The price of gold may fluctuate a little bit over time, but it will never go as low as the negatives and it will never disappear. That is far more than you can say about some of the companies you might invest in. Gold is also easy to manipulate, which makes it valuable as a precious metal.

Many people do not realize that the dollar used to be backed by gold. In other words, there were no more dollars available than there was gold and one dollar actually represented one dollar’s worth of gold. This was the case until the government took us off the gold standard.  This makes gold a hot commodity.

Keep in mind that there is a limited amount of gold. When there is a limited amount of anything at all, it holds its value very well. As the demand for gold increases and the supply decreases, the price of gold can only get higher. This is basic economics and something that should be kept in mind when you try to invest in anything at all. If you want to get your money’s worth, gold is the way to do it.

About the Author: Harry G. is a writer for 180Fusion,com. They can help you with any internet marketing you may have. Check us out, click here!

When it comes to factors that move markets, the “expert analysis” is generally always saturated with small, relatively minor or even insignificant factors.  This makes them look smart, like they found that hidden zinger.  During the housing boom everybody talked about low interest rates, baby boomers, and low unemployment, when really it was the printing of money and creation of fancy financial instruments which was the underlying factor.  Markets are simple (to me, anyway).  You just have to look at the big picture, the major factors, rather than get bogged down with the little things.  To that end, I want to talk about three things:

• Gold buying patterns since the correction.
• Scarce gold production.
• Quantitative Easing

Gold Buying Patterns

It is fascinating to me that once the gold price corrected, people flocked to the jewelry stores to buy the stuff.  Check out this article which is typical of the overall mentality.  Now, I know that gold jewelry is a small percentage of the overall demand for gold, but I will argue that all of the investment buying and selling is just moving back and forth.  It will move the price, but when people are buying gold, an investment case will exist.  Every time.  The rest is just fluff, albiet in the gold market there is alot of that.  It could take time, but this is one of the major factors that you should look at, and it’s pointing toward a continued bull market.

Scarce Gold Production

The gold production situation has not changed and is just getting worse.  A bonanza gold discovery these days is considered under 1 g/t, whereas only 10 years ago you would’ve laughed at that grade.  That’s because there’s hardly any gold left on the planet above that grade, and the price of gold has to increase to meet the realities of mining it.  The demand for gold might decrease if you’ve gotta pay more for it (see the previous point about gold demand though) but people will always want gold, and thus the gold price will continue to increase.  This is not a small gap in production either.  I’ve written about the president of Barrick Gold’s comments on this issue.  It’s massive, and ensures that the major pressure on the gold price is up, not down.

Quantitative Easing

Well, if you listen to the mainstream media, quantitative easing is slowing and therefore the pressure on the gold price is therefore down.  This is the correct relationship, yes.  But let’s look at the big picture.  Unless quantitative easing stops, or at least decreases to under 4% per year, the primary direction of pressure on the gold is still up, not down.  What are the odds that helicopter Ben will decrease quantitative easing to under 4% from the current 10 – 11%?  ‘Nuff said.

The major factors driving the gold price are still up, and therefore the gold price will continue to move up.  Juniors have been sold off and are in a fantastic buying position.  The big money-making investors of the last 15 years all bought the juniors at times like this.

This is particularly so in mining, where the business is really as simple as comparing two things:

1. The yearly cost of operating a mine
2. The revenue of metals sold.

The difference is simply the free cash flow, or the amount of money to spend on new projects per year.  Thanks to modern accounting practices, this is sometimes not the easiest thing to find in company reports and financials but the underlying business really is that simple.

So which mining companies have the strongest free cash flow.  We at Junior Gold decided to do a little research, and this is what we’ve found.

