Minyan Mailbag: Bright Future For Gold Juniors
The juniors are most definitely lagging the seniors right now.
Happy New Year! I appreciate the thoughts the other day about how nervous folks were to be in the juniors. I was just wondering if you can imagine any catalysts/scenarios that would get this group going. I know you said consolidation might be a catalyst, but I feel like we've seen quite a bit of that. I'm just getting frustrated watching gold go parabolic, and sitting with junior after junior(mostly producers/near term producers) that are all 50% off highs and sold relentlessly everyday.
I just don't get the institutions that have them for sale constantly---why own them in the first place---unless they're like RAB or somebody just doing deals for warrants or more Sprott liquidations. I know it's not supposed to be easy, but entering what feels like the fourth year in a row of junior underperformance makes me start to worry that they might never be the right place to be before this bull market ends.
We haven't seen a senior buy a junior since Newmont Mining (NEM) bought Miramar. That market's memory is short. But when we see one again (probably in 1Q sometime), it will no doubt spark further takeover speculation.
"Fourth year of underperformance?" I guess that depends on what juniors you were in. Other than Golden Star (GSS), which has gone sideways for two years, most of my juniors have quadrupled since late 2005 when I first began buying them. One always has to be very selective when buying junior golds, because there are a lot of dogs and many that are very expensive. For what it's worth, the approach I take is to employ a fairly strict valuation method when looking for juniors to buy and only buy juniors that are trading at deep deep discounts to their NAVs.
Also, keep in mind that we might have slightly different perspectives on the sector too. I rode the gold sector up (juniors, intermediates, and seniors) starting in 2000 when I was with the Prudent Bear fund but then exited the sector entirely in late 2003 when valuations in the sector became ridiculously expensive and then stayed away until December of 2005.
I certainly wasn't smart enough to sell the exact peak in the HUI or buy the exact summer 2005 low, but by sticking to a valuation-based approach, I avoided 2004 and early 2005 when most of the juniors went through a two-year bear market following that speculative peak in late 2003. If one bought GSS at $7 when it was pricing in $600 gold (gold was $400 at the time), I can see how one might feel that the juniors have been dogs for four years. But at this point, today is more like 2001 than late 2003. A speculative peak is still a long way away.
All of that said, the juniors are most definitely lagging the seniors right now (like Barrick Gold (ABX), Goldcorp. (GG), etc), which have hit new highs. Then again, that's what always happens early on during a rally. Look back at what the HUI did from the low in the summer of 2005 until December, and then look at what a stock like Minefinders (MFN) did back then. MFN fell during the most of the first portion of the HUI's rally but when it finally rallied in January, it doubled in 3 months: See the chart below.
Click here to enlarge.
At present, you have the added headwind of people fearing that the stock market will collapse and they will be trapped in illiquid junior golds. They're willing to buy the liquid seniors and intermediates, but they want to feel more comfortable before buying the juniors. The problem is that one never knows exactly when the market will suddenly get comfortable, but they will. That's where investing comes into play, rather than speculative trading. One has to simply buy deep value and then wait, or at least that is what I am doing with my junior golds.
Hope that helps,
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