To OTC Journal Members: 
 

One of the Greatest Divergences in the History of the Stock Market

All the global turmoil and the irrational desire to flee from equities has created one of the most exciting and widest divergences I've ever seen in 23 years investing in small and microcap stock.

Junior mining stocks- both in Canada and the US, went absolutely berserk in late 2010 and into May of 2011. With gold soaring up the charts, the junior mining companies were able to access capital, and the gold rush was on. The stocks traded gang busters for about six months.

I was lucky enough to make a triple on Orezone Gold (TSE: ORE), and I have friends in Canada who notched 6 to 10 baggers in early 2011.

Gold is not being accumulated massively for its true value. An overleveraged world is seeing currency universally lose value- with the dollar leading the pack. Investors are accumulating and hoarding gold as alternative currency to dollars, Euros, and the like. Just in the last 18 months gold has appreciated from $900 an ounce to about $1700, and many analysts are forecasting much higher prices ahead.

I believe the analysts see gold going higher until the world completes the process of "deleveraging"- meaning the economies of the world need to absorb the economic punishment associated with over borrowing.

There's a perception Europe is in crisis right now- their banking systems has not dealt with the massive defaults we have in the US. Stateside our Federal Government is now the worst offender. Think of the Federal Government as a 28 year old who got his first job, got 3 credit cards, then went and maxxed them all out to the tune of trillions. Your out is either defaulting on the debt, or getting more credit cards. The stock market has been casting its vote for a little more fiscal restraint of late.

So- what's the greatest divergence in the history of the stock market? Glad you asked. It's the price of gold vs the market valuations Junior mining companies are getting for the gold they own in the ground.

This is a divergence that cannot and will not last. If you believe as I do, that gold is likely to continue to appreciate, in today's market there's far greater upside in Junior Mining companies than there is in owning gold.

Junior miners are a lot like biotech companies. Successful smaller biotechs rarely develop new drugs and/or devices that they end up marketing. Typically, what happens is the small biotech develops the new drug to certain point using financing from the higher risk takers, then sells out to a major, risk averse pharmaceutical company.

Junior miners are the same. They test drill, do studies, and take samples. Once proved out with data, they either sell out or do a joint venture with a deep pockets major mining company, and the early shareholders stand to make absolute fortunes.

If you're an astute risk taker, and you want to make a fortune betting on gold in today's market- think junior miners. The market caps on the junior miners are set as if gold were only about $900 an ounce.

You can make a lot of money as the divergence corrects back to the middle, then a major find can get you a 10 bagger.

One more question- do you know where the richest gold fields in the world are? You got it- Central Mexico. The most expensive buy out in history came out of Central Mexico, and here's a new player in the sector that could be sitting on $18.14 billion in gold:

Lone Star Gold (OTC BB: LSTG): Lands Smack Dab in the Middle of Gold Country

I have no idea how unknown Lone Star Gold pulled off this major coup, but the fact is they did, and watch this stock start to go absolutely ballistic when the market opens tomorrow.

Late last week LSTG disclosed it signed a definitive agreement to purchase a 70% interest in 2000 acres in Central Mexico. Known as the La Candelaria gold-silver project, this property is spittin distance from one of the highest mining buy outs in history.

The La Candlelaria property is located 125 miles southwest of Chihuahua, and is next door neighbor to the massive Goldcorp (NYSE: GG) El Sauzal mine. Goldcorp paid Glamis $9.5 billion for the property back in 2006, and Glamis shareholders made an absolute fortune on the event.

As you can see from the map, La Calendelaria is located smack dab in the middle of some very prolific mining country. Goldcorp (NYSE: GG), Silver Standard (NASDAQ: SSRI), Coeur d'Alene (NYSE: CDE), and Gammon Gold (TSX: GAM) all have major operations in the area, and several of them are petering out.

Any one or all these majors have infrastructure in the area, and will need to replenish their resources by using a few of the billions they all have in the bank.

The opportunity is there. Thee behemoths are lurking nearby.

Now, let's look at potential valuation. 

$179 Per Share?

I have read one report that predicts LSTG is headed to $179 per share. I expect the stock to be trading in the $.90 range at the open tomorrow.

Those who have been reading the OTC Journal for sometime known I rarely make outrageous price predictions of that magnitude.

The forecast is based on the initial samplings from the property you see here.

The initial surveys, done in 2009, show there could be $18.4 billion in gold and silver located on this property. Initial samplings on La Candelaria property show 0.35 g/t gold and 89 g/t silver.

Secondary samples showed grades of up to 0.20 grams g/t gold and 44 g/t silver.

Estimated gold reserves: 10.3 million ounces (Moz) at average grade of 0.20 g/t gold.

10 million ounces of gold at today's price of $1700 per ounce equates to $17 billion in revenues-

Hence the forecast by another of $179 per share for LSTG. From $.90, that much gold equates to nearly $180 per share.

In order to see that kind of share price, and awful lot of good stuff needs to happen, and it might be quite a ways down the road before this stock sees a price any where near remotely like that.

So, let's come down the earth and consider what might happen in the near term.

The price of gold has gone parabolic. Money will begin pouring in the junior miners in pretty short order.

LSTG is a new player on the block, and hundreds of thousands of investors will be reading and learning about this company this coming week.

Let's just consider the next week. LSTG closed at $.80 on Friday. The news of their first acquired property just came out, and they are in the market's sweet spot. Look for lots of action on Monday.

I suspect the stock can probably find its way to the $1.25 level the first week, so anyone shares accumulated under $1.00 will likely be in the money in the short term. Your upside is $1.20 to $1.50 in the first two weeks.

Of course, your protection against your downside is a stop loss. $.65 seems reasonable for LSTG.

Conclusion: $1.25 to $1.50 upside in the short term. Really long term think $179 per share. Why not? It's happened before, and could happen again.

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