The Microcap Speculator

The dramatic underperformance of junior gold miners caught me by surprise.  Judging from your emails, I was not the only one.

In early June, I wrote that I was “100% bullish on gold.” Since then, gold climbed over $100, from around $870 to over $980, before retreating last week.   While I caught the bulk of the move in my gold futures position, my other gold positions, consisting of various large, mid-tier and junior mining companies, were disappointing.

I was able to book nice profits in large, beaten down South African mining stocks AngloGold Ashanti (NYSE:AU) and GoldFields (NYSE:GFI), as well as mid-tier miners like IamGold (NYSE:IAG).  But despite the substantial rise in gold, the portion of my field bet devoted to junior mining companies was largely unprofitable.

I added a heavy dose of junior gold miners because conventional wisdom posits that the juniors are a great way to gain leveraged exposure to the underlying metal.  So why are many juniors near their lows even as gold is within 7% of its all-time high?  Here are a few possibilities:

1. The juniors represent a nonconfirmation that signals weakness ahead for gold. Some think that the juniors are canaries in a coalmine, and their failure to approach highs signals troubles ahead for the underlying metal.  I don’t buy this theory.  As Jeff Cooper wrote last Friday on Minyanville, gold looks like it is carving out a bullish flag.  The future for the metal looks bright, regardless of what the juniors are doing.
2. Juniors are due to catch up. Maybe, but this position sounds more like hope than an investment thesis to me.  Sure, juniors probably suffered more from the recent stock slump than higher-priced mid-tier and large miners due to the margin requirements associated with low-priced stocks.  Juniors may be due for a run, but its important to entertain the possibility of a more systemic change.
3. The playbook has changed. Juniors might have been the best way to play gold in a leveraged way in the 30’s and 70’s, but that doesn’t mean they are today.  Perhaps the values accorded to juniors in prior runups were the result of a dearth of alternatives, not the inherent appeal of their investment model.  Today,  stock investors can simply buy gold via the streetTRACKS Gold ETF (NYSE:GLD).  And buy they have.  As Tim Iacono noted, the trust now holds over 650 tonnes of gold, including 46 tonnes added in this last runup alone.

Rogues gallery — underperforming junior miners

DISCLOSURE: Long GSS, UXG, TRE.