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As a result, Rick sees the majors paying substantial premiums for the juniors — more than you’d normally see.
“If the industry sees $2 billion in discounted free cash flows and they see a market cap of $600 or $700 million, they are willing to pay $1.3 billion to secure net-present value. So it’s possible that you will see 70%, 80% or even 100% premiums in bad markets, for good assets, in select names.”
Options traders are already sniffing this out: Early signs of a rally in small-cap gold stocks are showing up. According to figures from Trade Alert, open interest in call options on GDXJ — the gold junior ETF — reached a record 222,300 contracts as of Tuesday.
Starting a week earlier, “Options traders have demonstrated conviction in a turnaround, setting up multiple new positions that profit from gain over the coming months,” reports the Dow Jones Newswire.
What’s more, the put-versus-call ratio is the lowest since mid-September.
Interesting activity for an ETF that, as we noted yesterday, dropped 38% during 2011. Another catalyst Mr. Rule sees: New gold discoveries.
“It’s my belief that we are going to re-enter a discovery cycle and I would be surprised, frankly, if we didn’t have four or five names that made 50- or 100-fold returns on pre-discovery market capitalization.”
In fact, Rick finds the coming period analogous to the mid-1990s… when names like Diamond Fields shot up from $4 to $160… and Arequipa Resources catapulted from 30 cents to $30.
Another Good Year for Gold and Gold Stocks? originally appeared in the Daily Reckoning.
source: forbes.com
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