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« Randgold Resources Limited: Going well! | Main | Eurozone raises interest rates! »

Gold: Are juniors the way to go?

It has long been said that the junior gold exploration companies would put in the most explosive performances when the gold price moved north, however in the recent run up in gold from $650 to $1020 many juniors didn't not rise with gold and some stocks even went down over that period, the question is; why?

If an investor wants to be sure to benefit from increases in gold prices, then one must have exposure to gold. Many of these juniors do not have any ounces of gold in the ground as proven reserves, therefore why should they rise with gold prices? Junior explorers tend to rise on whether or not they have found gold, not whether the gold price is high or not. Of course there is more potential value in any possible find with a higher gold price, but the companies still have to find the yellow metal in order for the stock price to rise.

In addition to this there is a fundamental flaw in the argument that holding junior exploration companies offer a better return on investment than mainstream mining stocks or the physical bullion. Although it is true that if an exploration company makes a large find the stock price will explode, but how many stocks do that? The figure is less than one percent, and for the investor to really benefit from this rise one has to be significantly invested in the company. However due to the risky nature of the resource exploration business, serious diversification is essential. But if one is diversified into say fifty stocks, then even if one stock goes up ten fold, the portfolio will only increase by 20% as the other stocks, having not found gold yet, remain relatively static. Conventional wisdom also suggests that junior exploration companies should only be a small section of your entire portfolio and so this reduces those gains even more. For example, if gold exploration represents 10% of your entire portfolio, that 20% is reduced to a measly 2% gain, which isn't exactly what the investor had hoped for in return for the risks of investing in exploration projects. So unless one invests heavily in just a few exploration companies, it is unlikely that great rewards will ever flow into your portfolio. However, if one is to take that approach, its simply gambling if you load up heavily on one little explorer.

Perhaps the most disappointing aspect of this from the investors perspective, is that one may have recognised the bull market in gold, made the move to invest and while one was correct that gold prices would rise, one bought into junior exploration stocks and is now watching the precious metals market soar whilst explorers are struggling. Which brings us to the question: What is the best way to play the gold bull market? We have always preferred gold mining stocks, those with proven reserves and profitable production, and although many have doubled in the last six months, they have fallen short of our expectations in terms of leverage to the gold price.

One of the reasons both exploration companies and larger gold mining stocks are seeing their performance suffer is that a lot of capital is going into gold Exchange Traded Funds (ETF's) as opposed to investment in the stocks. There are various gold ETF's that track the price of gold almost exactly, so this is a practical way to gain exposure to the gold price without holding physical bullion, especially if one intends to trade this market, as ETF's can be bought and sold at the click of a button. More leverage can be found with specialist leveraged gold ETF's, that offer twice the performance of the gold price and some ETF's with 300% exposure, have already been proposed. However there are tax issues surrounding these investments, as they are not shares in a company, but units of a fund and as many ETF's hold a combination of derivatives in order to gain their exposure, some investors may be facing unforeseen taxes. However this is different for each individual and requires a further in depth analysis.

The most essential part of investment is to achieve your objective. If one's objective is to benefit from rising gold prices, then one must ensure that the vehicles one invests in have exposure to gold prices. Exploration stocks are not the best option for profiting from this bull market, as the majority have no gold, therefore no exposure to rising gold prices, which explains their poor performance over recent months. So whether it is through gold mining stocks or gold ETF's, your investment needs to have gold in order to shine.


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Reader Comments (4)

While there is some truth to your article about gold juniors[silver also]the REAL problem is the banks of Canada are robbing all the junoirs of any chance to succeed with their demands for broler warrants, warrants, low prices for pp,which all result in at LEAST 100 million shares just to get to production. And a big job[Galore Crrek] billions of $ to get to production.
so what happens when 10-12 million warrants come due. They the Canaacords of this world run the price up to get their
$ and then down for months on end and probably never up again. It is a vicious cycle. Then the real problem happens when you have this many shares issued - the shorts take over and gone is any chance of the juniors recovering.

I read lots of articles every day,yours included, and the stories about the Canadian banks demands and the naked shorts or FTDs is unbelieveable. It is amazing how anybody makes any money in juniors. I mean just look at Northgate,
400k unhedged, in Canada and Aust. and at 3.75/sh. There is only ONE answer - FTDs. They have been allowing this to go on for 3-5 yrs. that I know of. Thank you letting me vent. I don't know what I am going to do but getting out of jrs after the next run is definitely high on my list.

July 8, 2008 | Unregistered Commenterbulletbob

Can you provide some info on US Capital Gain Tax rates on GLD and DGP or suggest a website that offers this info? Thank you.

July 8, 2008 | Unregistered CommenterBruce Schwartz


Sorry we cannot help you with matters of taxation. We suggest that you talk to a financial adviser. Taxation differs for each jurisdiction. In the UK for instance we are taxed on profits but there is no taxation if we place a bet on the movement of gold or silver as gambling is not taxed!

Maybe one of our US readers can enlighten us all?

July 9, 2008 | Unregistered CommenterGold Prices

VHGI Gold closes with record volume of 445,000 shares on 12/8 based on 8k news.

December 20, 2009 | Unregistered CommenterJC2811

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