The BEST Way to Play Gold’s Breakout

After years of bumping up against $1,350 per ounce, the price of gold has finally succeeded in breaking out.

Gold rises decisively above key $1,350 level

Now is the time to buy.

And not just gold, mind you…

An even better way to play this is through junior gold mining stocks.

The junior gold mining sector offers incredible leverage to the breakout gold. When gold goes up — these junior gold stocks go up exponentially more.

Adding fuel to the rally, the junior gold mining sector is one that is long overdue for a ripping bull run.

For the past decade, the share prices of junior gold mining stocks have massively underperformed the overall market.

Check out the chart below.

Junior Miner

While the S&P 500 has marched relentlessly higher over the past ten years (almost tripling), the VanEck Junior Gold Mining ETF has lost two-thirds of its value!

This sector’s underperformance has been nothing short of brutal.

If there is a more out of favor group of companies than the junior gold miners, I’m not aware of it.

More importantly, it is very hard to see exactly why the junior gold mining sector has performed so abysmally over the last decade.

While the junior gold mining sector has dropped by two-thirds over the past decade, the price of gold has actually gone UP by 25%!

If that surprises you, don’t worry because you aren’t alone. I couldn’t believe it either.

You’re probably asking yourself right now, “Shouldn’t these stocks actually have gone up?”

Given the leverage that the junior gold miners have to the price of the metal, you would have thought that the group would have increased by more than the 25% increase that gold has experienced over the past decade.

Instead, the junior gold miners have been taken out to the woodshed again and again.

It doesn’t add up. And that is why I think these sector is about to go on a tear.

Don’t Buy One When You Can Own Them All!

While I think now is the time to have exposure to junior gold miners, I must admit that I’m not particularly fond of their business models.

Many of them operate in parts of the world that don’t exactly give you that warm fuzzy feeling.

They also don’t usually have diversified operations, so one operational snafu can be a big problem.

At an individual company level, investing in these stocks can definitely be risky.

Fortunately, there is an obvious solution to mitigate that company specific risk — don’t own one junior gold miner… Instead own them all!

I don’t think that we need to get selective here. This entire sector is like a coiled spring ready to rip.

With gold breaking out, I think we finally have the catalyst to make that happen.

The VanEck Junior Gold Miners ETF (GDXJ) provides exposure to a diversified portfolio of junior gold mining companies.

Currently, GDXJ holds 69 different junior miners with none of them representing more than 5% of its $4.1 billion portfolio.1

The average market capitalization of the companies in the portfolio is $2.2 billion, so they are small, but still financially solid operators.

As a group, they trade at a valuation of just over 1 times book value — which suggests there is little downside risk in owning this group of companies.

I believe that with flat gold prices, this group of stocks already represented great value.

But with gold breaking out, we now have the catalyst that could finally let this coiled spring release.

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley
Financial Analyst, The Daily Edge
EdgeFeedback@StPaulResearch.com

1 VanEck Vectors Junior Gold Miners ETF

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Jody Chudley

Jody Chudley is a contributing analyst to Lifetime Income Report and Contract Income Alert. Jody is a qualified accountant with a degree in Finance from Brandon University. After spending fifteen years in various finance and planning roles with an international financial institution, Jody set out to manage his portfolio on a full-time basis.

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