With gold now trading solidly over the magic $500 number, one would expect gold stocks, including the Juniors, to be marching in step. So far that hasn't been the case - but the pace may be about to quicken.
"At some point, there's going to be some real catch-up ball to play," says Robert M. Shields, Jr., president and CEO of Piedmont Mining Inc. Shields is also the originator of the Junior Index, published on GoldColony.com.
Shields created the index in December 2003. It peaked at 164 in early 2004, before it began a continuing downtrend that ended in May when it bottomed out at around 100. "With gold now over $500 an ounce, this index should be somewhere between 200 - 300," says Shields.
Instead, the index was only 126.56 on December 7. Shields says he's mystified at the disconnect between the activity of the Juniors and the gold price. "I suppose anybody can think up answers," he says. Investors may be worried about costs. Or maybe the answer lies in a lack of positive, exciting news, says Shields. "We need a good exciting new discovery, or a blockbuster merger. That's what gets people going."
Shields may get that blockbuster merger soon. According to a recent article in the Canadian Press, the majors are scrambling to replace reserves and production now that gold is trading above $500 for the first time since November 1987. The industry is not very profitable below $500/oz., so the big players have been slow to invest in new properties. The fastest way to acquire additional mines may be to buy up smaller companies that have already completed the exploration and permitting processes.
Jay Taylor, who consulted with Shields on the formation of the Junior Index, thinks it's just a matter of time before the Junior stocks take flight. Taylor, editor of J. Taylor's Gold & Technology Stock Report, isn't necessarily surprised that the Juniors have lagged both the Majors and the gold price. "Money moves down the food chain, so it makes sense that the Juniors would be the last to come back," says Taylor. "I think that's to be expected."
That said, Taylor thinks today's index, at 126.56, is indicative of a break in the downward trend. "It seems that the index has turned up, so I'm hopeful."
As for the reliability and usefulness of the index, both Taylor and Ian McAvity believe it is a useful measure of junior stocks. "It's not mathematically perfect, but it's a good model," says McAvity, editor of Deliberations on World Markets. And it's apparently the only model out there, at least for public viewing. McAvity says that there are one or two brokers in Canada who have created a similar model, but theirs are not "readily accessible," he says.
Taylor uses the index as a measure of his portfolio, "to see how we're doing," he says. "My juniors run the gamut," says Taylor. "And the index is more or less pretty close to what my performance is. I think it's a good proxy for Juniors."
The index contains 50 stocks. With several mergers in the works, Shields will have to make a couple of substitutions soon. He says he has a list of about 18 potential companies, six or eight of which are good candidates to replace those that drop off the index.
Stocks are selected for the list on the basis of several criteria. They must be primarily gold companies and primarily in exploration, rather than production. Shields also looks for companies that have solid management teams, and properties with substance. "We're not looking at those that have just a moose pasture or pretty maps," he says.
Size is also a factor. To be eligible for the list, a company's stock price must be no higher than $10 at the time it is listed.
Visit The GOLD Report - www.theaureport.com - a unique, free site featuring summaries of articles from major publications, specific recommendations from top worldwide analysts and portfolio managers covering gold stocks, and a directory, with samples, of precious metals newsletters. To subscribe, please complete our online form, or send an email with the word 'Subscribe' in the subject field to firstname.lastname@example.org.
The GOLD Report is Copyright © 2005 by Streetwise Inc. All rights are reserved. Streetwise Inc. hereby grants an unrestricted license to use or disseminate this copyrighted material only in whole (and always including this disclaimer), but never in part. The GOLD Report does not render investment advice and does not endorse or recommend the business, products, services or securities of any company mentioned in this report. From time to time, Streetwise Inc. directors, officers, employees or members of their families may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise. Streetwise Inc. does not guarantee the accuracy or thoroughness of the information reported.