With markets in need of a correction, it’s actually quite a difficult environment to be making new picks in. Investing in gold is a key strategy, but this sector’s been so strong that all the good companies have already seen their stock prices go way up. The returns are going to be mostly incremental from existing producers. Like always, the big money will be made with juniors who are making new discoveries.
As a speculative investor, I would actually devote a great deal of my efforts to the junior mining sector, especially given the state of the global economy. The underlying price of gold is going to stay strong for the next several years and institutional investors are on board with this view. Also, the domestic economy still isn’t strong enough to generate the kind of growth that a speculative investor is looking for. Even the technology sector isn’t producing the kind of top-line growth that gets people excited.
As I’ve written before, I like a junior miner to be an existing producer, have lots of cash in the bank with little to no debt, to be currently drilling for more minerals, and have a following from the Street and institutions. There are a lot of these companies out there, but the game has changed now that gold is trading over $1,000 an ounce. Now the business model really makes sense and companies have the cash to go looking for more metal.
The mining business has always been a cyclical industry and the same goes with investor sentiment for the sector. Right now, there is a ton of cash floating around the entire industry and, for investors, it’s time to milk it.
It’s always difficult giving generalized investment advice, because it’s tough to predict markets and each investor has a different view of things. Over the very near term, I would let both the equity and commodity markets consolidate for a while. Then I would be a new buyer of micro-cap gold stocks.
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