have to pay the MER fee although it is much lower comparing to a similar Mutual Fund.

- Most Canadian ETFs are very thinly traded and may become illiquid when you need to sell them.

- You cannot have free pre-authorized contributions (i.e. dollar cost averaging) to ETFs; every purchase will involve a brokerage commission.

 The biggest advantage of ETFs as compared to Mutual Funds is that their MER is significantly lower. Here is another article about ETFs vs Mutual Funds.

3.4. How to Make Money in Mining Shares

  The mining business is tricky; the Klondike Gold Rush is not the only time in history when people made or lost fortunes. Mining shares are one of the most volatile assets in the world. If you look through a monthly/quarterly update of any precious metals fund in Canada that has been in business longer than 10 years you will see that its price has had several substantial (over 25%) yearly fluctuations since its inception.

  You get the best deal for precious metal companies’ shares when they are down 40-50% or even lower. Like in any other industry you will make money when nobody else wants to buy shares that are down that low. The mining business will not go away and even if the sector is down 80% (which is rare but may happen), it will recover eventually. The more it goes down the more it will go up in the future.

  You have to be very patient with this investment and invest most of your money when it is significantly (e.g. 50%) down. If you do not know how to evaluate individual stocks then the best thing is to invest in precious metals ETFs when shares of precious metal mining companies are significantly down or consistently invest in low cost precious metals Mutual Funds (monthly/bi-weekly), i.e. the dollar cost average strategy.

  Stocks, bonds, warrants, rights, ETFs and mutual funds are all eligible for Registered plans.

4 Conclusion

  Taking stock, remember that precious metals are not a panacea, they are just another type of investment that does not correlate with the stock market and the real estate market. Similar to any other market, you can gain or lose money; everything depends on the exact timing of when you buy or sell. Unlike other investments, physical precious metals themselves have value and they will not drop to zero. However, they can drop substantially to make you feel miserable. As a result, it might be a good idea not to invest too much money in physical precious metals and consider additional investment options.

5 Resources to Explore

  Below are several good books and web sites to explore the subject of precious metals further:

 Books to read:

-$10,000 Gold: Why Gold's Inevitable Rise Is the Investor's Safe Haven by Nick Barisheff;

-The Golden Revolution: How to Prepare for the Coming Global Gold Standard by John Butler;

-Currency Wars: The Making of the Next Global Crisis by James Rickards.

Sites to review:

The Gold Tree-Forms of gold investment,uses and sources of gold – infographic

http://streetwisereports.com/ – publications on the natural resource sector

http://silver-investor.com – one of the best sites on how to invest in silver

http://www.caseyresearch.com – one of the best publications on how to invest in natural resources

http://www.coincommunity.com/ – a coin forum

http://mcalvanyweeklycommentary.com/ – weekly economics and precious metals podcasts

http://www.nunet.ca/link_main.html – links to different numismatic sites

If you are interested in investing in US coins consider listening to this podcast.

 

Management Expense Ratio (MER), i.e. how much it costs you to invest in a particular fund, the lower the MER the better.

 

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