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Should you follow the rich into these gold stocks?

Do they know something we don’t know?

Possibly. As it seems quite a few wealthy investors and fund managers are jumping into or topping up their holdings in junior gold miners.

Well-known small caps fund manager, David Paradice, is reported to have jumped into the junior end of the gold sector in September last year, including Saracen Mineral Holdings (ASX: SAR) and Perseus Mining (ASX: PRU), according to the Australian Financial Review (AFR).

Mr Paradice told the AFR that he thinks the US still has some issues and it will take a while for the economy to recover there. And as a result he was looking at defensive stocks like gold.

James Packer’s Ellerston Capital has acquired a 5.4% stake in Teranga Gold Corp (ASX: TGZ), while BRW rich-lister, Bill Paterson, holds shares in Kingsrose Mining (ASX: KRM), Northern Star Resources (ASX: NST) and Beadell Resources (ASX: BDR), having recently sold out of Saracen.

Legendary prospector Mark Creasy, of nickel explorer Sirius Resources (ASX: SIR) fame, holds shares in gold miner Evolution Mining (ASX: EVN).

As Mr Creasy told the AFR, “Things are on the improve for gold shares. Last year the market was basically pricing gold stocks as if gold was never going to come back again, ever.”

Late last year, many analysts were predicting gold prices of around US1,000 an ounce or lower, perhaps taking the short-term falls as a longer-term trend. That hasn’t occurred, and gold has recovered back above US$1,300 an ounce.

Foolish takeaway

The evidence suggests these wealthy investors took a sensible, contrarian approach and invested when most of the market was predicting dire straits for gold stocks. It’s an important lesson for investors — ‘being greedy when others are fearful’ as Warren Buffett has said. Something I suggested in this article back in August last year.

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Motley Fool writer/analyst Mike King owns shares in Kingsrose Mining and Beadell Resources. You can follow Mike on Twitter @TMFKinga

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