Montreal, Canada

The next super phase of the gold mining bull market is already underway since last spring. For the first time since 2007, junior mining stocks are racing ahead of the pack this year. The only sectors even coming close are junior and mid-sized base metal mining stocks.

Two primary gold exchange-traded-funds now show a clear divergence as performance favors the juniors and mid-cap exploration companies.

The Market Vectors Junior Gold Miners ETF (NYSE-GDXJ) was launched about a year ago and has almost doubled in value.

Since January 4, 2010, GDXJ, which holds a basket of mostly junior and mid-sized Canadian junior mining stocks, has gained 89%. Since July 1, GDXJ is up 57%.

In contrast, large-caps dominate the Market Vectors Gold Miners ETF (NYSE-GDX) – up more than 50% this year and up 27% since July 1. That’s not too shabby but pales compared to the more speculative smaller companies.

Large-Cap Gold Miners Set to Accelerate

Going forward, large-cap gold miners will accelerate acquisitions in the sector because it remains the most cost-effective way to build reserves. Net new above ground supply of gold has been in a secular downtrend since the late 1990s with South African production down by about 50% over the past decade. New reserves must be found through acquisitions and the best-managed large-cap gold miners have the cash.

In 2009, my Commodity Trend Alert (CTA) recommended an obscure small gold mining company in Canada called Rubicon Minerals (AMEX-RBY). The stock has almost doubled since our promotional editorial on gold last year and has surged more than 55% since November 1st. Rubicon is also a constituent of GDXJ.

A significant correction lies ahead for the gold mining sector. By all measures, we’re heavily overbought on a short-term basis and new investors are advised to dollar-average fresh purchases at these levels.

I suppose a violent but short-lived correction will arrive over the next several weeks, which will once again serve as another buying opportunity as gold prices head into Year XI of the greatest bull market on Earth.