mustbepatient (99.30)

Gold - disconnect between large-cap and small-cap gold stocks

October 08, 2008 – Comments (0) | RELATED TICKERS: ROY , KGN , GBN

This chart shows the TSX Venture exchange composite index compared to the HUI.  The TSXV is mainly comprised of junior resource companies (specifically gold and silver), and the HUI is comprised of larger gold miners.

 http://stockcharts.com/h-sc/ui?s=$CDNX:$HUI&p=D&yr=3&mn=0&dy=0&id=p78072081499

Here's the HUI relative to gold:

http://stockcharts.com/h-sc/ui?s=$HUI:$GOLD&p=D&yr=3&mn=0&dy=0&id=p78072081499

Obviously, the junior gold stocks have been crushed relative to the majors, and in turn the majors have been crushed relative to gold itself.

I the problems the market sees are:

a) a lack of liquidity on the buy side combined with a lot of forced selling,

b) renewed concern that many of these explorers will never get funded to production, considering the current credit crunch,

c) concern that world-wide property risk is increasing for resource companies, and

d) disillusionment among gold bugs that miners didn't make much money even with gold at $900+.

Liquidity will return and the forced selling will end, as it always does.

The banks that are left standing will still lend money to build mines if they have good rates of return.  If not, new money will come in chasing the returns that are possible out there.

The political risk is real, IMHO, and I am avoiding investments in countries showing a willingness to loot resource companies.  Spreading investments across countries is important (not even the US is necessarily safe, as evidenced by the extra taxes on oil companies).

Miners didn't make much money for a while because, while gold went up, other resources used in production (notably oil) went up even more.  The gold miners (and their stocks) will tend to do well when gold rises against everything else.  That is happening now, but the stock crash has retarded the gold-stock response so far.  I don't think the stocks will be held down much longer, and we may have already seen the bottom.

 In short, I am a big buyer of gold stocks right now, especially the juniors.