Tickers in this Article: GLD, ABX, GDX, GDXJ, GLDX, RBY, AEM, AUQ, NXG, UXG, BRD
With debt problems both here and in Europe, slowing global economic growth and high inflation expectations, it is no wonder why investors have flocked to gold over the past few months. For many investors, the precious metal's safe haven status and store of value properties have become ever more important in recent years. To that end, more portfolios are clamoring for gold exposure, and the physically backed SPDR Gold Shares (NYSE:GLD) has grown to nearly $70 billion in assets. Overall the ETF has returned more than 30% this year, and the metal itself has produced a 667% return over the last decade. With much uncertainty still plaguing the global economy, gold prices still have some room to run, but greater returns may lie with those smaller miners that are finding new sources of supply.

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Nothing Junior About Them
Some investors have sought to add extra gold exposure via the large-cap mining firms within the sector. While investing in a major international mining concern such as Barrick Gold (NYSE:ABX) can provide stable revenues and rising dividends, thinking small might be a better bet for your gold allocation or at least a portion of it. These junior miners offer some of the greatest leverage with regard to increasing gold demand and rising prices.

These smaller resource firms are the major source of new mines and supply in the world. Functioning as the real exploration firms, the juniors search for new mineral deposits, often without many of the bureaucratic red tape associated with larger mining firms. It's easier for a smaller miner to go out, buy some land and start prospecting. The juniors are absolutely critical in the early stages of new deposits.

More importantly, these firms have what the world's larger mining companies need to replace reserves and grow their asset bases. These are the real merger and acquisition (M&A) targets of the natural resources sector. A recent report by PricewaterhouseCoopers highlights the potential for increased M&A activity within the mining sector, likening it to a "global arms race", saying "With few large targets in play and diminishing key resource reserves, we expect global miners will continue to scour the globe for projects and broaden their deal strategies." With gold continuing to trade at higher prices and demand rising steadily, the larger mining firms have plenty of reasons to look at the juniors to increase their own mine supplies. (For related reading, see What Makes An M&A Deal Work?)

The Anti-Pyrite Portfolio
Another reason to be bullish on the juniors' prospects is they're cheaper than their larger twins. The large-cap Market Vectors Gold Miners ETF (NYSE:GDX) was up about 9.5% in August and has gained 7.7% year to date. Meanwhile, the junior-focused Market Vectors Junior Gold Miners ETF (NYSE:GDXJ) is down about 4.6% in 2011. For investors, adding a swath of junior E&P miners could be one the better long-term bets in the sector. Adding the Market Vectors fund or the new Global X Gold Explorers ETF (NYSE:GLDX) is an easy way to gain exposure. However, some of the best gains may lie in individual firms.

Rubicon Minerals (NYSE:RBY) could be an interesting starting point for investors. The miner recently published a decrease in resources, which sent shares falling. However, major miner Agnico-Eagle (NYSE:AEM) swooped in, buying a 9.2% stake in the firm for $70 million. With prime real estate in Canada, it might not be long before Rubicon is bought out completely.

Sometimes juniors take matters into their own hands. The recent offer from AuRico (NYSE:AUQ) (formally Gammon) to purchase Northgate Minerals (NYSE:NXG) could create one of the better mid-tier miners with significant operational cash flows. For investors, the tie-up could be one of the better ways to play the sector.

The Bottom Line
With uncertainty still plaguing the global macroeconomic situation, investors have flocked to gold in spades. However, some of the best gains may be in the smaller miners rather than the metal itself. As the source of new mine supply, stocks like Brigus Gold (NYSE:BRD) will see their stars rise. (For more on gold, see Gold: The Other Currency.)

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