Takeover signals a boom for gold junior shares

Arizona Star is not untypical of many junior gold stocks. It is a small gold explorer and development company based in Chile with a 51% stake in the proven Cerro Casale deposit.

The world's biggest gold mining company, Barrack Gold, paid around $450 per ounce for the proven gold in this deposit. Industry analysts say this is a high figure, and considerably higher than the price implied by the very low valuations given to gold junior stocks at present.

Some liken the gold juniors to the Internet stocks of the IT boom of the late 1990s. These were also not taken very seriously by investors until the later stages of what became the dot-com boom, when any company tagged as a dot-com saw its stock market value rocket.

Gold reserves

The plain fact is that the big mining companies have to replenish their reserves or go out of business, and buying junior gold companies is the way to do this. Of course, it helps if they already have proven reserves or hold claims adjacent to existing goldfields where finds are most likely and are easiest to exploit.

Those juniors who have 'moose pasture' in Canada - that is to say the right to prospect on vast claims of dubious potential - are not going to be acquisition targets and are more for the sillier, dot-com type investors.

They are still less foolish, however, than investors who have abandoned precious metals recently. They are going to be shown to be about as wise as the people who gave up on IT stocks in 1998 and thought the Internet a passing fad.

Bull market

For the present weakness of gold is just a bull market correction from the price overshooting above $1,000. Gold also moves inversely to the US dollar, which is rallying at the moment, but is in all probability still in a long-term downtrend.

Besides, monetary inflation is rampant now, courtesy of the central banks pumping billions of dollars into the faltering global economy to support the financial sector, and this guarantees higher consumer price inflation and a higher gold price.

In truth we are back to the stagflation years of the late 1970s and gold still has to get up to $2,400 an ounce just to match its inflation adjusted peak of 1980. Gold will get there, and when it does investment in the gold juniors will show maximum leverage to the gold price. Hence why Barrack has just bought one of the best juniors, and due diligence is being run on many more.

See also:
How to ride the gold and silver bull market, part 2: Buying for maximum upside
How to ride the gold and silver bull market, part 1
Buying on the dips an excellent gold bull market strategy