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Gotta Love Those Juniors

by John Rubino on August 22, 2011 · 28 comments

Gold and silver have been pretty much the best things to own during the past few years. But the mining stocks…not so much. This is no secret, though why the miners are underperforming is a subject of debate. You hear about high energy prices (though oil is way down lately) and potential nationalizations (though most of the biggest mines are in relatively stable countries). But the most likely explanation is that there isn’t one. Sometimes otherwise strong relationships diverge for a while and then snap back. Wondering why just gets in the way of exploiting the divergence.

So the real question, assuming precious metals don’t plunge from here, is which miners to load up on? Based on the chart below, it looks like the juniors win hands down:

The black line represents the McEwen Capital Junior Gold Index, a list of mostly Canadian exploration companies that have yet to start producing. This is generally the cheapest type of miner in terms of share price per ounce of metal in the ground, because until they start producing there’s always a chance they won’t. Once an explorer moves successfully into the producer category its valuation frequently pops.

As you can see, these juniors have returned nada in the past three years, which is on a par with the Dow Jones Industrials — a pathetic showing for companies whose metal reserves are worth two or three times per ounce what they were in 2008. In a long-term bull market successful explorers would be expected to outperform the underlying metals. So the upside potential is pretty obvious: If gold and silver hold their recent gains, lots of explorers will either be bought out for nice premiums or start producing and see their reserves revalued to twice or more their current levels.

Tagged as: gold, mining stocks, silver

dewey

GOLD….Have you looked at how much gold the USA has more than all the other Countries Combined!!! I would Venture to say that we have nothing but a bunch of IOU’s at Fort Knox (Dumb and Dumber) remember that movie…. a briefcase full of receipts…NO Money (thats also Gold) Uncle Ben, The USA has been fleeced… Leadership is trying to catch their own tails…They Look funny really FUNNY…. Obama has no plan or leadership….. not that i think many others would have a clue as well…JOBS JOBS JOBS HOUSING HOUSING HOUSING until we fix those items NOTHING WILL or CAN BE BETTER… Just keep pouring water on a Grease Fire…. Audit the FED or End the FED and make sure you have Physical gold or silver not Paper Gold or Silver that they say they have … PONZI… lets let Madoff out of Jail so he can HELP MANAGE OUR USA PONZI SCHEME!!!!
- mcp
  
  Rickards thinks the gold is still there and all thats changed hands is a bunch of paper claims.
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paper is poverty

I remember Financial Sense doing a multi-part series on naked short selling a while back, and they had found junior miners with 20% more shares in existence than they had issued. I.e. some bank (JPM, no doubt) had counterfeited all those extra shares, with predictable results on the price. And you hear the hedge funds have a long bullion / short miners trade, so they’re shorting too. Jim Sinclair’s solution is that the miners should issue substantial dividends as a way to put a stop to all this shorting. But I’m guessing a company has to be producing to be issuing dividends, so that strategy wouldn’t help the exploration companies.
http://blog.money4free.us Conspiracy girl

I recommended and bought Lepanto mining in the Philippines as well as Atlas. They have returned 400% and 200% on the year respectively. This doesn’t take into consideration of the appreciation of the Peso vs. the Dollar. The Peso is still artificially suppressed vs. the Dollar, trading at about 43 to 1 when it really should be trading at about 33 to 1. Some of the stocks I bought were at 57 to 1 5 years ago. When one is trading foreign stocks, they often overlook the currency appreciation vs. the Dollar that lead to hidden gains that will continue in developing economies.
PeteCA

Sorry … I’m completely off topic. But I was just looking at John Mauldin’s latest article (The Recession of 2011?) on your Web page – esp. the chart for the Mauldin Economic indicator. What’s really noticeable, as we go into a recession in the latter end of 2011, is how dramatically these indicators are falling through the floorboards. No sooner does the Fed terminate QE2, and the US economy just tanks.

I realize that QE2 officially stopped on June 30′th, but the timescale of these indicators operates over weeks and months. It is not short-term. So for all intents and purposes what I said is true – the US economy is capitulating as soon as stimulus is removed. That is not a good sign.

PeteCA
Chris

The idea that there is still gold in Fort Knox is quite remote. How can US convince other nations to sell their gold if US is still keeping all the gold in Fort Knox. It should be noted that no announcement was made about any sale of US gold while sale of other nations gold were made regularly in the past.
Ventureshadow

There must be a simple explanation about future expectations as to why gold miners have risen little and junior golds have not risen.

