Junior gold exploration stocks leverage a gold bull market. Therefore in 2006 they outperformed gold until the $725 an ounce peak in May, and then underperformed in the gold market correction. Now that this correction seems close or past the bottom, loading up on junior gold explorers could be hugely profitable.
In a world where stretched asset valuations are the order of the day it is rare to spot a bargain. And yet the current bombed out shares of the junior gold explorers present just such an opportunity.
Indeed, they are both an absolute and relative bargain. Absolute because many junior gold explorer prices have shifted by far less than the price of the gold seniors in recent years; and cheap relative to other asset classes which have all shot up on the back of low interest rates.
Serious investors are beginning to take notice. The website www.goldseek.com has seen a massive rise in visitor numbers, and is the best single source of gold information on the Internet. It lists numerous junior gold explorers and offers the chance to buy research on this tiny sector.
Undervalued gold reserves
The argument for buying on a selective basis is simple: as the price of gold increases the value of gold reserves rise even faster as the potential profits for gold producers are higher after paying relatively fixed overheads.
Junior gold exploration companies are firms that have staked claims to sites for gold exploration on the basis of geological surveys. Generally they paid but a fraction of what such reserves are worth at today's gold price. However, in the case of many of these firms their share price reflects nothing like this reserve valuation.
Now it may readily be commented that such reserve valuations might prove false or misleading. But properly run companies file accounts and have audits by qualified persons. They are also likely managed by experts in the field who hold large shareholdings and are hardly in the business of misleading themselves.
Some see the junior gold explorers as the dot-com stocks of the coming gold boom. And it is true that Deutsche Bank and JP Morgan are among those calling a bull gold market for 2007. Then surely the gold stocks that will rise most strongly will be those with the most potential for the future and not those already established?
And if you want a better justification then the concept of valuing a share according to its likely gold reserves should appeal. For at present the junior gold explorers are wrongly priced at a discount to the gold majors whose market value is far closer to reserve valuations.
On the matter of timing the buying of junior gold explorers, be careful! Waiting for the gold price to bottom out and resume its bull market trend might be too late, as the best managed and researched junior gold miners have a tiny free share float, and the takeoff, if it comes will be dramatic.