Investors have been interested in gold as an investment since Lehman's bankruptcy. The price of gold jumped to $900 an ounce in the days following the Lehman filing and AIG (AIG - commentary - Trade Now) bailout. In the weeks the followed, though, the price of gold collapsed amid an immediate deleveraging of all types of assets, stocks and commodities alike -- by November 2008, the commodity dropped to close to $700 an ounce.
At that time, many large gold producers and junior miners saw their stocks hit significant low points. In fact, if you go back and study the charts for the gold stocks, their low point came not in March 2009 but in early December 2008. Since then, they've had a steady upward climb.
You might have thought larger companies like Barrick Gold (ABX - commentary - Trade Now), Newmont Mining (NEM - commentary - Trade Now) and Goldcorp (GG - commentary - Trade Now) would have been scooping up junior miners at that low point because of the low prices. Like most of corporate America, however, they were hesitant to pull the trigger on any deals with so much uncertainty in the air.
With most observers expecting further price inflation and potential debt uncertainty ahead, many hedge fund managers are betting that gold prices will keep rising. If management teams of gold companies agree, they are likely considering how to grow their reserves. Using their higher stock prices and healthy cash balances will likely prove tempting in grabbing some smaller, valuable companies before other competitors do.
So, with the price of gold now much higher -- and the stock prices of these major players largely recovered (Barrick's market capitalization is over $44 billion) -- the sector seems poised for consolidation. What is the best way to play this? Simple -- look for the junior miners with the most attractive assets from a major producer's perspective.
I am a long holder of Seabridge Gold (SA - commentary - Trade Now), a company I wrote about back in February. Seabridge owns the rights to the KSM project in Canada; it's not developing the property, which is estimated to have 50 million in gold deposits, but looking to partner or be acquired by a larger producer.