The last few years have been great for gold investors. Since 2009, the price of gold jumped up from about $800 an ounce to a high around $1,800 last year. This is because when the economy is weak and the stock market is shaky, investors flee to gold as a safe haven. High gold prices worked out great for companies like Keegan Resources Inc. (NYSE: KGN), a small-cap gold mining firm. After nearly going bankrupt, Keegan saw its share price go up over 800 percent. This has been a great stock for investors over the past few years, but things appear to be going sour.
The World economy is finally recovering while inflation remains low. While these conditions are good for the market as a whole, they are problems for gold. Gold lost over 7 percent of its value over the past year while Keegan's share price collapsed by 50 percent. You can see there's a very strong connection between the price of gold and Keegan's share price. In addition, Keegan's stock swings by a greater amount in both directions. This is because Keegan is a junior gold mining company. What this means is that Keegan owns the rights to a source of gold, but does not currently have the capacity yet to mine the gold. They do not expect to start production until the end of 2014.
Should gold prices stay high until then, Keegan would start seeing high earnings and post a great return for investors. They just need to get there first. Now that gold prices are falling, investors are pulling out of this company. It's possible they'll run out of capital and never get to the point where they'll be able mine. As a result, Keegan's share price is very volatile and highly dependent on the price of gold.
The way things are looking right now, the world economy is going to recover. This means gold prices will continue to fall and could cause Keegan to go bankrupt. The World's recovery is far from certain though. America is struggling with debt problems and political gridlock while Europe is still in a recession. It wouldn't take much for everything to fall apart again. Gold and gold-related companies hedge against this risk.
Since no one can predict the future, it's a good idea to diversify your portfolio with at least some holdings in gold. If you're feeling a bit speculative, Keegan could fill this role. If the economy stays strong you'll lose your money but should we hit another rough patch, you'll see big two or even three digit returns. While large, established mining companies like AngloGold Ashanti Ltd. (NYSE: AU) and Barrick Gold Corporation (NYSE: ABX) are safer, they wouldn't be able to match these types of gains. If you're going to make this play, it would be a good idea to buy a few junior mining companies. This increases the chances that at least one of your stocks will survive long enough to pay off. Comstock Metals Ltd (OTCBB: CMMMF) and Kaminak Gold Corp. (PINK: KMKGF) are two other possibilities.
Is Keegan Resource Inc. set for a plunge? Probably. Things change fast though. Investors that bought this company a few years ago when things were looking bleak had a great run. In our uncertain economy, it could definitely happen again.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.