• Alamos Gold (TSX:AGI) was one of my winners in the early days, and I wish I’d held on.  Their Mulatos mine in Mexico is one of the lowest cost operations in the world, and its no surprise that since production started in 2006 the free cash flow has resulted in the purchase of other properties which are likely to become mines.
• Copper Mountain Mining (TSX:CUM) developed the Copper Mountain Mine from 2009 to 2011.  I remember how strange it was to make the decision to build a new mine at that time, with financial markets still somewhat in turmoil.  However, now Copper Mountain is at full production, having combined three former mines into one “superpit”, and the free cash flow is strong.  They will have to look for ways to spend all the money, so look for acquisitions, deposit growth, or some other string of good news that will propel this company into the ranks of mid-tier miners.
• China Gold International Resources (TSX: CGG) is a Canadian company that owns one of China’s largest gold mines.  At 135,000 ounces/year, it’s not really an elephant, but the important thing is that the costs are low.  The free cash flow keeps everything running profitably during the downturn and allows them to expand when times get better.
• Osisko Mining (TSX: OSK) had some big challenges in the development of the Canadian Malartic mine in northern Quebec, Canada (like moving a few hundred people within a town to make way for an open pit) but now mining has started and is ramping up to full production.  The low period between discovery and development is now over, and the growth period is just starting.  With strong free cash flow, this one is in a good investment spot now.
• Silver Wheaton (TSX:SLW):  Although I’ve said alot about Silver Wheaton on this blog, this list wouldn’t be complete without it.  Silver Wheaton is the king of free cash flow and pays a dividend.   They invented the silver streaming business, which silver is particularly suited for.  Without operating any mines, they’ve kept their cost per ounce down to $3.90, which they resell into the market at spot (north of $25 at the time of writing).  Of course, there are no free lunches in the market, and the downside is SLW’s share price.  Be prepared to pay up.

What are the consequences of investing in gold?

Prior to investing in gold you should know the implications of doing so:

• Gold isn’t a source of income and if you want to increase your monthly revenue, then you’ll have to buy its derivatives like exchange-traded funds (ETF), gold stocks or mutual funds that’ll get you dividends.

• Gold is chiefly held by governments as well as the central banks, thus exposing them to tremendous price fluctuations since they regularly buy and sell physical gold along with other substitutes.

What is a Gold ETF?

Gold ETFs are funds, traded on the stock exchange, who’s price is backed by physical metal.  Thus, they will allow you to take advantage of gold as a hedge against your investments, thereby further reducing any risk to your financial stability without having to own/store physical gold. So, when you are in debt, financial tools like these can help you to generate some additional income through which it’ll become easier for you to make extra repayments and to get any debt settlement advice you can visit : http://www.debtconsolidationcare.com/debt-settlement.html

Basically, gold-based exchange traded funds or ETFs will enable you to own a share on a fixed amount of gold, for instance, 1/10th of an ounce. These specialized financial tools can be bought and sold through any IRA (Individual Retirement Account) or brokerage firms since they are almost similar to stocks in terms of functioning in the market.

What are the reasons to buy Gold ETFs?

Trading in the Gold ETFs is comparatively simpler than other forms of investment options. Suppose you are planning to invest in gold and various other precious metal index, then in that case you’ll have to overcome the challenges of buying whatever equity is there in the index basket so as to focus on a certain price.

As a result, of heightened complications and commissions involved with the process, it may become quite unnerving to manage your investment goals as well as your debt obligations all at the same time.

On the other hand, you can streamline your investment approach by buying a simple Gold ETF since you’ll be able to save some extra money on commissions and pay a single price for the financial instrument.

What are the advantages of buying Gold ETFs?

Investing in Gold ETFs has the following advantages:

• Tax incentives Gold ETFs can be placed in a 401(k) thus allowing you to defer your taxes versus the purchase of physical gold.

• Simple investment option Investment process followed in Gold ETF is quite simpler and has lower transaction fees. Benefits like these will help debtors like you to grow up a sturdy nest egg and at the same time get rid of your financial woes.

Though there are various advantages of investing in Gold ETFs, yet they are not at immune to the tantrums of the financial markets or the macro-economic factors that influence them. Therefore, you must understand your financial health, have retirement goals and keep your asset allocations properly rebalanced to maximize your investment endeavors.

Take Quantitative Easing (QE), the U.S. Federal Reserve’s fancy term from printing money.  When QE was announced about five years ago, it was a big deal.  All the major newspapers reported on it, sometimes on the front page.  Between November 2008 and March 2009, the treasury notes on the Fed’s balance sheet went from $700 billion to $1.75 trillion, which amounted to an increase in the American money supply equal to about 1/15th of the GDP of the United States.  No wonder the newspapers reported on it!

Two years later Fed chairman Ben Bernanke announced another round of QE, dubbed QE2.  The economy was still sluggish (I wonder why…?) and the fed argued that an extra push was needed.  The amount was $600 billion but due to some debt maturity from previous asset purchases (they do not actually “print money”) the net increase from QE2 was about $400 billion.

