The juniors are cheap, and they "should" be acting better than they have been given where gold is. I agree with that, as do most gold bulls. But is that because there's a conspiracy of naked shorts that have decided to single out gold stocks in the one space (resources) that happens to be in a bull market equity-wise? That seems about as far-fetched as the theory that a conspiracy of "speculators" are to blame for the rise in oil and other commodity prices. (Again notice how the camp that believes oil's rise is a conspiracy similarly don't think it should be where it is and are forced to blame "conspiracy X" when oil doesn't do what they think it should, namely: "go down")

The gold shares (and the juniors in particular) have underperformed for a variety of reasons since last November. In my humble opinion, the most likely causes for this are (1) the illiquid conditions that existed in the stock market from November until March and (2) the sharp drop in the gold/oil ratio since March, which replaced illiquidity fears with fears of rising costs eating up gold mining margins.

The liquidity problem ended in March when the Fed began basically monetizing (depending on how you look at it) bad debt on the balance sheets of banks and primary dealers. However, the gold/oil ratio then began to collapse in March and provided a second headwind. That ratio "appears" to have bottomed a little over a week ago near the prior 2005 all-time low. If so, the shares (including the juniors) should be free to rally, assuming gold has another leg up to new highs like I expect. And it will have nothing to do with "running in naked shorts in juniors", no matter how emotionally pleasing such an image might be.

-Prof. Lewis

Position in gold.