Gold stocks are rocking.
Gold prices climbed from $1070 an ounce to $1250 in the last four months -- a 17% upswing.
Gold stocks, as should be expected, have multiplied those gains many times over.
The VanEck Vectors Gold Miners ETF (GDX), which is made up of the largest gold mining stocks, is up 91%.
The VanEck Vectors Junior Gold Miners ETF (GDXJ), which contains smaller gold mining stocks, is up 116%.
This is a major turn following four years of steady declines for the gold sector.
Sentiment towards gold has turned completely around too. And if it holds, gold stocks have a lot further to run in the months and years ahead.
However, after a run like that, gold stocks will correct. And when they do, the drop could be fierce. We’re talking a 20% to 30% potential drop.
Of course, that correction may not come until gold stocks rise another 50% or more.
That’s why now, for investors wanting to get in on gold stocks without chasing them, I’ve found an undervalued alternative which offers just as much capital appreciation potential as gold stocks with a lot less risk.
Here it is.
More Gains, Less Risk
Gold mining is one of the worst businesses you can be in.
It’s capital intensive.
Regulations are extreme. Just getting a permit in any first-world economy takes years...if it’s ever granted.
And there are always problems. Always.
Take Novagold (NG) and it’s Galore Creek project in British Columbia, Canada.
This massive project contains an estimated eight million ounces of gold, nine billion pounds of copper, and 136 million ounces of silver.
It’s big. Worth billions of dollars after costs are included.
Novagold partnered with a major mining company and put together the $2 billion to start building it too.
Within six months of starting to turn the deposit into a mine though, costs soared to more than $5 billion, the project was cancelled, and Novagold shares dropped from $22 to less than 40 cents.
Gold mining is a risky business.
There is a much less risky alternative that has done just as well as gold stocks though.
Best of all, these stocks do well because gold mining is so risky.
You see, gold companies raise and spend fortunes exploring and developing new gold deposits.
And with renewed interest in gold, they’re getting the capital they need ramping up those efforts fast.
It all starts with new capital. Piles of it.
The TSX Venture Exchange (TSXV) is the home to hundreds of gold exploration companies.
They raise money primarily by issuing shares and then invest that cash into exploration and drilling.
The money flowing into these companies is just starting to tick up.
Last month TSXV companies raised a total of $295 million. That’s an 82% increase over the $162 million raised in April 2015.
That’s great news for drilling companies which have been beaten up just as bad as the gold sector.
If you look at Energold (EGDFF), a small drilling company, it’s fortunes are just starting to turn around like the rest of the gold industry
It’s shares have fallen from past highs above $5 a share in 2011 all the way down to a recent low below 50 cents a share.
This year they’ve doubled back to about $1 a share.
Here’s the thing though, if a new gold bull market is coming, it’s going to mean an order of magnitude more work for drilling companies like Energold.
Let’s go back to the TSXV financing activities.
As you know, this past April was up big. An 82% increase.
Despite that, there’s so much room to grow.
If you go back to March 2011 -- the height of the last gold run -- you’ll find TSXV companies raised $1.6 billion.
That’s 506% higher than it was in March 2016 and a good idea of the growth opportunity for drilling sector companies.
The Only “Sure Thing” In Gold
There are unlimited ways to get in on it from ETFs which invests in precious metals directly to high-risk junior gold chasing the next big gold discovery.
There’s a clear correlation between risk and reward with all of those.
The gold drilling sector offers an anomaly on the risk spectrum.
It has massive growth potential, yet it isn’t a high risk exploration play or mining development company which faces truly massive risks at every turn.
In the end, there are so many unknowns about the gold sector.
We don’t know which companies are going to make the next big discoveries.
We don’t know which companies will run into disastrous operational problems.
We do, however, know companies are going to raise a lot of money and spend it looking for new gold discoveries.
As a result, the drilling companies are looking at years of growth ahead.
If you like gold, the drilling companies offer a safe, more diversified alternative without having to sacrifice all the capital appreciation potential by sticking to lower risk ETF’s and major mining companies.