In the era after the financial crisis of 2008, the world is awash with paper money, desperately seeking its way into investments that offer good returns. One such destination has been underground minerals and the stocks of mining companies that dig for them. This underground wealth is frequently seen as "real wealth" and indeed, investing in mining stocks can be a true wealth builder for investors. However, care must be taken in understanding and evaluating the risks associated with such investments.

Mining stocks can cover a range of companies that mine for a variety of commodities - precious metals such as gold, silver and platinum, industrial metals such as zinc and copper, "green" minerals such as rare earths, heavy metals such as uranium and thorium and so on. The attractions that mining companies hold for investors is two fold:

1. Mining company stocks can act as a proxy for the price of the underlying commodity
2. Mining companies can be a leveraged play on the commodity since the value of the company begins reflecting not only the annual produce of a given commodity from the mines, but also the size of the mine and potential tapped and untapped but recoverable areas under the ownership of the company.

Investing and Making money in Mining Stocks

It is important to understand the characteristics involved in investing and making money with mining stocks, and these are listed under:

1. As may be self-evident, mining stocks respond directly to the price of the underlying commodity (-ies) it is actually mining.
2. Commodities tend to undergo large scale secular bull/bear market cycles which drive mining companies out of business or to huge profits.
3. The best time to own mining stocks are when the underlying commodity is just beginning to come out of its long secular bear market. Thus when gold began emerging out of its 20 year bear market in 2001, was the time to own gold mining stocks. You will see this pattern repeat in each commodity in each cycle. Again, knowing when there is a true bull market versus a bear market trap falls in the art of reading market fundamentals and technical analysis.
4. The first few years of this bull market are the absolute best time to own mining stocks as there would be only a few companies that would have survived the bear market; they would be priced at an incredible bargain; and the run up in commodity prices would not be noticed for the first year or two of its rise.
5. As the public begins to note the rise in price and the corresponding rise in leveraged mining stocks, the share prices begin to shoot up and easily multiply by a factor of 4 to 10 in very short time (next 1-2 year).
6. At this stage, the bull market is in full public light and the bull market is usually about to take a pause. When this happens, and the underlying commodity price shows its first price weakness, the mining stocks quickly begin to give back gains. Losses of 50% are not uncommon. Thus, for the investor, it is important to lock-in gains at the first substantial price weakness shown by the underlying commodity. Judging the difference between a temporary pull back and sustained correction in the commodity price lies at the heart of making this determination.
7. The psychology of the mining stock investor is interesting from this point forward. Even as the underlying commodity recovers in price and races to new highs, the underlying mining stocks do not necessarily keep pace. Some may recover to their previous highs, but others frequently recover only partially. In many ways, the euphoria experienced by the first wave up is never fully re-captured. Thus, the real profits are made in that first move up - after which it is better to move on to greener pastures.

The above strategy would be our suggestion for buying and selling mining stocks based on underlying commodity price behavior. Of course choosing the actual stocks, including exploration firms, established names or buying entire indices is another area of investment research that will determine the degree of success you experience while investing in mining stocks.