What is the Breakout in Gold Stocks Signaling?

Our buddy Brian Hunt pointed out in yesterday's DailyWealth that gold stocks are breaking out. 

GDX, the ETF for gold stocks, has more than doubled off it's late October lows, and is not perched at its high water mark since August 2008.

Gold stocks are on the move

So should we sell in May and go away?  Or is the trend our friend?  So many cliches to choose from - only one can be right!

I think you're nuts to close any gold related positions right now.  Gold stocks appear to be leading the price of bullion, which is often a bullish sign.  Remember that the paper market for gold is easily manipulated - follow the phyical market.

Those of you who did just that back in December - when the paper price of gold were bottom, get gold buyers were snapping up the barbarous relic in record numbers - are probably sitting pretty right now.

Now remember that gold stocks are leveraged on the price of gold.  If the price of gold doubles, gold stocks will do more than double - they will go to the moon.  That's because they're doubling their sales price, while costs remain more or less the same (assuming oil does not rise in parallel).

So what if you want to get really, really stinking rich?  One way to play it - with a small speculative portion of your portfolio, of course - is by investing in junior gold producers.  They are some of the most volatile stocks in the world, but if gold skyrockets, these juniors are going to do some absolute moonshots.

One junior that is extremely worth of your consideration is AuEx Ventures.  Last fall, our local Casey Research group hosted Ron Parratt, CEO of AuEx - I was so impressed that I bought some shares the next day, which I still own.  Here's a full write up about AuEx if you're interested in learning more.

If you're looking for some guidance in navigating the potentially profitable but trecherous waters of junior gold miners, I'd recommend you take a look at International Speculator, a reserach service provided by Doug Casey's guys.  I've subscribed to it over a year now.  

The thesis is that if gold hits a real mania stage, the juniors will be the ones doing real moonshots, because they are highly leveraged to the price of gold for a number of reasons - maybe first and foremost, because the large gold producers are not doing much of their own exploration any more, they buy up juniors with promising finds.  So if things get out of hand, as Casey's guys are predicting, they believe the junior market will turn into something like the tech bubble in '99.

AuEx Ventures: An Intriguing Gold Junior Opportunity

Tuesday night, our Sacramento-based Casey Research investment group had the privilege of hosting Ron Parratt, CEO of AuEx Ventures, for a presentation and discussion about his company, and the challenge and adventure that is junior gold exploration.

First a quick primer on junior gold exploration for those not familiar with this field. Unlike gold majors, who have actual gold reserves to pull out of the ground, juniors have not yet found any gold. An investment in a junior is, in overly simple terms, essentially a bet that they will find gold before they run out of capital, and/or over dilute their shareholder base.

With that said, why would somebody want to invest in a junior, when they could just invest in one of the big gold producers and have a much safer investment?

Primarily because the upside potential is so tantalizing. The share price of a junior can do a moon shot if things go well - on the flip side of the coin, though, share prices are also very vulnerable to the downside. Ask anyone who has been invested in the juniors this year (your author included) - it has not been a fun ride so far this year.

Personally, I see three attractive aspects of investing in juniors:

1. The majors have been under-investing in exploration for decades, as a result of the gold bear market from 1980-2000. Even today, with the price of gold nearly tripled off its lows from earlier this decade, mining input costs are also way up, so the major gold producers are not making as much money as you would have imagined with gold at these prices. How are majors going to replenish their gold reserves? Probably by buying promising juniors.
2. I would rather bet on a talented entrepreneur and geologist - like Ron Parratt - finding something substantial, than a large bureaucratic company. I believe that talented, motivated people can accomplish amazing things when given room to operate freely.
3. If you can find a junior led by someone you trust and believe in, that's very powerful.
   

Now back to Ron and AuEx.

Ron is a very experienced explorer with exceptional qualifications. In 2003, he ventured on his own and co-founded AuEx Ventures, based out of Reno, NV. AuEx employs a joint venture model to exploration, where they will team up with a gold major on a given project, which allows AuEx to leverage their expenditures and minimize share dilution.

That is, their partner will pick-up a significant amount of the investment tab, in exchange for a share of the projects profits. This kind of leverage allows AuEx to have it's hand in many more projects than it could handle by itself.

Similar to the way an investor in gold juniors will keep a very diversified portfolio - with the idea being most will fail, but the few winners will carry the day for you - Ron takes the same approach with AuEx.

The JV approach in their own words:

At AuEx we believe that the joint venture business model is the most effective approach to the conduct of business in the mineral exploration industry. AuEx adopted the JV model because we are committed to minimizing risk by leveraging out that risk to select partners. Significant bi-products of the JV process include; (a) the protection of the corporate vehicle through minimal share dilution, (b) diversification of the Company's exploration programs, (c) annexation of partners' technical strengths and knowledge base and (d) the attraction of additional resources to multiply AuEx's exploration efforts.

I asked Ron what his general strategy towards JV's was, and he said basically they try to keep as much of the project as they can, which giving up as little as they can.

A quick, important aside about Ron: he comes across as an extremely honest, hard-working, talented guy who is great at what he does. Exactly the type of CEO you want to invest in. He owns a healthy equity stake, and is focused on constantly creating shareholder value - and you can't argue with his track record there (side note: he mentioned his initial friends/family round was issued ~$0.12/share - those folks are sitting pretty now).



Ron, a pretty even keel guy, really beams with excitement when talking about AuEx's Long Canyon project, which is looking very, very good. The bulk of the company's value is contained in Long Canyon, and good progress continues there.

AuEx's share price has taken a hit since topping the $3 mark earlier in 2008. According to Ron, business fundamentals are better now than when the share price peaked back in January.

All in all, I have the feeling that the recent pullback in AuEx's share price presents a great opportunity to invest in a world-class explorer like Ron. I don't own any shares yet, but plan to pick some up later this week. I'd encourage you to consider AuEx as a worthy addition to your mining portfolio.

Editor's Note: This article was also published by Seeking Alpha.