Will Junior Gold Stocks Take the Crown?

Justice Litle, Editorial Director, Taipan Publishing Group
Tuesday, 02 June 2009 00:00

If Crisis Trader editor Christian DeHaemer is right, junior gold stocks could take the crown as performance kings over the next two years. Read on to find out why.

To begin, a quick clarification from last week. In the discussion on gold as a form of crisis insurance, I didn’t mean to imply (as some thought) that no one on Wall Street is buying gold.

Rather, the point was that the majority of hidebound institutions are not yet buying gold in size. (If they were, the price would be much higher.)

In regard to some of the more flexible, sharper players on the street – the ones who aren’t afraid to make gutsy calls and march to their own rhythms – there’s been “a whole lotta buyin’ goin’ on.”

As I wrote to Macro Trader members a few weeks ago,

In the hedge fund world you have little dogs and you have big dogs. Some of the biggest dogs on the porch have made gigantic bets on gold.

I don’t pay attention to what a particular hedge fund does unless I know their track record and know their way of thinking. And in that respect, some of the managers I have deep respect for – like John Paulson of Paulson & Co. and David Einhorn of Greenlight Capital – have very strong bullish views on gold. They are seeing the same things Macro Trader sees, and doing the same math.

John Paulson (no relation to Hank) and David Einhorn alone have gold and gold stock positions running well into the multi-billions for their respective funds. (Now that’s what you call conviction.)

Macro Trader does not swing quite as big a line as that. But we too have numerous gold and silver positions on – in both select companies and the underlying metals themselves. Some of these are already boasting triple-digit gains.

My fellow Taipaners have snared big chunks of the action too. Zach Scheidt is rubbing his hands with glee over the potentially huge gold and silver gains in store for Death Cross Trader readers, and Christian DeHaemer of Crisis Trader believes the best by far is still yet to come.

Speaking of which, I recently had a chance to chat with Christian DeHaemer – an uncommon thing, as he is a man of few words – and he was enthusiastic in sharing a pretty bold view.

The way DeHaemer sees it, junior gold stocks will be the number one asset class over the next two years. They are poised to take the crown as performance kings. If DeHaemer is correct on this controversial call, junior golds could potentially make you more money than any other area of the market between now and 2011.

Via Crisis Trader and other services, DeHaemer has built a market-beating track record that extends beyond a decade. So with that in mind, I thought I would share his reasoning, interview style, as to why he feels so strongly about junior golds right now.

JL: How’s the current financial crisis treating you, Christian?

CD: Hi Justice. Not too bad actually. I bought a lot of stocks starting in December and I’ve been banking a lot of gains in anticipation of another down leg. Gains like 85% from Russian ETF calls, 131% from a small miner, and 85% gains from Vimpel-Com – a Russian telecom company – just to name a few.

JL: Congratulations on those. So, have you switched directions to become a net seller now?

CD: Yes, it’s time to free up some cash and wait for the summer bottom. I don’t know if we’ll retest the 666 low on the S&P 500, but it seems more likely than not.

JL: Given this prediction, where would you advise our readers to put their money?

CD: Hands down, the best performing asset class over the next two years will be junior gold miners.

JL: Why is that, would you say? I mean, our readers are familiar with the general case by now... but what’s the case in your own words?

CD: Several factors come to mind. For one thing, the U.S. is creating more money than at any time in history in an effort to inflate the next bubble, save the banks, and extend the hand of government. Bloomberg has put the total bailout bill at $12.8 trillion, which is roughly this year’s annual GDP. The profligate spending by current and past administrations is well documented and ultimately must lead to inflation. What we are seeing now is the de facto definition of an inflation-generating machine.

JL: Too much paper money chasing too few goods and so on.

CD: Exactly. We have seen from the 1970s that hard assets perform better in a high inflation environment. Add to this a falling dollar, which is the other side of the same coin, and a flight away from paper currencies into gold, and you get a powerful long-term trend in real assets like oil and gold.

JL: It seems that gold should continue to perform well in the event of either extreme – whether it be stimulus- driven boom (as a form of inflation buffer) or a fear-driven panic (as a form of insurance).

CD: Yes, I think that’s true. Gold is the best of both worlds and has a natural place in one’s portfolio. But you shouldn’t just buy gold. Gold will only double over the next two years. That’s not bad, but it’s possible to do much, much better. You should buy junior gold mining companies.

JL: But why junior golds?

CD: Because it’s a low-risk, high-reward scenario. Junior gold stocks didn’t fully participate in the rally that drove gold from $250 to $1,000 per ounce over the last seven years. But they absolutely got hammered in the commodity/credit bust of 2008. Many fell by 75% or more. And these are the top-tier, small companies with little or no debt and plenty of proven reserves. These are companies that were trading at market caps from $500 million to $1 billion a few years ago, that you can now buy in the $100 million range… in December I was able to pick up some of these small-cap gold companies for little more than the cash they had in the bank.

JL: If these stocks didn’t participate in gold’s extended multi-year rally earlier this decade, why do you see them taking off now (and doing so well in the next two years)?

CD: Well, they did participate at first. When gold surged to $600, one of the junior gold stocks I follow passed $3 per share. Then it fell back to $1 or so as a result of the credit crisis. Now their balance sheet is in much better shape in comparison to back then. They’ve found more gold. Costs (which are primarily equipment, real-estate and oil) have been cut in half. And the price of their product, gold, is heading towards $1,000 per ounce.
And yet, because of the credit crisis and the temporary hedge fund blowout in commodities last year, the stock went back to trading for a buck. It doesn’t get any better than that in terms of when to buy.

JL: Doesn’t get any better, eh?

CD: Well hold on, I spoke too soon. Maybe it does get better. The credit crisis also has shut down a large chunk of mining competition. Call it survival of the fittest. As a result there won’t be a supply surge to hold down prices. So, you have a situation where gold is in high and rising demand... margins are up, costs down... supply has been constrained... and many very smart people are predicting that gold will go to $2,000.

JL: And you already have some clear junior gold buying targets on your radar screen?

CD: Sure. The company I’m thinking of right now has plenty of cash, plenty of reserves, plenty of funding... in terms of conservative historical valuation it should be selling at $4.50 today, not the far lower levels we’re getting. If gold goes to $2,000, it’s easily a $12-$15 stock based on increased margins alone. And $2,000 gold is a very likely scenario. In fact, I’ve yet to hear a valid argument that says it won’t happen.

JL: Thanks Christian. How many junior gold names like this do you know of offhand?

CD: At least four – all U.S. traded companies with solid balance sheets and proven reserves. These are fantastic buys. In two years you’ll be hearing about them on CNBC as the best performing assets in the country. The downside risk is very limited. You want to start buying them now.

JL: Duly noted. I’m sure you’ll be rolling out these names to Crisis Trader subscribers too.

CD: Absolutely.

Ed. Note: To find out more about Christian DeHaemer and Crisis Trader, follow this link.

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