What to Look for in Small Gold Miners

Using a smartphone to calculate data

The start of this gold bull market began in 1999. As Jim Rogers, author of Hot Commodities writes, "The shortest bull market for commodities lasted 15 years, the longest 23 years, so if history is any guide, they've got a long way to go. This is not a bubble."

The uptick in gold is barely 13 years old. So we should see at least two more years of this party - maybe more - with a whole lot of investors making a boatload of cash. And you can be one of those investors.

The bottom line is that the problems plaguing the United States - the same ones that propel the price of gold - are far from over. That's good news for investors in the yellow metal.

As the U.S. dollar weakens, the price of gold strengthens. When the dollar fell in 1982 and 1983, the price of gold rose from $294 an ounce to $514 an ounce in just nine months - an increase of 74%. It happened again from 1985 to 1987, when a drop in the dollar propelled the price of gold from $282 to $502 over 21 months - an increase of 78%.

Several years ago our currency was in trouble. The Fed reacted and pumped $15 trillion dollars into the U.S. economy - a staggering amount of money.

As nervous global financial markets sold off steadily the Fed "came to the rescue" and cut interest rates to all-time lows.

As the dollar enters its next down phase, the United States could easily suffer a flight of capital. Not only will you see each dollar buy less, but, more importantly, there could be less demand for dollars, as foreign investors slash the flow of dollars from Asia, Europe, and the Middle East... or our biggest debtors start to pull their money from U.S. Treasuries.

At SmallCapInvestor our favorite gold investment is small, unhedged miners. We like the miners because of the profits they make as gold head higher. As you can see from the chart below most miners are profitable with gold around $620 an ounce range. After that, every dollar that gold rises goes right to the bottom line.

So miners can grow earnings at an exponential rate when gold prices rally. There's more risk with the small miners in the down times, but when gold spikes higher like it is now, the small miners are the place to be invested.

Back in mid-February, our commodities expert Kevin McElroy mentioned a small cap gold miner that he found appealing and remains bullish on the pick. It trades on the Canadian exchange, although the company also trades on the pink sheets - Kevin doesn't recommend buying the stock on the pink sheets because you might have difficulty buying or selling significant blocks of shares due to lack of volume.

So you'll either have to get set up with your full-service broker to buy stocks on Canadian exchanges, or open up a new account with a broker who can access Canadian exchanges.

Guyana Gold Fields (TSX: GUY) has a market cap of over $700 million.

This company has a slew of gold projects in different stages of development, with NI-43-101 reports under its belt and a few more coming in 2011. Each of these reports is a potential upside for this company. A large gold mineralization certified by a NI-43-101 could easily double or triple this company in short order.

Kevin says, "don't bet the farm on any gold miner. Even a $500 stake could give you a substantial return - but don't invest any capital that you would miss. I'd buy this company in three tranches. Buy your first tranche now, and if the stock starts to run, you can use your own judgment to jump "all-in" in two other purchases".

Kevin has been dead on in commodities, so take serious heed to his advice.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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