One possibility is that the future will not be good for miners, especially juniors. Seniors do represent gold to some degree. Juniors represent promise more than gold, and they will be disrupted if loans and new capital dry up. If they have to issue more stock to raise money, the price will fall. This is probably somewhat true.

Another possible explanation is that gold is overpriced, compared to other assets that can preserve wealth. Gold has now overtaken platinum. This aberrancy suggests that gold is overpriced. Gold also costs way way more than the cost to mine it, and this does not bode well for the future of gold prices. Gold prices are seized by greed and panic, those old familiar market forces.

Meanwhile, junior gold miners are a way out longshot. Like a lottery ticket. Sure I buy lottery tickets now and then. Remember to cross your fingers!
Jason Carter

Perhaps we will see a similar outcome when Juniors follow the stock market down in this next recession vs the 2008 recession. Many minors will become very cheap and will rebound fast and hard in the next stock market upswing.
http://www.affiliate-management-software.com Ames

I’m wondering if the juniors will ever be valued fairly. It would seem they are getting shorted like mad. Could it be the trading programs that hack them down each time they start to see the light of day? I may put a little money in the juniors, but probably the best bet overall is the real physical.
Brad Thrasher

Is MJGI listed on any of the exchanges? I found their website @ http://www.mcewencapital.com/ but don’t see them listed anywhere.

Cramer was touting gold miners today, even gave the juniors some love. He then said every portfolio should be 20% gold and/or a combination of precious metals. Katie bar the door, eh. Lookout cookout as more and more mainstream touts hype the miners.

Fearless Prediction: Gold passes $2750. Silver tops $60 on or before Halloween.
- Brad Thrasher
  
  P.S.
  
  The real gains will be in virtual or paper gold. We all know or should know that touts don’t promote real assets but rather the paper or virtual equivalent.
  
  Look for a bull in paper gold.
  
  $70. a bbl oil and excess cash parked in PM’s would go a long way toward realizing better outcomes.
  - Bruce C.
    
    By the way, I totally disagree with you about real profits being made in “paper gold”. Have no idea what you’re thinking. As you hinted yourself, “paper gold” (e.g., the GLD ETF) is leveraged (supposedly as much as 100-to-1) and so there will always be a dilution effect going on. Furthermore, and most importantly, as more and more physical bullion is essentially removed from the market by “buy-and-hold” investors (be they central banks or individuals) the stakes/risk increases for a monumental day of reckoning if/when enough physical gold (or silver) is demanded from paper market that cannot be satisfied. For example, Chavez’s request to take delivery of “his” gold could be a triggering event that could initiate a discovery process of historical proportions.
    
    Bottom-line: if you want to own PM ETFs then you better have fairly tight “stop-loss” orders in place at all times (and NOT “stop-limit” orders. If any such destabilizing event occurs “after hours” then your limit order may never be executed.)
    - Brad Thrasher
      
      The thing is Bruce the facts don’t support your opinion. Paper gold is up since I posted this on 8/23 and the GDX is up since you posted at 10:00a.m.
      
      This is the difference between you, an investor and me a trader. I’ll take 1-3% weekly gains all day.
      
      Based on your argument, if I didn’t do something every time I considered a possible adverse outcome, I wouldn’t do anything. Your “fairly tight stop loss orders” is always good advice.
      - Bruce C.
        
        I agree, if you’re including gold mining shares as “paper gold”. I prefer to restrict that term to the derivative products only (like a PM ETF such as GLD). Gold mining stocks are equities that carry whole host of other issues, both good and bad, and that would actually benefit from the (sudden) appreciation for physical, unlike the derivatives.
        
        Also, have you included the cost of fees, taxes, and administrative time in concluding that frequent trading of “paper gold” is so profitable?
        
        (I know you know this, but…) All of these discussions are fundamentally about two monetary models, the “dollar-centric” one in which the the US dollar is the ultimate arbiter and all else (including gold) orbits around it, and the “gold-centric” one which (periodically) recognizes physical gold as the best form of money on the planet and all other commodities (and derivatives like fiat currencies) orbit around IT. The financial world is still a dollar-centric one and so all of the existing paper games still work. But there will come a time, that I suspect will be sooner and more sudden than most people think, when the fiat currencies all “blow up” and major deflationary price discoveries will take place that will render fiat currencies relatively worthless, regardless of what value was exchanged for them (that’s the tragedy that will seem so unfair). In the mean time I like to trade too and play with cash/dollars, but I convert most of my savings to gold and silver because I think they’re a better form of money. When the music stops I’d rather have a fistful of gold than a fistful of dollars. I heard a gold skeptic yesterday point out that those who sell gold would rather have dollars than the gold, but what he didn’t know/mention was that the profits ARE converted to PMs, just like the proceeds are from many other wisely managed businesses.
      - Brad Thrasher
        
        The confusion is caused on my part Bruce. Absent formal investment training I do take some creative license in the definition of terms. For example, I consider a kernel of corn real and all financial descriptions and uses of corn a derivative or a virtual expression of corn’s value, including shares in a corn farm and/or paper currency.
        
