Goldsmith comment: About a month ago, we dedicated a week of the Digest to lessons on investing in the junior resource sector – these are the tiny stocks that hunt for big resource deposits.
Right now, we're in the middle of a bull market in these commodity "bloodhounds." The TSX Venture Exchange Index – an index that holds many of these companies – is up nearly 200% in the past two years, and 60% in the last six months. (And it's giving our newest advisory – the S&A Junior Resource Trader – a strong tailwind right now.)
So I sat down with S&A's editor in chief Brian Hunt to talk about the sector and how the new "JRT" is going to take advantage of the bull market... while controlling the risks these stocks are famous for. If you'd like more information on JRT first, click here. If you'd like to hear what Brian had to say, read on...
Sean Goldsmith: Let's start at the top. Why should our readers be interested in junior resource stocks?
Brian Hunt: Well first, I'd like to say that some of our readers should be interested in junior resource stocks... but not all of them.
The reason some of our readers should be interested in this sector is because it holds the highest potential to produce not just hundreds but thousands of percent gains in the coming years. It's that simple.
It's is one of the best chances you'll have to get filthy rich in stocks over the next decade. That's why an investor or trader should be interested in this idea.
Now to clarify, when I say "junior" miners, I'm talking about exploration firms with market caps from about $2 million to $200 million. They are microscopic compared to a big mining company like Newmont or Barrick Gold. They are less than 1% of the size of these big miners.
Juniors are the "bloodhounds" of the resource sector. They scour the world looking for gold, silver, copper, uranium, oil, diamonds, you name it. They're the companies traipsing around in jungles and going into places like the Yukon Territory.
These companies don't have much in the way of assets. They're just groups of people that raise cash in the public markets, then go out looking for resource deposits. If a company finds a big deposit, a $5,000 investment can turn into $150,000 in a short time. If they don't find anything, the company is toast... and shares can fall 99% in a short time. It's a high-risk business model.
This type of business model makes junior resources an unsuitable sector for many investors. They're not trained or equipped to handle the risks involved.
For those who are trained and equipped to handle the risk, this sector can make you a tremendous amount of money. And I think the next three, five, even 10 years could be a terrific time for this sector.
SG: We'll get into how to handle the risks in a minute. But first, why do you think the resource sector is going to do so well over the coming years?
BH: Most of our readers are familiar with the huge amounts of stimulus and cheap credit governments around the world are throwing at their economies. We hear about it every day, so there's no need to get into the specifics.
Whether these "everything but the kitchen sink" stimulus policies are right or wrong, they're stoking demand for commodities. They're stoking demand for crude oil and copper. They're stoking demand for uranium. They're stoking demand for grains.
For example, the tracking service Platts just reported that China's crude oil demand jumped to an all-time high in November. It increased 13% from November 2009. Copper just climbed above its 2008 peak. It's at an all-time high. Gold and silver are at multi-decade highs. Grain prices are surging.
These uptrends could last for years. Of course, there will be corrections and speed bumps along the way, but Asian demand is exploding. Supplies are tight in a lot of markets, like copper and grains. And the amount of stimulus being thrown at the global economy is huge.
I think it's likely gold will be over $2,000 an ounce in a year to two. I think you'll see at least $150 oil in the next three or four years. If these commodities and others like them reach those levels, mining and energy stocks will soar.
The bigger mining and energy stocks will provide great returns... but small mining and energy stocks could explode. And as our friend and master speculator Doug Casey likes to say, "you only need one" of these tiny companies to hit it big for you to make a lot of money.
Having said all that, I don't pretend to know what the future holds. A global economic crisis would crimp demand for everything. You can only form your trading thesis, know both the bull and the bear case, then take your trading cues from the market action. And above all, focus on risk control.
SG: How do you control risk in the juniors?
BH: First of all, recognize the resource sector for what it is: the biggest "boom and bust" sector on the planet.
Commodities go through huge uptrends and huge downtrends. We often tell the story of the uranium sector from the 1990s to 2010 to illustrate the boom/bust nature of commodities.
During the 1990s, uranium stagnated in the $10 per pound range. It endured a long bear market... a long period of disinterest. When a commodity spends a long time locked in a bear market, folks stop paying attention to it. They stop investing in it. Production will decline. And if it's cheap enough, demand for the cheap commodity will increase.
If supply falls off enough, and demand ticks up enough, you have a double whammy that can send prices skyrocketing.
That's what happened with uranium from 2002 to 2007. The price ran from around $10 to $140. Many uranium stocks ran up thousands of percent. This huge uptrend attracted all kinds of speculators and hot money, which sent prices too high and caused the sector to crash. Many uranium stocks lost more than 95% of their value. Many of them had no value to begin with.
You see cycles like this all the time in commodities. If you know about them, and how to identify them, you can use them to your advantage and make incredible returns.
Goldsmith comment: Tomorrow, Brian will explain how to spot big boom and bust cycles... and another vital rule for picking the biggest winners out of the junior resource crowd. If you're interested in learning more about the S&A Junior Resource Trader, click here.