bobbyald

Money Morning asked the same question - here's their take on it all: Why are the junior mining companies lagging so far behind? One fund that did not have a stellar year was RAB Capital. You’ll probably have heard about the group’s investments in Northern Rock – but this in fact constitutes a tiny portion of their portfolio. They invest largely in junior mining and exploration companies and, despite the phenomenal performance of gold, the underlying asset of the majority of these stocks, the fund was down. Why are these juniors in a bear market, when gold and silver are flying? A 30% move in gold should see more than a doubling of these juniors, not a decline. Here are some possible answers: Firstly, many junior mining companies haven't been increasing their profits during this period of high prices. Construction costs and operating costs are rising as fast (or faster) than the gold price. Since corporations are valued based on expected future profits (rather than a simple proportional relationship to gold price), there has not yet been sufficient justification to bid up valuations. Even things such as the acid used in heap leach operations is experiencing significant cost increases. Secondly, exchange-traded funds (ETFs) might be a factor. Why take individual company risk; why even bother doing any research on a company, when you can just buy GDX, the ETF which tracks the HUI index of gold miners? And if you want leverage, you can just trade options on it. So I think the ETFs have taken huge amounts of capital that would otherwise have gone into juniors - capital that pushed them higher in previous moves when the GDX didn't exist. Thirdly, people might have been so hurt in previous corrections that they are reluctant to put more money into this high-risk sector, while, more generally, with the deflationary impact of this credit crisis, appetite for speculation has disappeared. Exploration is highly speculative and capital-intensive – it badly needs funding. Fourthly, small caps market-wide have been hit much harder than large (just look at the Aim index for example) and this has spread into mining companies too. However, money can’t keep going into large cap miners and ETFs indefinitely. At a certain point, it has to go into the juniors. Valuations are extremely compelling, and soon we are going to see a flood of mergers and takeovers – it’s inevitable that money will start to flow in.

Anyone care to disclose their juniors (and majors)? I mainly follow Doody's top ten (as it was - too tight to subscribe) plus a few of Puplavas, Eedens etc. I now live in Aus but don't own any gold stocks down here as I'm just finding out about them.

I suppose the logic next question is what would happen to these juniors if we got a pull back to say, $700 gold? And if the lag is down to higher costs then why are majors up so much - they have rising costs too. Also some juniors have oil production as well so costs are contained to some degree. It's not easy to explain but my two main reasons would be as follows: 1) Unloved. 2) I own some.