Eric asks:

So, no production, no sales, no profits. Why would I be interested?

Well, you can check for signs of conflicts of interest on analysts’ websites. If someone recommends buying juniors but at the same takes money from these companies for example for putting an advertising banner on their websites, this should make you want dig deeper. If someone is known for recommending juniors that they had just purchased, then that should make you look for more information as well. Someone wise said once that you’re loyalty is where your source of income is.

Thanks for the tip. One more thing — when should I buy juniors?

Good luck!

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Investing in Juniors

From the precious metals investor’s there is a particularly important characteristic of the junior sector that each person owning these stocks should be aware of:

• Juniors are less likely to be held by institutional investors than individuals (mutual funds, for instance, often are allowed only to invest in big, senior companies, listed on major stock exchanges),
• Generally, individual investors tend to depend more on emotions than financial institutions do.
• Juniors are highly correlated with the general stock market
• Juniors are very risky on an individual basis, i.a. because they simply may not find any resources. The most important thing to keep in mind while investing in juniors is diversification.

Based on the above, these small junior companies are highly dependent on the emotional status of the individual precious metals investors. This finding has very important implications.

Juniors are more volatile (!) than big, senior companies. Emotions cause big upswings to become even bigger, when people get euphoric and buy already overvalued stocks. On the other hand when stocks fall, juniors tend to fall harder as investors panic and dump even already undervalued companies. In 2008, we had witnessed a massive plunge in virtually every asset class, the predominant emotion was fear. Taking into account influence the emotions have had on the junior sector it is not that strange that they sold off heavily. Bigger swings are therefore to be expected in this sector. However, gold is trading well above $1,200 and is getting ready (not taking about short term here) to soar much higher. The prevailing emotion will be greed, not fear. This means that the emotional factor will generally work in favor of the junior sector.

Additional important observation is that most individual investors are likely to enter the market at the late stage of a particular upleg. Juniors follow seniors on the way up and then on the way down. However this kind of correlation is not crystal clear. Sometimes junior and senior mining companies trade very closely. At times juniors get ahead of themselves and soar virtually regardless of the situation in the most popular precious metals stocks. Finally, there are moments, when juniors seem to ignore the move in the underlying metal and bigger gold stocks and move in a rather lethargic fashion. It is also not uncommon for juniors not to follow big gold stocks immediately during a sell-off. They do fall, but not at the pace that one would expect them to, given their high leverage. They fall further, but not necessarily exactly at the same time as the senior gold stocks.

Diversifying Juniors

Practically, the most important thing to remember, when investing in the junior sector is diversification. Of course, you can make a killing if you have one junior that is very successful but in the long term the odds are against you — the next junior will most likely fail and if you re-invested everything you will lose this investment capital either way. This is not how big money are made AND preserved in the long term. This goal is achieved in this sector through keeping a fully diversified portfolio and adjusting it on a regular basis.