Unsurprisingly, one year after QE2 the Fed figured another push was needed.  This time however, QE3 would be “open ended” and it would involve about $40 billion per month.  At this rate the previous QE’s would be equaled every four years (we were about four years from the start of QE at that point).  Even more unsurprisingly (to some of us), the fed quickly decided this still wasn’t enough and doubled it to $85 billion per month.  At that rate the previous QE’s would be equaled every two years.

To look at it another way, the U.S. Fed now has the authority to print money at a rate of 7% of the GDP per year, or about 10% of the M2 money supply.

Fed chairman Ben Bernanke has always been known in gold bug circles as “Helicopter Ben” because of his comment during a speech in 2002 that the government could avoid deflation at all costs by printing as much money as needed and dropping it from helicopters if necessary.  Although the printing presses haven’t been going as crazy as some people thought they would, since he became chairman one could safely assume that the Fed, under Bernanke, will always err on the side of printing money.

In case you can’t see the trend, the rate of increase of money supply appears to be accelerating.  What was once preposterous is now the norm.  An open ended money printing scheme of the size of QE3 was considered alarming currency debasement only five years ago.  Now it is accepted as economic stimulus.

John Embry of Sprott Asset Management said on a recent interview with King World News,  “We are in a period in world history which has never been seen before, and the thought that the powers that be have any idea about getting us out of this mess without serious chaos is dead wrong.”

I believe that we should not be duped by thinking that very smart people are “taking care of us” via the money supply.  I believe that increasing the money supply via Quantitative Easing is a very simple concept that you can, and should, grasp.  Your money is losing 10% of its value per year, and unless you are a fabulous investor the stock market probably won’t compensate you for that.  This is not rocket science.

Destroying 10% of everyone’s money per year better result in some serious economic activity to justify it.  It’s 2013 and I’m wondering where the results from QE really are.  At this point I’m thinking someone in Washington should be concluding that it’s obviously not working, but somehow I can’t see any evidence of that.

I also believe it’s a safe bet that the only way QE is going is up.  That means the only real way to keep your net worth in the foreseeable future is gold.  Will it end in a bubble, like housing a few years ago?  I don’t know.  But what I do know is that the trend is most certainly in that direction and we are still early in the game.

The S&P/TSX global gold index is currently trading at about 16 times earnings, about half of where it was at the bottom of the crash in 2009.  Can you believe that?  Gold is the ultimate value play right now.

Three major issues have weighed on gold equities since 2009:

1. Capital cost increases.  The inflation rate in the gold industry has been around 15%, which is mostly driven by labor.
2. Management teams have figured that rising gold prices would cover up rising labor and equipment costs, and have thus been slack on cost increases.
3. The rise in popularity of the exchange traded fund (ETF) has undermined the demand for gold equities.

Thus, if gold companies clean up their act, which is showing some encouraging signs, investors could do better on stocks than on bullion.  For one thing, stocks can pay dividends.  The yield on the S&P/TSX global gold index is now 1.6%, up from 0.5% in 2010.  A gold ETF can’t give you that.

As I’ve been saying all along, if you’re going to buy a major or intermediate gold miner, look at the free cash flow.  Strip away all of the accounting-ese and look at how many gold ounces they’re producing (and will produce in the future) and compare it to the total operating costs of the company.  This free cash flow is king, and it can vary drastically among companies.  Gold mining companies’ finances boil down to the same math as a small one-person operation, Revenue minus costs equals profit, and that’s how much is left over at the end of the year.  I bought Eldorado Gold at $0.30 back in 2001 on the basis of free cash flow, and look at where they are now.  In retrospect, it was a no-brainer (although I wouldn’t necessarily call it one at the time).

I’ve been investing in junior gold for 13 years, and one thing I can say for sure:   A recovery will happen, it’s just a matter of when.  So with that mentality, which stocks would be good to take the most advantage of a recovery?

