Investing in Junior Resource Gold Stocks
How Junior Resource Stocks Have Performed
Many junior resource stocks are running at or near 52-week highs, and the sector boasts some spectacular individual performances. Returns for producing or near-production stocks for the twelve months to the end of August are running at around 50%, and have shown good results since the start of this year.
Our portfolio, which is essentially in this sector, has shown very positive results for the entire year. Summer saw a slight weakening, but September has roared ahead. Compare this with the performance of investment in blue chip, or tech stocks, or indexes. None of those are performing well. There are sectors that have maintained their value, but those sectors are range bound.
How distressing it is to have to say that something has maintained its value'. We don't invest to break even, or to not lose too much.
The purpose of investing is to increase your wealth. The only way to have done that this year is to be in junior resource stocks. To be fair, as interest rates have fallen, fixed income bonds and equivalents have also risen a bit, but marginally. How much room on the downside of interest rates is there when money is freely available at 3 or 4 or 5%. It seems to us that the room left for bonds to increase in value is limited, while the potential for interest rates to rise, could ruin many a parade.
Risk/Reward Ratio
We return to the risk/reward ratio to judge these investments. Perhaps interest rates will remain very low, as they been for so long in Japan. In this event, bonds will not fall in value and one can rely on the interest received, if relying on these interest rates can produce enough income for anyone. But in that small possibility that interest rates could rise, as they have started to do in a few places, those bonds could lose a lot of value in a very short time.
Why risk money on this very poor risk/reward ratio? The potential gain is limited, while the potential loss is large, even if the odds of the potential loss occurring occurring are small. Even if the odds are 20:1, what happens to your money if the 1 occurs?
How the Commodity Gold Has Performed
Gold has shown a lot of strength this year and is at record highs. There are many who have projected $1,650 as the price by the end of this year. There certainly seems to be a lot of strength and technicals certainly point to a strengthening. We don't care to participate in these guessing games. The fact that gold is strong, that demand is increasing, and that more and more investors are finding it the preferred investment, is sufficient for us. Whether gold rises another $200 or falls $200, the price of gold anywhere in this range is sufficient to allow junior minor companies to have enormous profits on a wide range of potential deposits. That is the place to be.
Junior Resource Stocks Compared to the General Market
Compared with general equities, gold stocks are performing very well and providing the reciprocal advantages they are supposed to demonstrate.
While this sector is showing strength, and more money is flowing into these stocks, the market has generally fallen, and there is more and more talk about moving money out of stocks into cash or investments that provide an interest or interest-equivalent return. The fact that returns are at historic lows doesn't seem to be deterring the flight of money from stocks.
Compare the Price of Gold to the Value of Shares of Companies in the Gold Space
When one considers the very strong rise in the price of gold and compares it to the trading value of the shares of companies, there is a major disconnect. For some time now, as the commodity gold has continued its relentless climb, the shares of gold companies have stagnated. For example, the price of Barrick Gold Corp was about $50 at the end of 2007. Today it is $40. An investment there would have been disappointing.
There are many reasons for this disconnect including cost of production, management and so on, which we discussed in another commentary previously, but the fact remains that senior gold companies have not kept pace with the price of gold. To a greater of lesser degree, this disconnect between the commodity and the shares is widespread. Mid-size companies in the sector have similarly suffered.
Junior Gold Companies
Take a look at the large number of junior miners and explorers that have experienced enormous growth in this period. There are numerous examples of peoples realizing 100%, 200% and 500% gains. The trick is to pick those stocks that have this potential.
Investing in Junior Resource Gold Stocks
By: Larry Cyna
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