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Here
we are in May, and everyone asks the question, is it time to sell and walk
way? Well that depends what you are holding. This article focuses on timing
in regard to the junior resource mining equities, for which we use the S&P/TSX
Ventures Composite Index as a proxy.
Resource Junior Sector Roller Coaster
Over half of our fund's portfolio of 50+ junior issues are trading 50% below their
peaks, and I suspect many other junior resource investors are in the same
boat. Indeed, despite oil and gold trading at all time record
highs, the TSX Ventures Composite Index ("Ventures Index") is
trading near its 2 year low. Investing in juniors in the past 2 years has not
been for the faint-of-heart and the Ventures Index has made several round-trips
between 3,300 and 2,500, highlighted by a stunning and record 33% drop last
August.
 
Good fundamentals of underlying
commodities
I have been hearing oil bears talking of
a big correction since oil was $40. While I can't tell you where oil is
going, the chance of it ever going below $100 is diminishing rapidly by the
day, as the chart indicates strong support at 200 DMA (day moving average),
which is $95 and rising.
Gold has been a lagger
relative to oil. Gold price is currently sitting at $880/oz and the chart
indicates good support at $850, its 1980 high and support at its 200 DMA of
$830, which continues to rise. We project the next leg up for gold later this
year will be to take out $1,000/oz with ease.
Junior Shares: Buy or Sell?
Below we show the chart of the Ventures
Index divided by gold.
This ratio indicates the relative value
of junior mining shares compared to the price of gold.
As the chart indicated, resource equity
investors did well by selling in April of 2002, 2004, 2005, 2006 and 2007
(red circles). Is selling resource equities the right move again in Spring
2008?
One might think so; however, this chart
is sitting at 7 year low since the bull began in 2001 and it is a hard case
to argue against investing in the Ventures Index if you don't see gold and
oil staging a spectacular 30%+ crash. Another way to put it: I see the risk
of getting in the Ventures index as very low unless oil and gold crash 30% in
the next 2 months.
Technically, as we saw before, The
Ventures Index is currently trading at 2,500, lurking right beneath its 50
DMA. I track dozens on dozens of junior issues and many are staging similar
breakout patterns by Knight Resources (KNP.V) and Independent Nickel Corp
(INI.TO) below.
On April 8, I published an article
titled "The start of the run for gold (shares)" http://www.goldmau.com/content/contributors/lee_john/08-04-09.php
From that article:
"It makes no sense that the
American mortgage crisis is impacting Canadian gold and resource juniors. One
can now margin at 5% to buy oil trusts paying 15% dividend and gold juniors
for less than $10/oz in the ground. I am confident the situation will
reverse, offset not by higher interest rates but by higher junior stock
prices.
Within two months and as soon as we hit
the bottom of interest rates, I expect all the hoarded money to spill out
looking for a new home as it simply does not pay to park money earning 2%
with real inflation running at double digits.
-John Lee, April 9 2008
Now a month and another interest cut
later, we are indeed seeing revival of the Ventures Index and I expect it to
break out of 2,500 level to test 200 DMA of 2,750
shortly.
By :
John Lee, CFA
Goldmau.com
John Lee is a portfolio manager at
Mau Capital Management. He is a
CFA charter holder and has degrees in Economics and Engineering from Rice University.
He previously studied under Mr. James Turk, a renowned authority
on the gold market, and is specialized in investing in junior gold and
resource companies. Mr. Lee's articles are frequently cited at major resource
websites and a esteemed speaker at several major
resource conferences.
Please visit www.GoldMau for instant market alerts and stock updates.
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