• Kaminak Gold (KAM-X) discovered a 3.2 million ounce gold deposit during the downturn.  The stock is trading below $1 with a market cap of only $80 million.  This one’s a no brainer.  In the 13 years I’ve been investing in junior gold, you’ve never been able to buy that much gold for that market cap.  99% of the time, you’ve needed to pay about 5 – 10 times that much.  In a recovery, a triple or quadruple on KAM is about as sure as they come (maybe even a ten bagger).
• Romios Gold Resources (RG-X).  With Copper Fox Metals advancing their Schaft Creek deposit to feasibility and Novagold investing more money into Galore Creek during the downturn, Romios is the so-called “golden triangle’s” hidden gem.  If both of those deposits advance to construction, which is a likely within a year or two, everyone will be looking for the next one, and Romios is the big landholder in the area.  At 6 cents, it’s definitely a higher risk play, but the potential rewards are enormous.
• Northern Freegold Resources (NFR-X) has slowly and methodically advanced their deposit from an exploration play to a 2 million ounce deposit during the downturn, complete with a Preliminary Economic Assessment that looks promising.  If the gold price goes up past $2,000, the economics on the deposit go off the charts, and at $0.10 ($15 million market cap) this is a ten bagger waiting to happen.
• Goldrock Mines (GRM-X).  If investing in new mines is your thing, Goldrock Mines has been advancing their Lindero deposit to full feasibility and will look to finance and build the mine within 2013.  In 2010, the prefeasibility study calculated an IRR of 25% and a payback period of only 2.8 years on 161,000 ounces of yearly production – at a gold price of $850/ounce.  Today’s numbers are no doubt substantially better, and with a capex of only $213 million, they could well end up with a majority, or even full, ownership of the mine, thereby become an intermediate producer in a couple of years.  Goldrock is run by a couple of mining engineers, and that is the stated goal.  At $0.65 (with low share count), this one you could someday be bragging to your grand kids about.
• Pilot Gold (PLG-T) is pulling fantastic drill holes out of the ground at their property in Turkey.  Run by the management of the former Fronteer Development (sold for north of $2 billion to Newmont) they knew the areas they worked in very well (Nevada and Turkey) and kept a few of the most promising development properties for the new spinoff when they sold Fronteer.  Now the properties are starting to turn up the goods.  Three PhD’s on staff ensure smart people are working for you.  When stocks like this get beaten down, it’s a massive buying opportunity.

Sometimes you will also see “streaming” agreements, whereby the royalty company buys the production with an upfront cost plus a fixed cost per ounce as it is mined.  The primary difference to the investor is that streaming agreements remove the operational risk even more, because the royalty company buys the first production, not the last production, and the purchase price is fixed.

I have invested in a few of these and I will provide a brief overview and analysis of each.

1. Franco-Nevada Corp. (FNV-T, FNV-N) is the big boy in the space. Although originally formed on the basis of a royalty agreement with Barrick for the Goldstrike mine in Nevada, USA, Franco-Nevada has done a good job diversifying itself over the years. Goldstrike now accounts for only about 20% of revenue (the Palmarejo gold streaming agreement accounts for about 25%). Franco-Nevada pays a dividend of $.72/share, or about 1.5%.
2. Royal Gold (RGL-T) is the other major player in the space.  They have arguably a larger development pipeline with big royalty agreements on two of the world’s giant deposits under development:  Barrick’s Pascua Lama project under construction and Seabridge Gold’s 42 million ounce KSM deposit.  With an annual dividend of $0.80/share (1.1%) the dividend is slightly lower but the potential upside is higher.
3. Silver Wheaton (SLW-T) is one of my big winners.  They basically invented the streaming business, which is particularly suited to silver but has now been successfully applied to gold as well.  Silver Wheaton’s overall cash cost per ounce is still $3.90, which used to be a healthy 50% discount to the spot price but has since turned into a ten fold profit on the original silver stream.  Of course, purchase agreements are pricier now but Silver Wheaton is still a big cash cow.
4. Sandstorm Gold (SSL-T) is not related to Silver Wheaton but Silver Wheaton’s success resulted in its CFO leaving to start Sandstorm.  Like Silver Wheaton, they stick to streaming agreements, with the primary differentiator being gold rather than silver.  They have assembled a fairly strong list of revenue properties with a cash purchase cost of about $400/ounce.
5. Gold Royalties Corp. (GRO-X) is a relatively new player in the space, with first revenue occurring in February 2013 from their Net Smelter Return royalty on Metanor Resources’ Bachelor Lake mine.  With another size royalty agreements waiting on revenue once production starts, this one could be a good speculative royalty play.

