After a heady couple of years, the Midas metal has lost momentum. Gold prices have slipped about 2% in July to fall just below where they started in 2012.
And gold mining stocks have felt the brunt of it more than the metal itself.
For the past few years, the miners have been chasing the metal. The general expectation was that the mining stocks would eventually catch up to gold prices.
But now it looks like the metal is retreating to meet the miners.
The Market Vectors Junior Gold Miners (GDXJ:NYSE), an exchange-traded fund (ETF) that represents the junior miners, is off more than 25% since its inception in late 2009. The big miners represented by Market Vectors Gold Miners (GDX:NYSE) are essentially flat over the same period.
Yet gold prices, as measured by the SPDR Gold Trust (GLD:NYSE) are up almost 40% in the same general timeframe.
So where does that leave gold investors?
Well, it's probably not an ideal time to buy gold if it's pausing here (which it seems to be doing) after a multi-year rally.
And the big miners have their hands full as gold prices have stalled and gold demand has fallen. They may be fully valued, at least for the time being, since they won't be undertaking new projects or acquisitions until things get better or worse.
Beat Gold Prices with a Junior Miner
That leaves the junior miners. They're undervalued enough that they still have some headroom, even given today's tepid metals market. And if things start to improve, they become buyout targets for the big miners.
One junior miner in particular that continues to impress both gold stock fanatics and market-savvy investors alike is Paramount Gold and Silver Corp (PZG:NYSE).
Paramount is a U.S.-domiciled (it has Canadian roots) exploration and development company with multimillion-ounce advanced-stage precious metals projects in Nevada (Sleeper) and northern Mexico (San Miguel).
Fully-funded exploration programs are now in progress at its two core projects and the initial results are very exciting.
In late March, the company closed a $21.4 million secondary financing for operations. Although the move has diluted share prices somewhat, it should be good for the company and investors in the long run. Given the results so far, Paramount should be able to make productive use of the money in both Sleeper and San Miguel.
Paramount bought the Sleeper open pit mine (run by Amax Gold from 1986–1996) and surrounding stakes to define and exploit previously unrecognized resources in the vicinity of the original mine. The total stake is about 47,500 acres. PZG expects to release results of its Preliminary Economic Assessment (PEA) for this opportunity this month—and things look very promising.
In addition, Paramount plans to use the mine's extensive database to find other high-grade deposits similar to Sleeper. Paramount believes this corridor represents a favorable structural setting with excellent potential for finding a new deposit.
San Miguel: Key to PZG Profits
Paramount reported in June that its San Miguel Project was also looking at some big finds.
The 100%-owned San Miguel Project consists of 43 concessions covering over 353,000 acres in the Palmarejo District of northwest Mexico. That makes Paramount the largest claim holder in this rapidly growing precious metals mining camp.
The current program at San Miguel is part of Paramount's strategy of expanding and upgrading known, large-scale precious metal occurrences in established mining camps, defining their economic potential, and then partnering with nearby producers.
The San Miguel Project is ideally situated near established, low-cost production where the infrastructure already exists for early, cost-effective exploitation.
Paramount started to drill the untested gaps between deposits earlier this year to evaluate the potential for further discoveries along the structural corridor called the Guazapares Megastructure.
Preliminary drilling into both gaps has confirmed continuity of mineralization and has found intersections of high-grade precious metals. (Translation: They done found gold!) Paramount will continue to drill these areas systematically to define and model the mineralization.
A new resource estimate by Mine Development Associates (MDA, www.mda.com) of Reno, NV, is expected during the second quarter of 2012 for the entire San Miguel Project and will include all 2011 and early 2012 drill results.
Geological jargon aside, this company looks like it is on the brink of hitting the big time. And that means its production costs per gram drop and its margins increase. That would spell a big move in the stock, regardless if gold prices rise or even plateau.
And don't forget that when the big miners start looking to grow their reserves safely, junior miners like PZG will be very attractive.
Good things are about to hit Paramount Gold and Silver, so this may be an ideal time to put some risk capital on the nose of this junior. Buy PZG below $3.
G. S. Early