For many investors in the precious metals market, the year 2004 was not a good one. Although gold is now up some 10% from a year ago, gold stocks have been basically flat on average. No matter what measurement you take, it was not easy to make money this year. The dollars that many investors are now making since the summer are, in many case, the dollars that were lost in the first half of the year.
Altough I went very cautious last winter and suggested raising your cash position up to 50% of your portfolio, I also suggested that you concentrate on one sector within the PM market: Juniors. Those investors who were disciplined and lucky enough to take profits and wait for the new opportunities that came later in the summer did extremely well. Our six top performers are all up anywhere between 65% and 130% so far this year while our list of 46 gold and silver stocks is up only 3.3% in 2004. Many of our non-performers and losers were big gainers in 2003. The fact that our group of stocks is still up 252% in the last 36 months despite a flat 2004, should tell you one thing: juniors are the place to be, but timing is everything.
With gold in an uptrend, selective juniors will continue to outperform. But beware, volatility will continue. One of our top performer went up 158% in one day last July following the release of good exploration news. It subsequently fell 31% in one day last week following bad exploration results. Another stock which, unfortunately, is not among our favorites, went up 300% in a short two weeks period following a major gold discovery. Another one collapsed 50% in one day last September following bad political news. Juniors are speculative vehicles that can make you big money. But they can also ruin your portfolio if you do not follow your business closely.
Gold will continue to be volatile with major corrections along the way. The next top could well be just around the corner or only after we reach US$500. The following correction could chop as much as 20% of the top of the yellow metal. The truth is that nobody can be sure. We can only hope. One thing is sure though. There will always be juniors making the headlines and generating profits for their shareholders no matter what gold does. The best example that I constantly use to demonstrate that a good drill hole will always make a difference even if gold is in a severe bear market is the story of Francisco Gold and the discovery of El Sauzal in 1996-1997. (see issue #128, free on our website). FGX stock went from C$4 to C$36 in a 12 months period while, at the same time, gold went from US$414 to US$340.
My conclusion is that the best way to make money in the mining sector is not to wait for the metals to go up, but to learn how to pick the best juniors. We will do this exercise in our upcoming annual issue.
Editor, The Ormetal Report
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