Jan 05, 2011

How High Can Junior Gold Stock Boom Gold?: One Reason to Get Excited About 2011

By Andrew Mickey, Q1 Publishing

This only happened once in the four times in the past 30 years.

Each time it happened, investors had the chance to walk away with average gains of 140% in the span of a couple short years.

Now it’s happening all over again. But this time around, due to the crash of 2008 and the ongoing responses to it, the potential gains are even greater.

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Smalls Sums into Big Fortunes

There are only been a few ways to make a fortune in the markets.

You could have caught onto the 30-year bull market in stocks in the early 1980s. Of course, coming out of a decade of stagflation and economic malaise, not too many folks had big grubstakes to start with.

You could have worked at a company in a bubble sector. My old colleague has regaled me numerous times about the job that would have made him a millionaire – a customer service job he passed up for AOL in 1992.

Or you could have made a fortune many times when a small Canadian stock exchange, now called the TSX Venture Exchange, wakes up.

Right now it’s waking up.

When Gold Climbs, TSX Venture Stocks Soar

The sharp rebound in commodities over the past couple of years has sent many of the speculative, tiny stocks on the TSX Venture Exchange soaring.

Soaring prices of gold, silver, copper, iron ore, oil, rare earth elements, and every other commodity has brought more attention to the junior resource sector than it has seen in years.

The table below shows the historical booms and bust of the TSX Venture Exchange:

As you can see, the TSX Venture is the ultimate boom and bust market.

When markets climb, it soars. The TSX Venture index increased 140% on average when it’s on the rise.

When markets fall, it collapses. The TSX Venture index plummeted 61% on average when the music stopped.

But this time around, we’re anticipating a bigger boom than has ever hit the TSX Venture market for a number of reasons.

The Party is Just Getting Started

The TSX Venture market has risen more than 200% from its 2008 lows, but there’s likely more to come:

It’s Still Well Below Historical Highs - The index has recovered strongly, but it’s still well below its all-time highs because it was hit so hard in 2008.

The index closed last year at 2287. In comparison, it reached a high of around 3300 in 2007 and more than 3700 in 1987.

So even though gold is nearly 50% higher than it was in when the TSX Venture hit new multi-decade highs in 2007 and gold is three times higher than it was in during the TSX boom of the mid-1980s, the market could climb another 61% and still be below its all-time highs.

Middle Innings of Gold Bull Market – the TSX Venture is dominated by junior gold and precious metals stocks. The combination of deep government deficits, declining faith in the value of all currencies, and negative real interest rates are going to keep gold prices high and headed higher over the next few years.

There will be plenty of sharp corrections along the way. Gold is historically a very volatile asset and it’s unlikely we’ve reached a “new plateau.” But the long-term trend is still up.

Gold Investment Demand Turns from Fear-Driven to Greed-Driven – all markets are driven by fear and/or greed. The current rise in gold has been driven mostly by fears of currency devaluation, social unrest, etc.

As gold prices rise and gold and gold stocks deliver even more gains, the fear will be replaced by greed. That’s when gold’s rise will accelerate rapidly and the coming bubble will have reached its final stages.

Remember, bullion dealer sales are exponentially higher with gold above $1,000 than they were when it was $300. The same situation is true for gold stocks. They higher they go, the more investors want to buy them.

Gold Miners are Scraping the Bottom of the Barrel – Most gold mines today are mining low-grade ores. The largest ones are averaging between one and two grams of gold per tonne of ore processed. And they’re making a lot of money.

In contrast, those grades are down significantly from earlier in the century when miners needed to average grades of 30 grams of gold per tonne just to keep the lights on.

Exploration Boom Underway – the declining grades are a symbol that the world is running out of big high-grade gold deposits. Many are now developing smaller deposits of two or three million ounces. But there is a lot money going into gold exploration and 2011 is set to be a record year for gold exploration. There will be the occasional big discovery (five to ten million ounces or larger), but they will still only come once or twice a year.

No When to Say When

We expect the gold bull market to continue well into the future.

The last gold bull market in the 1970s was marked by consistent annual rises in average gold prices of between 20% to 40%. Last year’s 30% increase puts us right in the heart of Goldilocks bull territory – not too fast, not too slow, but just right.

The end of the last bull market came when the average gold price increased 99% in one year. That parabolic rise signaled “the top.” We’ll get nervous about gold when it starts to move too fast.

Until then, the bull market in TSX Venture stocks is alive and well. There will be sharp corrections along the way. The corrections will be big as these tiny stocks are terribly volatile. But in the next few years, fortunes will be made in TSX Venture stocks.

In the next Prosperity Dispatch, we’ll look at how you can capitalize on the bull run in TSX Venture stocks, the identifiers of the top gold discoveries of 2009 and 2010, and how you can possibly find the 1000% gains even if you don’t have a Ph.D. in geology.

Anytime you get a chance to turn a small speculation into your biggest gain for the year is certainly exciting. In TSX Venture stocks, where the average gains from the start of a boom to the end of it are well above 100% and the market as a whole is still well below its recent 2007 highs, the window of opportunity is open now.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

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