Sovereign Funds Load Up
It seems like every financial journal or publication has been extolling the benefits of gold over the last year. Sometimes widespread acceptance of a trend is a sure sign of a bubble waiting to pop. But that’s not the case with the precious metal right now, especially if you play the trend by investing in junior gold miners.
It's true that gold miners stand to make big profits if the price of gold continues to increase from its current price of $1,120 an ounce. But even if it doesn't, these little companies still maintain big margins that ultimately trickle down to earnings. That’s because their gold recovery costs are essentially fixed - everything above those costs is pure gravy.
The worst thing investors can do right now is to ignore this trend. Just because you weren’t buying gold at $850 or $1,000 doesn’t mean you missed the boat. And waiting will only make it worse because a big pullback just isn’t likely to happen. But what is likely is that investors who buy and maintain positions in strong gold mining companies will be sitting on nice gains in a few years, if not a few months. And the best investments right now are the junior miners.
When gold was making its strong climb to $1,218 an ounce it was the junior miners that saw their stocks climb sharply higher. Shares of small-cap companies like NovaGold Resources (AMEX: NG) shot up 65% over the last 52-weeks while large-cap players like Newmont Mining (NYSE: NEM) only rose 10.5%.
Small-Cap Investor PRO subscribers were recently introduced to the cheapest junior gold miner I could find. This little company's stock is currently trading at $3.50 per share and has a market cap of only $170 million. Yet it's sitting on reserves worth over $1.1 billion! What's more, this company recently was approved for listing on the American Stock Exchange and completed a 4:1 reverse stock split. It is also partnering with another junior gold miner to go after big gold reserves in the hills of Mexico.
During the recent sell-off, this speculative small-cap stock sold off to $3.00 under irrational selling pressure. I urged subscribers to pick up shares, and just two weeks later the stock is back up to $3.50. That's a 17% gain in just two weeks, with more on the way. What's more, it's currently trading with a PE of only 15.3, a huge discount to other small-caps juniors like Seabridge Gold (AMEX: SA) which has a current PE 97. To learn more about this high potential small-cap junior minor, sign up for a risk-free trial subscription to Small-Cap Investor PRO. Just click here to learn more about this stock today!
***So what about rumors of a bubble in gold? This is a situation where it literally pays to take a closer look. Last month at the Davos conference in Switzerland George Soros (one of the greatest speculative investors in history) made headlines when he said “The ultimate asset bubble is gold.”
I always like to dig into these statements a little. Sure enough, recent SEC filings reveal that at the same time Soros was saying gold could become a bubble, his Soros Fund Management was buying 6.2 million shares of the SPDR Gold Trust ETF (NYSE: GLD) for $663 million.
Based on the timing of the filing and Soros' comments, it's reasonable to assume that Soros was buying gold in December when it was trading around $1,120. Gold is on the verge of breaking above that range now. Just take a look at this one year chart that shows the continuous contract of gold and you'll see what I mean.
So what do we do with the information that George Soros is now buying? To start, we assume that he sees the potential for a big move higher in gold. But one man's opinion does not make gold's move guaranteed. So I like to look at what is going on at a larger scale. And buying by sovereign wealth funds shows me that this is indeed more than just one man's opinion.
Central banks around the world are buying gold too. This demand is helping to propel gold prices higher. India, Russia, and China are just three countries that have increased gold reserves in recent months. In November, India bought 200 metric tons from the International Monetary Fund. Hedge-funds are bullish on gold too. In fact, Albert Friedberg, a Toronto based hedge-fund manager and regular Barron's contributor recently bought a 24% stake in junior miner Seabridge Gold (AMEX: SA).
Buying by these huge funds is putting almost a permanent bid under gold, keeping the precious metal from falling far from its current range between $1,075 and $1,150. The permanent bid comes from two reasons: a weak U.S. dollar and inflation fears.
Gold prices have continued to soar as concern over inflation increases. And those inflation fears are being fueled by historically low interest rates, an oversupply of money, and out of control fiscal and monetary stimulus around the world that aims to jumpstart the global economy. A growing trend of Asia's developing economies diversifying away from U.S. treasuries and into gold isn't hurting either.
The bull market in gold has room to run. But don't just take my word for it. Considering that there are massive funds with billions of dollars flowing into gold and gold stocks should help to drive home the reality that this is not a bubble waiting to pop. Individual investors should consider buying shares of gold miners to capitalize on increasing demand for the precious metal.
