Mining stocks and physical commodities have a different performance when the world economy is in flux. Federal deficits, bank crises, and currency depreciations result in negative implications for the equity market. During these times, investors seek a safe haven in the form of the physical commodity. However, selecting between mining stocks and commodity ownership does not need to be a mutually exclusive decision.
A junior mining company is especially susceptible to volatility during times of economic uncertainty. In the 1970s, shares of large mining companies in the gold sector experienced impressive increases, but these did not nearly match the increase in the price of physical gold. Though some junior miners outperformed both of these, many others went out of business. However, investors that are highly tolerant to risk may still want to make a small investment in junior miners that have proven resources.
During the most troubling economic conditions, mining stocks will usually not outperform the physical commodity they are seeking. Investors move to safe havens rather than the speculative investments such as mining company stocks. The best mining stock investments to make during these times are blue chip stocks that offer dividends and mining ETFs. The ETF holds a basket of mining companies so it spreads the risk inherent in this form of investment.
Timing is the key factor when making an investment in mining stocks during a poor economy. Mining companies can be very volatile during uncertain times, as can ETFs. When the market declines sharply, mining stocks usually correlate with the equity markets rather than commodity prices. The investor should always diversify the portfolio to minimize the impact of any losses.
Mining stocks have the potential to appreciate much higher than the price of their physical commodities. However, investors need to remember that these stocks are leveraged plays on commodity prices so they carry more risk. This is not to say that investors should avoid mining stocks during a troubled economy. They should simply weigh the risks against the potential rewards and invest conservatively.
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