Risk aversion is now the prevailing sentiment for investors in the stock and credit markets. Credit spreads are growing across the board. As just one of many examples, the chart below shows a spike in the ratio between the US treasuries and investment grade corporate bonds to levels not seen since 2002.

Investors are moving money from paper assets to tangibles. Hard assets such as gold, silver, platinum, crude oil and various agricultural products (all part of the Reuters-CRB Index - $CCI) are near new highs.

In the natural resource stock arena, this mounting risk aversion is reflected in the underperformance of small cap juniors. In fact, this class of equities began to fall sharply relative to gold in the summer of 2007, at the same time when fears of the systemic financial crisis started to haunt investors.

This has become somewhat of a puzzle for bargain hunters who are invested in junior mining companies and who have been unable to capitalize on the gold price move since the beginning of the financial crisis in the summer of 2007. In fact, risk aversion has become so severe that small caps traded on the Venture exchange in Canada are now at their lowest level relative to gold (real money) since the beginning of the gold bull market.

This spells opportunity. Unless we are on the brink of falling into a depression (the probability of which, in our opinion, is slim to none), patient investors who continue to build positions in extremely undervalued junior mining companies will be quite pleased with their returns in 2008.

This article continues on the theme addressed in two prior publications: Junior Mining Company Credibility in Question and When Will the Juniors Finally Begin to Rally?

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