It's Time for the Junior Gold Miners

01/19/2010 1:00 pm EST

Focus: ETFS

Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, says smaller gold mining stocks have had a good run, but they should go much further before the bull market in gold ends.

The dollar is breaking down, and our indicators for the gold mining stocks have turned bullish once again.

[The] awful December employment report dealt a blow to the post-December US dollar bear market rally. I’ve had my doubts all along, since the cards are not in place for a vigorous economic recovery—at least not yet.

The Dollar Index had been smashed to bits heading into December and was long overdue for a rally. I think we’ve had that rally for now or until the next important batch of economic data.

The market has been too aggressive discounting rate hikes by the Federal Reserve this summer; it won’t happen. The Fed has never raised interest rates when the unemployment rate is rising. This is dollar-bearish action.

Throughout this great rally, I’ve stuck to the large-cap gold stocks—and I still believe this is where you must overweight a mining portfolio. Of course, you should also hold a big chunk of gold and silver.

Despite the biggest bull market in history for gold, the majority of junior and mid-sized mining companies has struggled this decade because of soaring input costs, labor, and poor management. You’ve gone nowhere in most of these stocks over the last decade.

But the next phase of this bull market will probably see more speculative mines taken over by the bigger boys as the latter seek to grow their reserves through acquisitions in an era of declining gold production and soaring costs. The big boys have the balance sheets and the cash, while the junior mines—at least the stronger prospects—will increasingly find themselves sought after as buyouts accelerate.

The TSX Venture Composite Index, [which] includes mostly junior mining and energy [stocks], hit a high at 3,369.79 in mid-2008 and has since declined a cumulative 52%. From its decade low earlier last year the Toronto Venture Index has recovered 135% heading into this week. That might seem impressive but let’s remember that we’re still more than 50% off the peak.

This week, we’re buying the recently issued Van Eck Market Vectors Junior Gold Miners ETF (NYSEArca: GDXJ). This new ETF holds a diversified basket of terrific prospects, Rubicon Minerals, which we [liked] last August at $2.85. RBY now trades at $5.21 or an 83% return.

Many other stocks have this or similar potential in GDXJ. In fact, most of the juniors have gone through the roof since last spring as gold prices continue to hit new highs. But compared to where they should be trading over the next 12 months, I think they’re cheap. I’m pretty convinced you’ll see a mania or “bubble” materialize for this group as gold heads higher, supported by rising mergers activity, courtesy of the large-cap gold mines.

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