Look for Profit Among Junior Gold Miners

In the last few trading sessions, gold has been steadily assaulting the $1,300-an-ounce resistance level. It appears that very few traders doubt it will hit that new high in the near term, considering the recent high on the spot market of $1,278.90 per ounce of gold. Of course, whenever gold rallies this strongly, the inevitable question on investors’ lips is: how much upside momentum is still left in the bullion and, more importantly, how could they make the best of it while the gold is still surging?

Gold bugs believe that there is plenty of upside momentum left and they are framing it in terms of years, not months. Their reasoning appears sound — there are so many factors driving the price of gold upward, such as volatile currency markets, über-sized government deficits, more economic stimulus potentially creating an inflationary wave, and the still weak global economy. Neither of these factors is likely to back down anytime soon and thus neither is the price of gold.

The good news this time is that not only gold bugs are preaching to the choir. It seems that quite a few respected gold analysts also believe gold is truly in a long-term bull market. Additionally, gold fundamentals support the argument that gold is not likely going to morph into an asset bubble.

As far as future gold price predictions go, some gold analysts are rooting for the gold price of $2,300. Why this price of $2,300 per ounce? Simply, the price of $2,300 per ounce of gold approximates the price that gold had reached in January 1980 after inflation is taken into the equation.

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What analysts are also saying is that this price cannot be reached overnight. Investing in gold is like running a marathon. There will always be short sprints along the way, but the pace is usually steady and takes its time to reach the peak.

Of course, investors should not ignore other, more hesitant voices when it comes to the price of gold both short-term and long-term. The hesitancy, at least in the short term, comes from the fact that, in the past 30 days or so, gold has rallied almost $60.00. Not that gold usually follows the typical dynamic of a bull market, but still, most bull markets move in fits and starts. Additionally, most bull markets are known for sharp corrections after steep surges. I would agree with the fits and starts theory, but only to the extent that, if there is any short-term downturn in gold, it will be due to some profit-taking, and not due to bearish fundamentals.

Watching the volume of trading in gold stocks can tell volumes. I’m seeing sharp volume increases among large-cap gold stocks, which signals that institutions are flooding these names with capital. It seems that even portfolio managers who have never even considered gold before are now trying to get on the gravy train. Since they have liquidity obligations to the funds they manage, they need to buy mature issues that are trading at least two to three million shares daily.

Eventually, however, they will run out of large-caps in which to invest. Most prospectuses in the case of registered funds, or trust agreements and fund declarations in the case of non-registered funds, limit an individual fund’s exposure to gold. And, as the gold bull market matures, I expect to see more institutional money going into more speculative, junior mining companies.

What should you look for in gold juniors before institutions move in and take over the market in mid-sized and small-cap companies, too? I always examine a gold mining company’s exploration projects, their proven and probable reserves, prospects for mine building, local infrastructure and workforce, any issues with local environmental authorities, etc. Actually, the emphasis is on the reserves, because large-caps are literally running out of ounces to both mine and sell, while juniors are just starting to build theirs.

Furthermore, I like junior miners that are sticking to actual mining and selling of gold and not playing with hedge books. Finally, there is always profit to be hauled in when a junior gold miner becomes the object of a takeover. What should you look for there? Gold mining is an extremely capital-intensive industry. So, a good candidate for a takeover would be a company with strong exploration projects, but that’s short on cash to develop them.