        I haven’t jumped into MJGI because I can’t find an exchange that lists it. JR impresses me as an honorable tout. Buying paper that isn’t listed on a major exchange is just outside my comfort zone. So I bought a call on GDX instead.
        
        To your specific question of have I done a cost/benefit analysis of trading in paper gold, ahh nope, this is my very first “paper” trade lol.
Bruce C.

Ya know, all this happy talk about investing in the breakdown of the financial system is fun and profitable but I’ve recently experienced a few glimpses of the flip side that were palpably sickening and foreboding. Mostly in the form of social breakdowns and chaos at stores (Walmart in particular) and some football games. There was something about them that was more intense and sinister than usual, more people involved and disturbingly complicit. Obviously it’s better to be prepared and flush than not, but if/when the big cities start to go it’s gonna be deadly serious for everyone.
- Brad Thrasher
  
  Hey Bruce,
  
  Some anecdotes to be filed under Behavioral Economics:
  
  A few years back I’m watching Katrina news coverage with a neighbor. He broke our silence with, “Oh F-bomb, that looks exactly like what I saw in Mogadishu.” In the days and weeks after Katrina, the only difference between the gangs and the cops were the colors.
  
  We saw it in Detroit and L.A. in the sixties. We saw it at Kent State in 1970. Look at Libya today. It’s nothing we haven’t seen before.
  
  From istockanalyst.com:
  
  …..economic woes combined with military defeat allowed socialists to seize control of the French capital. Paris was turned upside down, and mobs ruled.
  
  And that’s when Rothschild told his clients … It Was Time To Buy
  
  The story goes that a panic-stricken investor turned up at Rothschild’s office and exclaimed, “You advise me to buy securities now? NOW?! The streets of Paris run with blood.”
  
  Rothschild, calm as ever, answered, “My dear friend, if the streets of Paris were not running with blood, do you think you would be able to buy at the present prices?”
  
  There is a second part to Rothschild’s quote — one that is perhaps even more impressive: Buy when there’s blood in the streets, even if the blood is your own.
  
  Rothschild proved to be quite prescient. French bankers were able to fund a counter-revolution. And the investments that Rothschild and his friends made doubled in value … and then went higher!
  - Bruce C.
    
    Hi Thrash,
    
    First of all, my comment wasn’t necessarily directed at you nor even to the other readers here. I was just trying to express the dichotomy I felt recently between the intellectual analysis of economic/financial opportunities and the corresponding physical and human realities down in “the trenches” as things unfold. It’s very sobering. My point was not to discourage taking advantage of whatever opportunities there are, but just to perhaps be careful of what you wish for and to point out what kind of world, say, $5,000 gold would be imply.
    
    I’m no expert on the similarities and differences of the various upheavals throughout history, so I may be wrong to expect that the consequences of, say, food shortages here (or any modern industrialized country) in 20xx will be any “worse” than usual, but I do. The size and densities of the cities are unprecedented, fewer people than ever know how to produce their own food or provide for themselves, and the the “just-in-time” delivery systems are critical for current lifestyles. If/when that breaks down I think chaos will ensue like never before. Remember, it takes only about 2 weeks for people to starve and I can’t imagine “government” (FEMA ?) taking up the slack in that time, and that’s assuming “the powers that be” would even want to save lives. After all, they may have read Rothschild’s quotes too and may figure that mass starvations would tease prices down even more than otherwise, to get a better deal (and global starvations might solve a lot of global resource allocation problems too).
PeteCA

Bruce … it is good to think about the impact of food shortages in America. It’s not clear whether they will occur, or whether instead family budgets will be eaten up by rampant inflation of food and energy prices. But it would be unrealistic to think that shortages could not happen in the USA. One factor that will play in is that the “supply lines” for our foods stores and supermarkets are really very thin. There are not huge inventories of food supplies. The on-going availability of food is based on efficient transportation (i.e. trucking) of food to stores ever day. If this gets interrupted, people will go hungry fast.

PeteCA
- Brad Thrasher
  
  Hey PeteCA, We might see another example of service interruptions courtesy of Hurricane Irene. I suspect this one is mostly media hype but you never know.
  
