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The
stocks within the junior exploration sector have recently become influenced
by a new mind-set. Earlier in their Bull Market these companies were affected
by two primary factors. The first was the price of gold.
The
yellow metal struck its Bear Market $252.50 low in August,1999. After
displaying an initial burst of strength it again declined and posted a double
bottom at $255 in early 2001. It has since doubled in price and, until now,
the junior stocks have tended to mirror gold’s price action. Each yellow metal
up-wave saw a delayed overflow of excitement enter the juniors moving them
higher in price, while each gold set-back made their stocks whither.
The
second heretofore major influence driving the junior shares was a spill-over
of emotion and capital from the major gold stocks. As a group, the gold
producers tended to move in lock-step fashion with gold, with the exploration
companies carried by their tailwinds.
For
newcomers to this sector I believe that it is important to recognize that the
gold and gold producer Bull Markets have influenced virtually all stocks
within the mineral exploration universe. It hasn’t greatly mattered
whether these small enterprises explored for gold, silver, copper, nickel,
uranium or any other precious or base metal.
One
should view this sector as a world unto itself. Investors and speculators
that enter this arena tend to commit a certain portion of their speculative
capital to it. They may initially be seeking exposure to gold explorers, but
once their money enters it influences the entire group.
An
analogy would be a small town or country, where one or more sectors for one
reason or another attract a large influx of new capital. Most of the shops,
factories or other enterprises will experience an increase in business. This
will encourage a further rise in spending which benefits the financial state
of the entire community. Salaries and incomes will improve, and the citizens
will become more prosperous as money flows from one hand to another.
So
it is with the junior exploration sector. Once exposed to the market,
investors witness copper, uranium or other exploration companies generate
substantial profits for their stockholders. This moves many to invest in
non-gold explorers in their desire to similarly profit. Further, given the
numerous Bull Markets in which various precious and base metals find
themselves, most stocks within this group attract further capital from other
investors for the specific metals for which they search.
I
believe that a bit of history from my experience is warranted at this
juncture. The early stages of a gold Bull Market, which can last for a few
years or more, sees little money entering junior companies from the general
public. Those who first purchase gold stocks either recognize the birth of a
new Bull Market, are resource funds, or are speculators. They are all
familiar with the market.
The
early major money enters from generalist funds. They will take positions in
the major companies such as Barrick Gold and Newmont Mining and move their
prices higher. They acquire shares of the best known companies as they do in
all market areas that they trade. The secondary producers will also do well
because some money will flow into them in anticipation that escalating gold
prices will drive their profits higher. The pending producers will also
attract some capital because profits from their future production now seems
assured. The junior companies will float higher in price primarily based upon
the “hope” that they will “strike it rich”.
Of
utmost importance is that all gold stock advances historically follow a
similar pattern. They tend to begin with the major companies first leaving
their lows behind. This is followed by the secondary producers moving higher,
and later by the pending producers. After these sectors are trending higher
the junior companies join them, and the entire group rises together.
LATER IN THE GOLD CYCLE
As
gold’s Bull Market progresses, the producing companies continue to
strike new highs. Their price appreciations are surpassed by the expected
producers whose investors hope will one day generate income. During this
period the market capitalizations of the producers and future producers
sharply escalate in value.
At
some point one or more experts announce that “the large caps are too
expensive”, and that profits should be taken. They recommend that the
money should be reinvested in lower quality gold related companies.
For
the first time, significant outside money begins to flow into the various
levels of exploration and developmental companies. Its main target is
companies with large, advanced projects that higher gold prices are expected
to make economically viable. Investors by this time witnessed major profits
accrue to those who bought junior companies that rose from pennies to
dollars, on the back of their impending production.
Throughout
gold’s Bull Market most investors watched from the sidelines while the
large known but earlier uneconomic deposits approached or were brought into
production. Their hearts sank while they observed the stock prices and market
capitalizations of these companies soar without their participation.
Finally,
a company or two announce impressive drill results. Earlier, their share
prices would have attracted attention, but little excitement. However, now,
more and more investors become frightened that they will miss yet another
huge score. They compare the new exploration results to those of the
“pending producers” that they failed to invest in and fantasize.
They dream that their new stock will rise in price and generate huge market
capitalizations such as their comparisons. This marks the birth of a
“drill hole market”.
The
metamorphosis that exploration stocks have just undergone is of great
importance to investors. It appears that the last few months of 2005 marked
the birth of a “drill hole market”. These are rare and are
characterized by the great excitement and soaring stock prices that accompany
impressive drill results. Investors now compare single drill assays with
those that companies with substantial projects and market capitalizations
have reported to the market. Investor’s imaginations take control and
they believe that their company will become a producer, and rocket to a
market capitalization of an advanced successful “look alike
company”. Their fear of lower metal prices evaporates. These are times
when “the luck of a single drill hole into a mountain of geological
uncertainty” will stun the market and multiply a tiny company’s
share price. These markets can last for years, and I believe we have just
entered such a market.
By
: Dr. Richard
S. Appel
www.financialinsights.org
The
above was excerpted from the February 2006 issue of Financial Insights ©
I publish Financial
Insights. It is a monthly newsletter in which I discuss gold, the financial markets,
as well as various junior resource stocks that I believe offer great price
appreciation potential.
Please
visit my website www.financialinsights.org where
you will be able to view previous issues of Financial Insights, as well as
the companies that I am presently following. You will also be able to learn
about me and about a special subscription offer.
CAVEAT
I
expect to have positions in many of the stocks that I discuss in these
letters, and I will always disclose them to you. In essence, I will be
putting my money where my mouth is! However, if this troubles you please
avoid those that I own! I will attempt wherever possible, to offer stocks
that I believe will allow my subscribers to participate without unduly
affecting the stock price. It is my desire for my subscribers to purchase
their stock as cheaply as possible. I would also suggest to beginning
purchasers of these stocks, the following:
always place limit orders when making purchases. If you don't, you run the
risk of paying too much because you may inadvertently and unnecessarily raise
the price. It may take a little patience, but in the long run you will save
yourself a significant sum of money. In order to have a chance for success in
this market, you must spread your risk among several companies. To that end,
you should divide your available risk money into equal increments. These are
all speculations! Never invest any money in these stocks that you could not
afford to lose all of
Please call the companies regularly. They are controlling
your investments.
FINANCIAL INSIGHTS is written and published by Dr. Richard Appel and is
made available for informational purposes only. Dr. Appel pledges to disclose
if he directly or indirectly has a position in any of the securities
mentioned. He will make every effort to obtain information from sources
believed to be reliable, but its accuracy and completeness cannot be
guaranteed. Dr. Appel encourages your letters and emails, but cannot respond
personally. Be assured that all letters will be read and considered for
response in future letters. It is in your best interest to contact any
company in which you consider investing, regarding their financial statements
and corporate information. Further, you should thoroughly research and
consult with a professional investment advisor before making any equity
investments. Use of any
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