For many commodity and resource-related companies, their stock prices have taken a bit of a rest over the last month or so. I still contend that 2006 is going to be the year of precious metals and any sectoral weakness in this area is a buying opportunity.
Investor interest in precious metal stocks always tends to occur in waves. Make no mistake; these companies are speculative investments, even the large-cap companies with well established operations.
If you want to have exposure to this sector of the market (which I think is a good idea right now) then you only want to consider the market leaders. Diversification is always key with these stocks, so you might think of owning a basket of stocks, perhaps including a highly speculative junior pick, a well established intermediate producer, and then a well-known large-cap leader.
One junior speculative company that I came across recently, Desert Sun Mining (AMEX/DEZ), just got bought out by one of my favorite intermediate producers, Yamana Gold (AMEX/AUY). Just like the technology and financial industries, mergers and acquisitions happen quickly and the market leaders are always a target. In this case, a junior producer was bought out by an intermediate producer that is trying to become a large-cap leader in the marketplace.
Very often in the mining business, it is easier for a company to issue shares and raise a pile of cash, then just go out and purchase other attractive companies. Consolidation and economies of scale really works in the mining business.
One of the Street’s favorite large-cap gold plays is Goldcorp (NYSE/GG). It’s hard to beat this company in the gold business. If you believe in the continued strength of the gold market, this company is worthy of consideration.
In my view, some precious metal exposure is a necessity in a well balanced equity portfolio. This applies to both institutional pools of money, as well as individual portfolios. There are going to be bumps along the road, but the precious metals rally remains intact.