Gold Juniors Revving Up for Another Big Move

Posted by on Mar 03, 2010 | No comment

Since 2000, gold prices recorded nine consecutive years of gains, while gold stocks moved higher in fits and starts to trade nearly 10 times higher from the bottom of the HUI Index registered in 2001. Investors who loaded up on blue chip gold mining stocks early in the prior decade made a 10-bagger return.

Junior shares trade differently from their big brothers, however. The significant bull move in gold between 2002 and 2006 produced a lot of 200+% annual returns in the junior gold market. Investors sure remember Seabridge Gold (AMEX: SA), which traded at a mere two bucks in the second quarter of 2005 on its way to nearly $40 reached in the fourth quarter of 2007. Gold bull markets produce these moves in juniors more often than one thinks, and we haven’t even begun the craze phase of this market yet, the bubble stage.

Investors in juniors took a big hit along with the rest of the planet in 2008 and 2009 during the credit crunch, which still persists today amidst inappropriately overly optimistic assumptions of renewed growth coming to the US and European economies. Credit will remain tight for some time, but the increased value juniors will enjoy during this time will have nothing to do with tight credit conditions in the typical sense. Tight credit, instead, will be the catalyst for multiple currency devaluations.

Junior will move with gold because of systemic problems in the currency markets, not because of the Keynesian hocus pocus of renewed inflation fears stemming from an inflationary “demand pull” in the commodities markets. Distrust of fiat currencies leads crowds to seek a return of capital, not a return on capital. That’s how a gold market blow off stage is born.

Currency crises follow credit crises; and that’s where we are now, waiting for the next shoe to drop in this ongoing crisis. Only the timing of the various currency devaluations is in question.

Anticipating coming trouble in the FOREX, a revving of the junior mining market has begun, again, in stealth mode. The past year has been good for juniors, which, as measured by the Gold Stock Strategist Emerging Junior Gold Producers (GSSX) Index (up 120% in 2009) outperforming the gold ETF–GLD, the hedged gold mining index–XAU, and the unhedged gold mining index–HUI, by nearly a four-to-one margin, even outperforming the TSX Venture Exchange of 90%.

A performance like this may scream of “bubble,” but not is the case of junior mining stocks. Bubbles in this sector will end with returns in the thousands of percent in a slew of stocks, not a mere doubling in price of a handful of stocks.

Statistics reveal that in the late ’70s and early ’80s it wasn’t uncommon for juniors to return 10, 20 and 100 times initial investments. And the monetary problems, then, mostly centered on the US dollar. Today, the problem with the dollar is epidemic of all major currencies. The problems with the Euro are expected to spread to the U.K. Pound, then, the US dollar. Seven-hundred million people seeking safety from currency devaluations will no doubt push the gold market higher, creating a larger force of demand witnessed in the ’70s when the dollar was the focus of concern.

Monetization of debt will escalate as the credit crises moves to the next stage. Gold and gold stocks will again take center stage as well, moving in violent bursts to the upside from time to time. We’ve been here before, and it sure looks good for another major move in the gold junior market.

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