In order to stop the current crisis, the Federal Reserve and Treasury Departments have been pulling out all the stops - bailouts, loans and our huge economic stimulus package. While the government seems to be making some bold moves in stabilizing the economy, it isn't coming cheap. Besides the physical cost (higher taxes), all of this economic shock and awe is creating a new, but potentially dangerous problem: inflation.

Gold is typically seen as an inflation-safe haven, keeping or increasing its value even in times of duress. Certainly, the current economic strife we are experiencing is the sort of ammunition for which gold bugs yearn. The price of gold has risen accordingly, with the grim news. More recently, the price has retreated with glimmers of a possible recovery by the end of 2009 or in early 2010. This short term break gives long term investors an entry point to help sway the tides of inflation on their portfolios.

IN PICTURES: Eight Ways To Survive A Market Downturn

Buying the Junior Miners

There are several ways for investors to purchase and own gold in their portfolios, including the two very popular exchange traded funds. Both the SPDR Gold Shares (NYSE: GLD) and the iShares COMEX Gold Trust (NYSE: IAU) hold the physical metal and represent one-tenth of an ounce of gold. While, not a direct inflation hedge, mining stocks do tend to follow the ups and downs of an ounce of gold. As an added bonus, investors can participate in company driven "upside surprises" and long-term growth caused by economic conditions.

One of the few real catalysts for portfolio growth in the natural resource sector are those of the junior miners. Essentially serving as exploration firms, this group of stocks searches for new mineral deposits and are a major source of future mine supply. These companies may or may not operate physical mines and often own swaths of untested property. Major producers see the juniors as a way to add to their overall reserves and will often partner with or buyout these mid-tier producers.

Digging for Gold
Junior junior mining companies with proven mineral reserves are preferable over those with large reserves. Arguably, governmental and environmental regulations could be the biggest determining factor in junior miner health. Crystallex International's (AMEX: KRY) Las Cristinas project is one of the largest undeveloped gold deposits in the world. However, recent moves by the Venezuelan government to nationalize natural resource production in the country could put this venture at risk of failure. Miners operating in unfriendly nations or regions should be avoided. In addition, those with actual mining operations and yearly production goals should be given favorable treatment. Below are a few low-priced junior mining stocks that met the above criteria.

Northgate Minerals Corporation (AMEX: NXG) finished 2008 with total proven and probable reserves of 39.76 million tons. This includes 1.28 million ounces of gold and 126 million pounds of copper. Northgate added to its own reserves through its recent purchase of Perseverance Corporation. The company produced 354,800 ounces of gold during 2008 in its four operational mines throughout Canada and Australia at a cash cost of $447 per ounce, and finished 2008 with $62 million in cash.

With one of the highest per capita GDP rates in Africa, Ghana is home to the Ashanti Gold Belt. With two main mines in the area, Golden Star Resources (AMEX: GSS) is in thick of the fertile gold region. The miner had 3.28 million ounces of proven and inferred reserves at the end of 2008. In addition, Golden Star has several exploration assets in Western Africa and Brazil. The company reported record annual sales of 295,926 ounces of gold and a quarterly cash cost of $637 per ounce.

NovaGold Resources (AMEX: NG) benefits from one of the largest proven resource bases of any public junior mining company. 21.3 million ounces of gold, 62 million ounces of silver and 4.5 billion pounds of copper, all located within Alaska and British Columbia. Add this to its partnerships with top producers such as Barrick Gold Corporation (NYSE: ABX) and Teck Cominco Limited (NYSE: TCK), and you have a recipe for success.

Bottom Line
While the Federal Reserve and world governments seem to be making the right moves in stabilizing the world's economy, they are creating a potentially large inflationary future environment. In the short term, gold (the ultimate inflation hedge) has been dropping due to economic recovery hopes. For long term investors, this represents a buying opportunity. The proceeding junior mining stocks offer investors a way to protect themselves from inflation, as well as profit from the consolidating nature of the natural resource industry. (In addition, read 8 Reasons To Own Gold to learn more about the benefits of owning gold)

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