Junior Gold Miners Should Sparkle As Gold Futures Turn Back Up

Readers of this blog know that I have been bullish on gold for some time. Even in recent weeks, with central banks dumping bullion and most commentators calling for a broad retreat in commodity prices, what has surprised me most is how little gold prices have actually dropped.

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The weekly chart shows that the yellow dog has put in a series of higher lows since late 2006. Like Bill Cara and James Sinclair, I believe that gold is headed for a retest of 2006 highs.

If so, junior mining shares should profit handsomely. Like natural gas five years ago, the precious metal majors can replace and grow reserves more cheaply by acquiring junior mining companies than by virgin exploration. That doesn't mean that I expect all of my gold holdings to be acquired. Rather, the prospect that they might be acquired should provide a higher upside as bullion prices increase relative to the majors. Mid-tier mining companies also are likely acquisition targets.

Since I don't know which junior mining company will become Wall Street's next darling, I spread my gold positions across several junior and mid-tier companies. I like each for different reasons, but the list is by no means intended to be comprehensive. There are plenty of good mining companies out there.

Juniors I currently own:

U.S. Gold (UXG) (articles): former Goldcorp CEO Rob McEwen seems to be lining up another world-class claim in Nevada. It's risky, but McEwen has a huge amount of his own capital in the venture. I want to bet alongside him.

Tanzanian Royalty Exploration (TRE): royalty structure founded and run by James Sinclair, who continues to increase his ownership stake.

Crystallex International (KRY): Sure, there is a chance that Hugo Chavez will rescind the mining contract for the Las Cristinas mine, or that the needed environmental permit will never come through. But if Crystallex gets the permit, a double or more should be easy. By all accounts, Las Cristinas is a phenomenal property, and it's in Venezuela's interest to get it mined. Bill Cara has called this the Stock of the Year for 2007. Cramer says avoid. I say avoid Cramer and stick with Bill.

Golden Star Resources (GSS): I just bought Goldenstar last week. Technicals are great--a breakout from prolonged consolidation, followed by a retrace to the point of breakout. Fundamental performance leaves a bit to be desired, but I'm willing to give GSS a little leeway.

Western Goldfields (WGDF.OB): My most recent purchase, last Friday at $1.98. Shares look like they are breaking upward out of consolidation. Cara says "This one is a winner on all counts. I don't think WGI.TO will be trading at a low price for long." I think his analysis is spot on.

I also own on shares in the following larger companies: Goldcorp. (GG), Agnico-Eagle (AEM), Gold Fields (GFI), and Meridian Gold (MDG).

As always, I will scale out portions of these positions into rallies. On a serious pullback, I'll reconsider the entire position.

DISCLOSURE: I am long UXG, TRE, KRY, GSS, WGDF.OB, GG, AEM, GFI, MDG. I presently have no position in gold futures. Not a recommendation to buy or sell any security. For informational and educational purposes only.

Comments

[Goldilox:]

We are seeing this happen right now gold is begining to surge and it looks like its going to continue. If you want to follow alot of junior resource companies in a forum based realtime environment. I suggest you check out www.agoracom.com
Keep up the flow of information on the smallcaps, they deserve much more attention than they have been getting in traditional media. The internet has allowed for better research and information on this highly important space.
Thanks.

2008 Jul 12 07:33 PM