  Much behavior is understandable and explainable in Behavioral Economics. I’m certainly no expert though I trust studies in behavioral economics more than the Freudians, Prophecy and other unverifiable theorists.
  
  A good source for BE info is available @ http://www.russellsage.org/
Brandonism

Brad, Pete, and Bruce.
I have to say after reading your posts I was impressed with the discussion and banter. I am a student of history and I am closely attentive to trends, so it wasn’t difficult for me to notice that our economy in parallel with Europe’s economy is in, to say the least, in trouble. I want to know that what I do within the next couple of years with my investment decisions are the right ones, so I have a couple questions that maybe you would be able to advise. First of all: what do you think would be a wise investment for the short term and or long term, i.e Gold and Silver bullion, Gold Mining stocks, numismatic coins, or paper gold? Considering the current situation with the Euro, will the collapse of the Euro be a good indicator of what is to come with the dollar? And finally, how will physical gold and silver help me if there IS and or ISN’T a total collapse? Thanks and I hope to hear from you.
- Brad Thrasher
  
  Did a search and Brandonism is a hoot. In the broad brush scheme of things I see the the subjugation of political organizations and government by corporate governance and NGO’s the larger issue of our time.
  That said, our immediate future seems to be a QE3 funding a massive jobs bill. About time for this Keynesian. We would have been much better served by paying off every residential mortgage than we are bailing out the paper money boys.
  IMO, the single best place to chart your new financial future is buying John Rubino’s book. The next best thing is to do what he says.
  Long term, you want to create a nest egg outside the reach of our financial system. Convert as much of your saivingsextricate yourself from the financial system.convert your paper currency into gold and silver. and non-perishables. get your investments into your hands and control and outside the reach of the financial system.
- Bruce C.
  
  I would also add a few specifics to what Brad said.
  
  Have at least 6 months of living expenses on hand in your local currency (presumably US dollars). Even though inflation/hyper-inflation are the fears of the day a deflationary depression may actually be what happens in which case dollars/cash will be the most valuable thing for your practical finances. Although gold/silver bullion should ultimately preserve your wealth no matter what happens, having to sell it during a deflationary period would not be profitable. In other words, don’t put ALL of your savings into bullion, and certainly not numismatics.
  
  Personally, I don’t think numismatic coins will be that great of an investment. I own some as a form of diversification but they have lagged bullion so far. There are too many potential problems for laymen investors. For one thing, their value is based upon the ratings from businesses like PCGS and that makes me nervous. There is too much conflict of interest. The ratings companies get paid for rating coins so they have an incentive to gradually water down their grading criteria to attract business. Even a few years ago, never mind today as interest in numismatics has increased thanks to Glenn Beck, dealers were finding that coins that were graded, say, MS 62 in 2004 could be re-graded as MS 63 or 64 in 2010, which continues to increase the supply of the higher grade levels. But even if that is not occurring significantly, increased buyer demand also increases the overall supply of graded coins too. Both factors tend to depress future price levels.
  
  Furthermore, in a depressed economy I don’t see people paying big bucks for old coins, however immaculate and rare they may be. I also don’t think any governments are going to try to confiscate private gold again, since no country is on a gold standard any more, and US citizens would probably have the least amount of gold to steal than any other group in the world. (Only Americans are selling their gold, so they won’t even have much gold jewelry soon.) It wouldn’t be worth the political cost to bother with. Few people are patriotic/gullible enough to go along with that again.
  
  I like gold mining shares, at least in theory. We shall see how they play out. Since a lot of my money is in IRAs and 401ks that I can’t liquidate I’m stuck with having to make “paper” investments, and mining shares seem to be an interesting choice given that arena. The irony of it all is if the US dollar does “collapse” it really doesn’t matter if one “makes” ten or even a hundred times their money in FRNs, though I suppose psychologically having a million devalued dollars is better than none. If however, a deflationary depression develops then I’m afraid mining shares will decrease in value too, but they may be the least affected.
joe

What people don’t realize is that the miners are not doing well because all the money that should be going into mining is sitting in gld, pslv, agq, etc. it is simple supply and demand. This money is out of the mining stocks and sitting in paper instruments. There will eventually be a catch up when the paper collapses and people can not get physical metal so they will flood into mining stocks but when is a question and also I suspect the govt will limit the dollars going into mining companies somehow when everyone tries to get in.
- paper is poverty
  
  It shows how early we still are in the gold and silver bull market. If things were really rolling and people were getting greedy, they’d want the additional leverage to the spot price that you can get with miners. Bullion ETFs would be seen as an overly conservative play.
Gilbert

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