I got to spend the last few days up in Vancouver at the Vancouver Investment Resource Conference 2012, an event where junior gold (and other resources) miners met retail investors, newsletter writers, and others in that world.
Now the key thing with junior miners is that none are actually miners. They’re all microcap, penny-stock companies, scrounging for equity injections, as they drill holes in far-flung places (northern Canada, Guyana, Mali) looking for some evidence that a plot of land they’ve staked out actually contains gold. And if they can show they have some gold, then they get more equity, and with that equity they can look for more gold. And if they can find enough evidence of gold, then if they’re lucky they can sell to a larger mining company, which might at some point actually build a mine.
A key thing I realised was that while normal mining companies might somehow be levered to the price of gold, for these juniors it doesn’t matter too much — most are years away from selling any gold, if ever. Instead their stocks rise and fall on their “story” and more importantly general risk appetite.
These are pure punts. When people are feeling gambly, they buy junior miners. When they’re feeling conservative they dump them. And so in 2011, while gold did fine, the junior miners got walloped.
Anyway, in writing about the theme of 2012 — which is the ‘dash for trash’ — I hit upon this interesting chart/correlation.
It’s a 6-month look at the Junior Gold Mining ETF (GDXJ) vs. the Egyptian EGX 30 Price Index. Now I don’t think the two have any real-world relationship at all.
But in 2011, both were trash, and nobody had appetite for either. And so both were purely at the whim of Risk On/Risk Off flows, and they traded basically in line with each other. And that stands even know, as both have been on fire lately.
You hear a lot about how everything is correlated these days, but the fact that these far-flung indices move so nicely, when all they have in common is that they’re super-risky really hammers the point home.
Key: Market Vectors Junior Gold Miners = Green. Egyptian EGX 30 Price Return Index = Orange