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It sure has been a brutal year
for the junior sector so far. The horror show has decimated most juniors and
many are trading at levels not seen since the beginning of this bull market
in 2001. Does it mean the death of the juniors? Although most people would
tend to believe that would be the case indeed one has to remember that we
were there before in 2001/2002. Juniors were trading at penny levels coming down
from multiple dollar levels the years before. In 2003 however many juniors
caught tail wind and appreciated by 1000% or more in just a year. It's all
about perception.
Let me give an example here:
Company XYZ, a junior
exploration company that I’ve been following for years traded at 5
cents back in February 2002. Its market cap had evaporated by more than 98%
over the years before. You may guess what sentiment was at that time. Well, I
can tell you, it wasn’t good. But then suddenly out of the blue its
share price jumped by 100% in a single day to 10 cents and within 18 months
the stock appreciated to a high of $1.60. The company didn’t show off
any drilling results during that period and nothing spectacular had happened.
So what did cause the run (along with the entire junior sector) then? The
answer is simple. Perception changed. You simply can’t value a junior
without proven resources, it’s all about perception and expectations. Perception
can change overnight and once it does change things can go very fast. Now
fast forward to today, needless to say that sentiment has rocked bottom again
but the same applies today as it did in 2002. Once perception changes, things can go up fast again. John Embry recently said in an interview
with The Gold Report:
John Embry:
Things have gone much
farther down than I could have imagined in my worst nightmare. If you are
confident that the gold price is going higher, this is an ideal time to be
picking away and buying a diversified list of very good quality, cheap
juniors. I've made the most money in my life buying things that are out of
favor because there's no downside risk, certainly from a fundamental
standpoint. When the worm turns, these things could double very quickly. When
that happens it'll be hard to buy. Start picking away now, as long as you
share my opinion that the gold will see a hefty price rise over the next 12
months.
END.
As John Embry says
you have to be a believer in much higher gold prices since rising gold prices
remain the single most important driver for higher gold stocks.
Yes, I know many will
argue that the junior problems these days are related to the credit crisis
which will wipe out most juniors. A junior not able to finance its ongoing
exploration projects will bleed to death.
Although these
concerns are justified still many juniors out there are positioned well and
have secured their exploration budgets for years to come. Other juniors
(producers) don’t have to worry at all since they generate enough cash
flow themselves in order to get things moving forward.
So what could change
perception then these days? Well, that’s hard to tell, it could be a
spark generated by a new world class discovery, it could be record high gold
prices, it could be a chain of acquisitions by the major producers.
The bottom line is
you’ll be investing in juniors because:
- The industry is not
replacing the reserves it is mining every year so majors are forced to
acquire juniors because of the need for more reserves
- 75% off all new discoveries
are made by juniors
- History says the time to
buy is when sentiment hits rock bottom
- Buying juniors in early
2002 has paid off tremendously
- Buying juniors now will be
paying off most likely within 12 months from now
This is all described in detail
in my piece:
The Investment Case For junior Mining
Companies – part II
So juniors can be picked up
almost for free these days and it’s my strong believe that some of them
will show off stellar returns indeed within the next 12 months or so just
like we saw in 2003. Again, big up-moves always start from extreme depressed
sentiment levels.
Now you don’t have to be
an Einstein in order to recognize that we find ourselves at extreme depressed
levels indeed as most juniors couldn’t escape the wave of capitulation
selling that has haunted the TSX venture exchange for many months now. People
might wonder at what point the selling pressure finally eases, in other words
when can we expect to see the sign ‘SOLD OUT – No More
Shares Available’ hanging out in front of our beloved junior mining
companies. Let’s face it, at one point most sellers will be gone which
will result in a sharp contraction in volume of traded shares. What
we’ve been witnessing lately are sharp waterfall sell-offs on high
volume of traded shares. Once this volume of traded shares dries up
it’ll be a sign that most desperate sellers have done their dirty
job.
Please keep in mind that most of
the selling arises from redemption pressure. John Embry of Sprott Asset
Management admitted lately that his own Gold Fund was subject to redemption
pressure as well. It’s not that he wants to sell his juniors but he is
forced to do so through his clients. Again, at one point the selling pressure
simply eases because the stock will be sold out. What happens next is rather
predictable. No aggressive sell orders, only a very few offers on ridiculous
low price levels. This simply means that someone who wants to buy shares at
that point in time has to bid up the price. In other words, we can see sharp
recoveries just upon low volumes of traded shares. Believe it or not but many
juniors did pop up lately to the tune of 30%, 40% and more in just a single
day on just a few thousand shares. This should tell you something, it should
tell you that the selling pressure has eased indeed.
This seems to be good news for
the depressed share holder but where to go from here, why should you hold on
to a particular junior (or start buying), what chances does your company have
to survive, what chances do they have to come up with some real goodies that
will trigger some serious interest in the stock, in what time frame you could
expect some real excitement, how will management secure the funding of its
ongoing exploration efforts…
Enough questions but let’s
start off with what a junior should be worth, in order words, juniors that
traded several dollars last year, where they overvalued? Or are they
undervalued now since they’ve dropped to a few pennies only? What
should be fair value? The answer is already stated above, it’s all
about perception and expectations, you simply can’t value a junior
without proven resources, you just trust your hard earned money to
company’s management because you trust them to deliver you what you
expect them to in let’s say a two/four year time frame. Yes, the bottom
line is you invest in a small cap exploration company because you have faith
in management to deliver you a world class discovery which will enable you to
cash in on a 1000+% profit.
