Why Junior Gold Miners Amount to 25% of My Speculative Portfolio

Though I was stopped out of them a few times earlier this year, I now have approximately one quarter of my speculative portfolio allocated to long positions in junior gold miners. Here’s why:

The fundamental backdrop is extremely supportive. A few weeks ago, I expected the dollar to soften as the U.S. government stretched its balance sheet beyond belief. This, of course, was wrong — not because the dollar is a safe haven but rather because other countries are also in dire straits. The United States has no monopoly on currency devaluation. Its a global phenomenon, and most countries are participants. Only one currency cannot be devalued by governments: gold. Unlike fiat currencies, it is not vulnerable to the best laid plans of mice and men.

The fundamentals also look strong on a micro level. I’m not referring to a discounted cash flow analysis, or anything like that. Rather, I mean that it is cheaper for the majors to buy juniors at these levels than it is for them to explore and develop new properties.

The technical picture for gold itself is strong. Boosted by a nearly 5% leap Friday, the gold ETF (NYSE:GLD) broke its multi-month downtrend and closed over its 50-week moving average.

The junior miners are trading well. Most junior miner stock charts show positive patterns. In the aggregate, they seem to indicate a modest return of speculative interest to the sector. Below are charts of four junior miners that I own. Also listed are the latest news items for each, reflecting the generally positive tilt of newsflow from junior miners.

1. New Gold (AmEx:NGD)

Market cap: $363.96M (per Yahoo!)

Latest news:

New Gold Exceeds 2008 Production Guidance and Boosts 2009 Forecast

New Gold to buy back notes at discount to reduce debt

2. Banro Corp. (AmEx:BAA)

Market Cap: $48.26M (per Google Finance - note may not reflect recent financing)

Latest news:

Banro Increases Measured and Indicated Mineral Resources at Twangiza

Banro intercepts broad zones of gold mineralization at Lugushwa

3. Golden Star Resources (AmEx:GSS)

Market cap: $283.13M (per Yahoo!)

Latest news:

Golden Star Resources upgraded by Canaccord Adams

4. U.S. Gold (AmEx:UXG)

Market Cap: 120.84M (per Yahoo!)

Latest news:

U.S. Gold Corp. - El Gallo: Two New High-Grade Areas Discovered

US Gold Intersects Impressive High-Grade

DISCLOSURE: Long GSS, UXG, BAA, NGD. No position in GLD.

Comments

[Roger Knights:]

Over on the Kitco site, poster "AGoldhamster" said this:

"Extremely bullish chart for gold now:

1) Price clearly above main trendchannel
2) Crossover 50/100 MA
3) Price clearly above 300 dma
4) Crossover on MACD
5) Good volume"

Jan 25 04:46 AM

[arlin:]

Im invested in Tyhee,currently a .10 junior.They recently added 250,000 oz.to their total infered,which is now over two million oz.in Canada........
This stock has traded between ,10 and .80,and is not for the faint of heart.
I do think this jr has better times ahead but have no idea when.
This type of investing is only for your vey speculative money.

Jan 25 09:38 AM

[Turnipseed:]

Cash position, whether from cash on hand or cash flow is also important. Funding will be difficult for the foreseeable future so cash position will be critical for survivability.

Jan 25 05:26 PM

[Ian R. Camp...:]

For 35 years I ran Canada’s best known Business Valuation Consultancy. Three years ago I became intensely interested in the U.S. Consumer, world economic prospects, and the mining and oil & gas sectors. Each day I review over 100 Internet articles and summarize and comment on them on StockResearchPortalBlo.... Today I have referenced this artilce in my one of my blog posts titled 'The Best from Seeking Alpha - January 26'.

I plan to have a look at each of the 4 companies mentioned, and apply my own valuation metrics to them. For anyone interested, last fall I posted a series of 17 posts on my blog outlining in some detail my views on what ought to be considered when one is valuing a mining explorer or producer. I wrote those posts because I couldn't find any books or internet articles that in my view were very comprehensive. Anyone interested in those blog posts can find them at stockresearchportalblo... under the Blog Category 'The Valuation of Mining Companies'. They are also available as one 'E-Book' in the E-Learning section of stockresearchportal.co.... Printed on letter sized paper, the E-book is about 50 pages long.

Jan 26 11:41 AM

[buyitcheap:]

I think these juniors, along with gold, are due for a pull back for gold, say $60, that would take the wind out of some of these juniors and get us another opportunity to buy more.

I buy the long term thesis on gold though. The action in Newmont with their stock issue is amazing - perhaps the juniors will be bought which would be very price supportive.

Jan 28 08:13 AM

[The Gold St...:]

For a comprehensive list of junior gold producers, see www.goldstockstrategis.../.

Feb 02 07:57 AM