Junior has been misbehaving

All measurements are set as an index = 43.80 at 12/31/2004 (GLD price)

When investing in gold, one has several options. Everything from collectible coins, bullion, stocks, and ETF's are on the menu.

I track, and own, three dinstinct categories.

GLD is an ETF that holds gold bullion. For me, it is the best way to own gold without having to figure out how to handle and store it. It also tracks well to the price of gold. There are a few indices that track gold stocks; I prefer the GOX index. It is comprised of the major gold producers, like Newmont and Barrick. The Juniors - the explorers and developers - are the most difficult to track, so I made my own index. I use 10 junior stocks, then advance an index based on the median price change each month. My results mirror everything I have read lately, in that junior gold miners are lagging.

I started my comparison at the end of 2004 when gold was in the $430 range. Since then staying as close to bullion has been the best way to go; a CAGR of 21.6%. Major gold producers have been challenged by high energy costs, political risk and their own price hedging stumbles. Despite those drags, one would think the price of the base commodity could not be any more favorable and these majors should be well leveraged to the price of gold. If your costs are $700 per ounce and gold travels from $1200 to $1400 - it's not just a 17% (2/12) gain for them - it is a 40% gain to the bottom line ($700, versus $500).

The juniors, who are very important for the major producers to expand their finite capacity, just have not delivered. One of the most frustrating aspects to owning the juniors is the way their management always hypes their opportunities and never acknowledges risks until they experience them. The management all speak effortlessly in terms of probable reserves, but usually contradict themselves when they project their long term cash needs - as they continually issue more shares to advance exploration and production. Those "probables" always seem to undeliver in the present, but always look so good in the future. Meanwhile machinery failure, environmentalists, nationalists, you name it, detracts from current results.

Despite their lagging performance, juniors are returning an average 6.2% over the six-plus years I have tracked them. That compares very favorably to the 1.8% CAGR on the Dow Jones in that same time frame.

Some of the underperformance can be laid at the feet of the majors. Eventually these giants will buy the juniors to expand capacity - but they always wait until they get expensive before they start buying. It is as if they don't like a bargain. Most likely they just move in herds and only start buying when inflation in the price points to the fact that if they don't buy now, it's going to cost them more in the near term future.

The juniors are the only group here that have not come back to their pre-credit-crisis high. For that reason alone, I like them here - I just try not to listen to their management.

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