Sure enough when sentiment turns
south the small cap exploration company could drop by 50% or more and when
sentiment turns to the better that same company could appreciate again by
multiples of 100%, see SAMEX example in introduction above. The bottom line
is you shouldn’t invest in juniors in order to enjoy sentiment changes
but for discovery chances only. So if you see your favorite junior dropping
down fast your only worry should be if they will survive and if they will be
able to continue to do what you paid them for which is to explore for new
discoveries.
Many juniors are putting their
exploration projects on hold these days in order to preserve their remaining
cash. As a share holder I wouldn’t be too happy about that since that
leaves only sentiment change being able to raise share prices. In other
words, I wouldn’t invest in juniors who have put everything on hold. Once
the market turns you want to be invested in juniors who have done their
exploration work already instead of those that still have to start.
Coming weeks we will cover some
companies that could benefit most of a market turnaround. If you want to
participate you can join us HERE (special offer till
Oct 01)
It seems the gold market is
bottoming here. Although it’s still to early to tell but I don’t
see gold drop much further against sky-rocketing physical demand and extreme
dollar bearish news brought to you by Lehman Bros, AIG, Fannie, Freddie and
hundreds of other banks that will follow suit.
On Saturday September 13 we send
out the charts below to our members that support the view of gold to be
bottomed out at $730+ and HUI to be bottomed out at 250+
GOLDDRIVERS Charts Update
September 13, 2008
When gold approached its $850
support level in August and the HUI its 350 support level there was hope that
the correction that started in July was nearing its end. We all know by now
what happened next since these support levels didn't hold and a wave of
massive selling pushed gold and HUI to the next levels of major support
thereby leaving most gold share holders in a state of mental shock.
As painful as it is we just have
to deal with it and keep the big picture in mind which says the gold bull
market is far from over ( see 'Gold - Fundamentals still pointing
towards $2000+'). Gold has traded 9 out of last 10 sessions down and
approached its 2006 high of $730. The HUI started to perform well against
gold as of last Wednesday which usually marks the end of a long correction. Could
it be we've seen the Gold/HUI low's indeed?
Sure enough it's too early too
tell but from a technical point of view it seems that that could be the case
indeed. Now let's take a peek at the charts and see what they say:
r-Gold chart
My favorite indicator for
spotting major bottoms concerns the relative gold chart. The relative gold
chart has nailed all major bottoms of this gold bull market over the last 7
years. This time it flashed a major 'BUY' again in August (r-Gold value
dropping below 1.0). Unfortunately the r-Gold value dropped even further to
new low extremes and touched an incredible low of 0.84 on September 11. The
rGold value recovered a bit on September 12 and clocked 0.86. Combined with a
strong physical demand for gold the September 11 low for gold could very well
proven to be the end of the correction indeed.
The r-GOLD chart is gold divided
by its own 200 dma.It has proven to be a reliable indicator in spotting major
bottoms for gold in the past 7 years
As this r-Gold chart clearly
reveals, gold has been being pushed in its deepest over-sold territory since
the bull market began in 2001.
Now let's take a peek at the TA
gold chart and see where solid support is to be expected:
TA Gold chart
Whenever a long term resistance
is being taken out it becomes a future support level. This has obviously been
the case with the $730 level which took almost 16 months to be taken out. Now
on September 11, 2008 gold approached this level again but bounced off
sharply.
Will the $730 level proven to be
the end of the brutal correction? Again, maybe too early to tell but given
the fact we're witnessing record high demand for gold combined with an
extreme over-sold condition the odds are $730+ could be the bottom indeed. Furthermore
it should be noted that the HUI made an impressive bounce on Friday September
12 which usually marks the end of a severe correction. (HUI outperforming gold).
Now let's take a peek at the HUI
charts:
r- HUI chart
The r-HUI chart is gold divided
by its own 200 dma.It has proven to be a reliable indicator in spotting major
bottoms for gold in the past 7 years
The HUI crashed down all the way
to its 2005 break-out levels in the 250 - 260 range. Back in 2005 the 250 -
260 range had served as a long-term resistance level which took almost two
years to be taken out. Again, long-term resistance levels being taken out
will serve as support levels for future corrections. On September 11 the HUI
touched 253 but bounced off sharply from there towards 290 on Friday
September 12. This is really impressive and again, move like these (HUI
sharply outperforming gold) usually marks the end of a severe correction.
Gold/HUI ratio
During the correction the HUI
dropped faster than gold which translates itself in an appreciating Gold/HUI
ratio. By the time the correction end the HIUI starts outperforming gold as
described above. Sure enough this results in a dropping Gold/HUI ratio.
When we take a peek at the
gold/HUI ratio chart it becomes painfully clear how severe this correction
has been. Of a more up-beat note it's good to see the gold/HUI ratio dropping
fast since Wednesday September 10.
As mention above the HUI crashed
all the way back to its 2005 break-out level of 250. The TA HUI chart visualizes this
best:
TA HUI chart
Again, once a heavy long-term
resistance has been taken out it will become future support. As mentioned
above the HUI bounced off sharply from its support level (253) towards 290 in just one single day.
These are encouraging
developments but sure enough we have to be patient until recent down-trends
have been breached to the up-side.
Gold vs HUI chart
The last chart I want to show is
the gold vs HUI chart which clearly demonstrates the disconnect between gold
and HUI lately. The HUI was trading at levels not seen since gold traded at
$520:
Also clearly visible on this
chart is the extreme over valuation of the HUI back in December 2003 when the
HUI clocked 250 levels while gold just touched the $400 mark
END.
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Comments are welcome
at: ehommelberg@golddrivers.com
Best Regards,
Eric
Hommelberg
Editor,
the Gold Discovery Letter, the Gold Drivers Report
www.golddrivers.com
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