Investing in gold 2006; Part Two: exploration companies

If you look at the prices of large gold mining companies in 2005 then a very attractive advance is seen, particularly in the second half of the year. Yet the share prices of the much smaller market capitalization junior gold exploration companies have hardly moved in many cases.

This is a market anomaly. How can the underlying value of gold shift by 20-25% and the companies that actually search for gold stay unchanged in value? Vancouver-based Saks Investment Group notes that 'when small capitalization mining stocks enter a bull phase, the rule of thumb is that they outperform large mining stocks by 300-1000%.'

Biotechs of the late 2000s?

Franklin Templeton Investments' Steve Land goes further and argues: 'These junior companies are like biotechnology stocks. You can make a lot of money if you have the right project. They are cheaper than bigger stocks and safer than ever because of the cushion from gold prices being so high.'

The downside for investors in junior gold exploration stocks is that you need to be patient. The clever thing to do is to buy while prices are low and the investment action is in bullion and gold producer stocks. Buy and hold at low prices.

For gold exploration stocks tend to suddenly deliver massive out performance late in the gold cycle, but by then everyone may be buying them like the Nasdaq in early 2000; like the dot-com stocks, gold explorers offer the future possibility of great wealth which is what the over-optimistic investor usually buys.

Joe Granville, the legendary 84-year old analyst with one of the most expensive newsletters in the business (www.granvilleletter.com), has recommended Linux Gold Corporation (www.linuxgoldcorp.com) as his top pick for 2006, ahead of Bema Gold and GoldCorp. Linux has five gold exploration projects and well-regarded management, but its low market capitalization might frighten off the more cautious investor.

Saks Investment Group also tips Linux Gold, and has four other smaller gold companies to recommend to investors in the Middle East, depending on market conditions at the time: Avino Silver and Gold Mines (www.avino.com); Skyharbour Resources (www.skyharbourltd.com); Teryl Resources (www.terylresources.com); NovaGold Resources (www.novagold.net); and Glencairn Gold Corp (www.glencairngold.com).

Junior gold stock research

This is presently an under-researched area of the stock market, and most of these companies have very low stock market capitalizations, and low share prices. However, this makes it possible to accumulate large volumes of shares at low prices, and if the price of gold keeps on rising then eventually the price of junior gold exploration companies has to follow. Other sources of gold exploration company tips are www.goldseek.com and www.stock-tracker.net.

For those allocating cash within a gold portfolio, it is therefore worth considering the inclusion of a few gold exploration minnows; these could be the high performers of the future that will improve the overall portfolio performance.

It has to be said that the downside risk of the junior gold exploration stocks does not look very significant, particularly if you stick to firms recommended by industry experts. For one thing, these shares have not moved up much with the gold price so far, thus if gold suddenly moved down again, it would be a fair assumption that they would stay unchanged.