The ‘Academy’ is the only place (we know of) on the internet that teaches you how to invest in junior gold.  Right now, you invest based on a recommendation from somebody, or a news story, or a newsletter writer.  You just gotta wing it.  Where did they get their information from?  What do they know that you don’t?  And how did they differentiate between the multitude of stocks out there?

If you are one of those people who say maybe I should have my own opinion, then the Junior Gold Academy is for you.  Written by an engineer, the articles cover the following topics:

• Exploration:  Drill results, surface exploration.  What it means and how to interpret it.
• Feasibility:  All the acronyms explained.  NPV, IRR, Payback period.  What they mean to the investor.
• Share structure:  Does it matter?  If so, what should I look for?
• Types of Companies:  There are only a few, so we go through each type and how you can value them.
• Investment Strategies:  Of course, you have to have a guiding strategy, and we’ll walk you through the options there too.

How do I get there?

The only thing you have to do is look for the navigation item “Academy” on the menu bar of our site.  It’s a new section of our site.  Easy peasy!

Don’t forget to leave comments too.  We hope the Academy will turn into a learning area for all things Junior Gold!

1. Buy and hold
2. Short term trading
3. Momentum investing
4. Anticipating a bubble
5. Drill result speculation
6. Area plays
7. Buyout candidates
8. Refurbishing old mines

Buy and Hold

When the market is moving upward over the long term, this strategy can be successful.  The gold price has been rising very steadily and consistently since 2001.  Why not buy and hold until the major trend shows a sign of reversing.  The difficulty with this logic is that if I dropped you into 2006 or 2009, you would probably have told me the major trend has already reversed.  It is not as easy to call as you might think.  In order to play the sector with buying and holding you would want to get into established, producing companies, as exploration carries its own risk that far outweighs the broader market trend.

Short Term Trading

Given the massive ups and downs with junior gold stocks, why not buy when they’re low and sell when they’re high.  You won’t catch the exact bottoms and tops, but even if you’re somewhere on the correct side of 50/50, you should do okay, right?  With this strategy you would want to choose exploration stocks with some sort of underlying value (so they don’t go out of business or dilute excessively).  Even the exploration stocks will swing by a factor of 10 from the bottom to the top of the market, everything else being equal.

Momentum Investing

When a stock starts to move, it will probably continue to move for a while.  With junior gold, a discovery, or some other positive development with the company or in the area can get a stock price going, and often it keeps going for some time.  You just need to time the exit relatively well.

Anticipating a Bubble

Take a look at the gold price over 10 years.  Is it going to be a bubble, just like housing in 2008 or internet stocks in 1999?  How many people were kicking themselves wishing they had bought in early?  Maybe gold will be next.

Drill Result Speculation

With exploration, drill results are everything.  You never know what you might find, and when you hit the jackpot, stocks can 20 fold (I’ve seen it).  Why not look for the juniors that are drilling and buy stock in them?  Rotate your money around until you find a winner, and nothing else will matter (unless you don’t find a winner, of course).

Area Plays

When someone makes a discovery, everybody in the area benefits.  One could argue that all the others in the area that are farther away or not on trend with the discovery are overpriced.  So why not buy some stock of a junior that is making an entrance, or a company that is heavily advertising their involvement in the area.  You have to have your finger firmly on the exit button though, because area plays create share value that’s based on hype, and that’s a shaky foundation indeed.

Buyout Candidates

When a junior gets purchased by a major, there’s usually a premium.  The lowest I’ve seen is around 20%, and the highest I’ve seen is around 150% (Really.  Google ‘Andean Resources’, purchased by Goldcorp in 2010).  If you stick to potential buyout candidates, you can take part in these fantastic premiums once in a while.  At the minimum, it’s a quick buck from a relatively non-risky stock.

Refurbishing Old Mines

Some junior resource companies are trying to get some revenue by refurbishing old mines.  Even if they’re small, this is a gigantic leap forward because the threshold between exploring and producing metal is such an enormous hill to cross.  Just beware of the technical challenges.  Exploration people generally don’t know enough about mine construction, metallurgy, mining methods, or regulatory issues, to do it all by themselves.  Make sure they bring in more expertise, either in-house or via consultants.