Gold penny stocks are gold companies that trade under $5 per share and have a small market capitalization. These companies trade on stock exchanges like the Nasdaq (NASD) and New York Stock Exchange (NYSE).
Some companies that don’t meet the listing qualifications for NASD or NYSE trade on the Pink Sheets or FINRA’s OTC Bulletin Board. To trade on the NASD or NYSE firms must adhere to certain financial, accounting, compliance and regulatory requirements.
Some that don’t meet those requirements trade on the OTC Markets.
However, the best gold penny stocks release financial disclosures and other important information that investors can rely on to make decisions.
Trading gold penny stocks is risky because many of these companies are in a developmental stage. They are not generating income from the production of gold and are heavily dependent on outside financing to keep their business alive.
But with great risk comes the potential for great reward.
2017 was a banner year for the stock market, as the S&P 500 surged more than 20%, gold saw gains of around 9%. However, there were plenty of gold penny stocks that outperformed both of them.
For example, Kingold Jewelry Inc (NASD: KGJI) a producer of 24-karat jewelry in China, saw its shares gain 77.9% in 2016 and 56.59% in 2017. It’s these type of extraordinary gains that draw investors into gold penny stocks.
Why Gold Penny Stocks Can Have Explosive Moves
Gold penny stocks are not covered by an army of analysts. That said, without the help of institutional research, gold penny stocks can see large price swings, especially if the company issues a positive press release.
Without analysts, investors rely more on press releases and blog reports to formulate opinions on the company’s fundamentals.
Since these are low priced stocks with a small market cap, it’s a lot easier for investors to accept large price swings.
If a gold penny stock moves from $0.01 penny per share to $0.03 that is a 200% return. Now, if a gold stock moves from $10 to $16 per share, that is a 60% gain. Psychologically, the gold stock that moved up $6 seems like a larger move than the gold penny stock that moved $0.02 higher.
But in percentage terms it’s not. Gold penny stocks give investors a low barrier of entry and exposure to the gold market. Since many of them are priced low, smaller investors can leverage their capital and potentially profit off these large moves.
Characteristics Of The Best Gold Penny Stocks
The best gold penny stocks are transparent and supply investors essential data to make informed decisions.
The OTC Markets groups Pink Sheets in subcategories. These subcategories help gauge transparency.
For example, A gold penny stock is listed as “Pink- Current Information” if its following the Alternative Reporting Standard by filing through the OTC Disclosure & News Services pursuant to the Pink Basic Disclosure Guidelines.
An example of a gold penny stock that has Current Information is Bakerville Gold Mines Ltd. (OTC: BGMZF)
Now, this doesn’t make it a good investment, it just means that the company is disclosing information in a timely manner and makes it publicly available.
A firm is listed as “Pink- Limited Information” if it’s having financial reporting problems. This may occur if the company is going through economic distress or even a bankruptcy. Investors are warned that there is limited public information on the company.
An example of a gold penny stock listed as Pink Limited Information is Newport Gold, Inc. (OTC: NWPG)
Now, a “Pink- No Information” company is unable or willing to provide disclosure to the public, the regulators, or the exchange. The company records are no longer current, and therefore should be considered risky.
An example of a gold penny stock listed as Pink No Information is Affinity Gold Corp. (OTC: AFYG)
The OTC Markets doesn’t just offer Pink Sheets. In addition, there is the OTCQX Best Market, consisting of established investor focused U.S. and global companies.
In addition, to the OTCQX, you can find gold penny stocks traded on the OTCQB. The OTCQB Venture Market is for development stage U.S. and international companies that don’t qualify for OTCQX.
K92 Mining Inc. (OTC: KNTNF) is an example of a gold penny stock listed on the OTCQB Venture Market.
Since these firms don’t have a whole lot of revenue, its critical that they don’t drown themselves in debt.
For example, Banro Corporation, formerly traded on the NYSE and TSX, had a liabilities to current assets hovering around .30 in 2017. It saw it shares drop by more than 94%, eventually causing the NYSE and TSX to suspend trading on the symbol.
Comstock Mining, Inc. (NYSE: LODE) saw a net loss of $8.2M over the first nine months of 2017. Its net cash provided by financing activities was $6.4M, coming mainly from debt and equity issuances. During the same period, the total debt of the firm was $10.3M.
The company saw shares of its stock price slash by 70% in 2017.
On the other hand, Gold Resource Corp (NYSE: GORO) had no long term debt on its books for the fiscal years of 2016 and 2017. The firm has had 7+ years of consecutive monthly dividends. It even offers investors a cash to physical dividend program where you can take delivery or send physical to a vault of your choice.
Liquidity Matters When Trading Gold Penny Stocks
A “thin” gold penny stock is one that doesn’t trade a lot of volume on a daily basis, typically anything under a couple hundred thousand shares traded daily is considered thin.
Its difficult to build a large position and execution could get sloppy if you decide to trade a thinly traded gold penny stock.
Gowest Gold Ltd. (OTC: GWSAF) traded less than 20,000 shares on average over the last 30 days of 2017. To make matters worse, the company does not have a website, nor has it been disclosing company financials to the investing public. The stock trades on the Grey Market, broker-dealers are not willing to publicly quote the stock.
Investing in companies like Gowest is a risky gamble that should be avoided.
Ideally, you want to stick with gold penny stocks that offer a competitive bid/ask spread to avoid slippage. The more active the stock is during the day, the better it is from an execution standpoint.
More Tips on How To Buy Gold Penny Stocks
Cheap Doesn’t Always Equal Good Value
It’s true that low priced stocks have the potential to rise dramatically if they receive a positive catalyst. However, buying a stock because it has a low price is not a good alone.
There are several important factors worth considering like: return on equity, management, balance sheet, project outlook, and much more, before deciding to invest in a gold penny stock.
Don’t Sip The Kool-Aid
Wall Street does not cover most of the gold penny stocks that are traded on the market. That means you have to vet the stocks yourself before investing in them.
The lack of institutional research has opened the door for bloggers and newsletters to have an influence on this space. However, make sure that what you’re reading is unbiased and not coming from someone who is “talking up their position.”
The same goes when you’re looking for information on social media, ask yourself, is the poster sincere or are they just trying to pump their position up.
Most gold penny stocks don’t survive. They are unable to get revenue and eventually drown in debt. Instead of putting all your eggs in one basket, diversify and avoid putting a large portion of your portfolio in one single position.
Stick to trading transparent gold penny stocks. Ones that have got a good hold of their finances and are not bleeding in debt. When investing in these early stage companies, make sure to read about the management of the firm. Find out what their previous work history is, and if they have had success or failure with any other publicly traded company.
Be skeptical on what you read from blogs and newsletter as you don’t know if they have a hidden agenda. Visit the company website and make sure to read their disclosures to learn more about how their operations work and what future projections are.
Eventually you’ll start seeing patterns of what successful gold penny stocks have in common and hopefully be able to find new ones before they have an explosive move.