Will $1,000 gold signal a rush to buy junior explorers?

With the gold price closing on $1,000 and silver just through $16 an ounce again, gold stocks have been showing big advances in the past week.

However, it is still possible to find quality junior gold exploration stocks with prices little changed since the wipe-out last autumn. These are almost certainly the last great bargains available in this bull run for precious metals.

Dot-com parallel

The obvious parallel is the dot-com stocks in the IT boom of the late 90s, which rose exponentially late in the day on unrealistic expectations about the future. For junior explorers are a gamble at the best of times. But they do actually own the claims to future gold and silver mines.

In a true bull market for precious metals the values of these mineral exploration rights will rise exponentially as it becomes economic to explore for gold and silver with the prize for discovery rising sharply in value. If you want to own those claims buy juniors.

However, this interest comes later in the precious metal investment cycle. You need to see higher prices first, and think that they are going to last or go higher, before you commit to an exploration project.

But that leaves a big opportunity for early investors. The companies with those absolutely essential claims are out-of-favor and available on the cheap. The art then is to separate the wheat from the chaff and buy the better juniors before others wake up to the idea.

It is tempting to give a small list of such juniors with excellent claims in politically stable regions but that can wait for another article. It is only too easy to be dismissed as a share tout when discussing this asset class, and that overshadows the investment argument.

Stock selection

So where is the flaw in this case, aside from the difficulty of stock selection for which a number of good websites exist?

Well, we saw that last autumn when a general stock market crash pulled down the gold price and crashed the juniors. Will that happen again?

It is not impossible, but if the price of gold and silver continues to rise – and with bonds also under pressure precious metal prices may not fall like last autumn – then the time to buy juniors is now. Sit and wait if you like but that might be too late for the best deals.