There's Gold In those Hills
Last week I received an update from a junior gold miner that I hold in the Small Cap Investor PRO portfolio. The company expects to pull 70,000 ounces of gold from the hills of Mexico in 2010. And looking at gold prices, that translates to a bundle of cash. Gold hasn't dipped below $1,060 over the last six months, and has been consolidating since November when it briefly broke through $1,200.
In the last quarter this company received an average price of $1,119 per ounce, and total cost per ounce was only $425. That's a $694 profit per ounce! That's why I love low cost gold producers, as the price of gold goes up, their margins expand. And the more gold they pull from the ground – well you get the picture.
***Nothing is quite as exciting, or rewarding, as investing in promising small-cap stocks - those on the path to growth, profits, and big returns for their shareholders. I love investing in small-cap stocks, those publicly traded companies with market capitalizations of less than $2 billion. But my favorite and best-performing investments of all time have tended to be the smallest of the small caps, with market capitalization of less than $500 million. These are often called micro caps. I like to discover the unknown stock with great promise and strong fundamentals when nobody else has recognized the potential. And I try to buy growth at value prices.
Sometimes these stocks are not yet listed on the major exchanges like the NYSE, AMEX, or NASDAQ. They may trade on the over-the-counter (OTC) exchange, and I will occasionally invest just before they jump to the major exchanges. To do this they need to pass a number of credibility criteria ranging from minimum stock-price to financial disclosures. While the risk of investing in OTC listed stocks can be higher, so can the opportunity. I've invested in both winners and losers, and the gains from the winners typically more than compensate for the duds.
If, and when, these stocks meet the criteria to jump to a major exchange, shares can soar. Many mutual funds can't invest in OTC listed stocks, but they can once they gain major listing. Demand for the best ones drives share price higher, and I like to have a position before this happens.
In the Small Cap Investor PRO portfolio, we occasionally use this strategy to find high potential small-cap stocks. I wouldn't recommend doing it with all investments, but rather as part of a broader strategy if you're comfortable with the risk inherent to investing in tiny companies.
***The junior gold producer I discussed above recently jumped to the AMEX after meeting the stringent criteria. Shares are trading around my entry price right now, not surprising given the pullback in gold and the stock market this week. But long-term, this low cost junior miner is a great way for small cap investors to gain exposure to gold, and a high growth company.
Look at the below chart and you'll see our stock (the dotted line and left-side scale) compared to the continuous contract for gold (solid line and right-side scale). You can clearly see the recent pull-back in the stock share price. You can also see that the recent divergence in the stock share price as compared to the price of gold is pretty significant – especially by historical standards over the last year.
I believe this divergence will close soon. There are three ways you can play this divergence if you agree with me.
1) You can short gold via the SPDR Gold ETF (NYSE: GLD) if you think gold will drop.
2) You can buy shares of this gold stock if you think, as I do, that it will go up once the market settles down.
3) You could play the spread - short GLD, and buy the individual stock. This is more advanced, and should only be attempted by experienced investors.
I'm watching this stock closely, and if gold prices continue to drop I'd recommend buying shares on the dip. You can find out more about this stock, and get my full research report when you sign up for a no-risk trial subscription to Small Cap Investor PRO. Just click here to get started today!
