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Wrong again.

Numerous pundits have made a big deal of stocks’ recent rally and gold’s plunge. Some even went so far as to claim that gold has lost its “safe haven” status. They’re horribly mistaken.

For one thing, gold has held up incredibly well compared to both stocks AND commodities this year. Stocks have fallen 32% in 2008 thus far. Oil is down 26%. Zinc is down 58%. Gold is only down 16%.

In simple terms: Had you put all of your money in gold at the beginning of 2008, you would have outperformed virtually every asset class in existence. It’s also worth considering that much of the downward pressure in gold has come predominantly from the “paper” market.

As I’ve written on these pages before, the physical or bullion market in gold is extremely tight due to unprecedented demand. The US Mint has stopped producing several coins because it cannot keep up with investors’ appetite for bullion. Indeed, most bullion dealers are now charging premiums of 8-9%. This time last year premiums were only 2-3%.

However, due to institutional liquidations and outright manipulation in the paper market, gold struggles to clear even $800 an ounce. And while the paper market for gold has been hit pretty hard, gold mining stocks, particularly the juniors, have been absolutely creamed.

It’s not hard to see why.

An individual gold mining junior might have a daily dollar volume of $5-$10 million. Even smaller hedge funds ($50 million in assets) could crush one of these with a $1-2 million sale (never mind intentional crushing from shorts).

The result is that gold mining stocks are at historic lows relative to the price of gold. If you go back to 1984, mining stocks have only been this cheap relative to the price of gold two other times: 1986 and 2001, both of which were around the END of BEAR markets.

In fact, today, numerous gold juniors are so cheap that they’re trading below book value. Let me put this in perspective: at these levels these companies are cheaper than their mining assets alone. By buying today you are essentially getting the gold reserves for FREE. Below is a screen I ran last week. The data comes from Yahoo! Finance.

Company Name Symbol Market Cap Total Cash Total Debt Price/ Book
NEVSUN RESOURCES
NSU
41.0M
59.9M
0
0.966
RICHMONT MINES
RIC
37.2M
25.2M
0
0.801
KIMBER RESOURCES
KBX
27.2M
5.5M
0
0.799
ALLIED NEVADA GOLD
ANV
107.2M
51.6M
2.2M
0.709
ENTREE GOLD
EGI
47.0M
61.9M
0
0.698
VISTA GOLD NEW
VGZ
32.0M
33.4M
22.4M
0.601
KEEGAN RES
KGN
13.1M
10.2M
0
0.547
CENTRAL SUN MINING
SMC
7.2M
4.7M
0
0.177
OREZONE RES
OZN
57.1M
13.2M
0
0.165

The most common accusation leveled against gold juniors is that the credit crisis will stop them from receiving the credit necessary to fund their operations. However, as the above table shows, many of these companies are already sitting on substantial cash hoards. In addition, some that are already producing gold throw off enough cash to fund their operations without additional loans or credit.

I can’t tell you when gold will finally break to new highs again. And I certainly cannot vouch for the above companies as being great investments (I haven’t done nearly enough research to formally recommend any of them). But one thing I can tell you is that taken as a whole, gold mining stocks are at extremely cheap levels relative to the price of gold. If you’re looking for value in today’s market, this is a great place to start.

Source: Junior Gold Miners Are Dirt Cheap