What would you say if I tell you that there is a way where you can buy one ounce of gold for as low as 10 dollars?

Well, most likely you will shout out loudly: Scam! Or you will bring as much distance between me and you as possible. Both reactions are understandable. Because when anyone offers you to buy an ounce of gold for ten dollars, while the market price is, at this time of writing (August 2024) at around USD 2,400 then the gold must either be a very very cheap fake, or the seller must be a scammer, or there must be some other catch.

And to calm your worried mind, I will freely acknowledge that yes - there is a catch. But it might be a catch worth accepting, because the chance of profiting big is real:

A worthwhile catch: Watch your gold price raise and raise

While I am talking about real gold, I am talking about gold that is, well.....in the ground.

Uff, what a bummer. What's the point of having gold below the ground, eh? Sure, if you want to own gold because you like the looks and the feel of it, you may not like this story. If however you are interested in gold in order to make money, real money, a lot of money - then I suggest you give me a few more minutes.

There is no doubt that gold in the ground has a few disadvantages compared to gold in your vault, but it also has a few pros. Let me explain.

The disadvantages are that you have to invest a lot of money to get it out from below, seperate it from the ore where it is nestled in, and build a plant to purify it. Only then you have what's known as 'bullion gold', i.e. with a purity of 99,9%.

This is the investment gold that you can buy bars of gold coins from, and that is priced twice a day in London and in Shanghai.

Doing all of that takes a lot of money (several hunderds of millions of dollars), and also time ( at least five years, but even ten years would not be considered exceptionally long). This is why the market prices an ounce of gold that is still in the ground much below an ounce of bullion gold.  Makes sense?

And this then is the pro of gold in the ground: It is very cheap (also, no one is going to steal it, but that is another element).But cheap by itself doesn't need to be an advantage. For it to be of benefit, the cheap gold must transform into more expensive gold, so that you as a owner of this gold can take profit. And this is what is going to happen.

The gold in the ground is initially so cheap not only because of the time and costs involved for getting it out and make it shine. You also have to pay your people, pay back the banks that borrowed you money and so on. Additionally, you also have a number of unknowns: You don't know how much gold there really is, and how much of it you can recover. How costly it will be to do so, and how the gold price will develop. These factors also contribute to price limitations. 

In short, you have a mix of technical and financial challenges to develop a gold deposit, i.e. the site wheer the gold is amassed below ground and bring the gold out. This is the job of Junior Miners or exploration companies. And the more developed a deposit is, the more you will know about it, and the higher the market will value the ounces that you have:

As you can see, advanced projects (center column) that are about to build their mine can have valuations between USD 200 - USD 300 per ounce of reserves. This is in a way the upper price limit that Junior Miners will 'get' for their gold. Normally. Because in the left column, we spot that Kinross' Great Bear project is already at 270 USD per ounce below the ground, even though this project is not very advanced (because it doesn't have a feasibility study yet). This tells us that some projects are considered so exceptionall, that markets provide a very high price even to their below-ground-ounces. 

The upside potential of Junior Miners:

But let's assume for the moment that the USD 250 per ounce is kind of our upper limit (again, it can go beyond, but also may stick below), then looking at the ten dollars from the left colum in table one (Emperor Metals) simply tells us: There is a huge upside potential from the ten dollars per ounce to the 250 dollar per counce. Seen from this perspective, the job of an exploration company for its investors is to lift the price from ten dollars to 250 dollars per ounce. I know this is a bit of an oversimplification, but believe me: I have done numerous such valuations, and very roughly, this is what happens. 

Of course, a gold project needs to be of good quality so that it is worthwhile to continue developing it, and you need to have the right people on board that are able to do all this work and get money from investors. But it then clearly means that a good gold project has the ability to increase its market valuation for its ounces by ten, fifteen, twenty and thirty times (again, from ten dollars to 300 dollars per ounce). 

This is sort of an alternative explanation of the gigantic upside potential that Junior Miners have. Of course, there is also a diminishing effect through dilution, which Junior Miners need to undergo to get fresh capital from the stock exchanges. This will led to an increase in shares, meaning that you as an investor will not enjoy the full raise. But there still might be enough of it left. Increases of more than thousand percent (i.e. a ten-fold increase in value) are happening in this sector. 

Of course, it also depends on the time when you enter as an investor: The earlier, the lower the price (of both the ounces and the market capitalization). On the other side, the risks are also higher.

This is the trade-off any investor has to examine. If you chose the right project, you can also profit from this unparalelled price increase.

The company I have mentioned in the left column in table one (Emperor Metals) is a Junior Mining company where I have invested in myself and which is in the Explorado portfolio. You can read more about this company, and why I think it will increase in value substantially here:      

Note: (i) I have no contractual relationships with the companies I analyze; (ii) I may own shares of analyzed companies, so potential conflict of interest may occure; (iii) this is no investment advice, but purely for educational purposes. Interested investors need to conduct their own due-diligence and/or request professional advice.