For investors looking to position themselves in the gold market the argument is perhaps that they are too late. It is true you can no longer pick up gold for $250 an ounce like in 2002 when Dr. Marc Faber published his book ‘Tomorrow’s Gold’.
However, as with any advancing major asset class even after a serious upward movement, you will find that anomalies are created. In short, not every boat rides higher on the rising tide, and you should buy that boat before somebody else spots it!
To invest in gold there are three major routes: physical gold or gold deposit certificates such as those of the Perth Mint; exchange traded funds underpinned by gold holdings; and the shares of gold producers and the gold junior explorers.
It is worth considering these two types of gold share separately. The shares of large gold producers are leveraged to the gold price.
Put simply their operating costs stay relatively unchanged so when the gold price moves up you get the whole marginal profit to leverage the share price and that movement will usually be more than the increase in the gold price.
Junior gold exploration companies own the rights to mine on land that is reckoned by geologists to offer the prospect of finding gold. These rights are known as claims and have a marketable value which will increase with the value of the physical metal.
In the past when the gold price has advanced significantly the maximum leverage has been achieved by investment in such junior gold exploration companies whose claims are then likely to be most in demand, both from other juniors and the gold majors, and rise in value, particularly if gold deposits have been found.
This is why the winner of the 2006 Time Digest prize for ‘Gold Timer of the Year’, the famous octogenarian investor Joe Granville recommended the junior stock Linux Gold as his top pick for 2007, alongside the more recognizable major names of Agnico Eagle, Barrick Gold, Gold Fields and Gammon Lake Resources.
Resource stock research
Indeed, there is a website dedicated to researching smaller resource stocks run by Casey Research, www.caseyresearch.com, which has a wider trawl of potential junior mining company investments and there are many others who advertise on the leading gold investment website, www.goldseek.com.
It would clearly be foolhardy to concentrate investment into one small junior gold exploration company but having a spread of such shares should provide excellent leverage to a rising gold price, and could well provide the added sparkle to a gold portfolio, if as expected gold is set for another powerful move ahead.
The good news is that the junior mining companies seem to have dropped out of favor in recent months, and many can now be bought at prices not seen since the early days of the gold price boom. So this might be a wise time to stock up as prices will fly higher if the gold market lifts off again as surely global monetary inflation dictates it will.