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September 21, 2005 – There is
a well-defined pattern that has repeatedly occurred throughout my
participation in the gold market. In fact, I am certain that it predated my
late1960's entry into this field. Unfortunately, for me, it took nearly a
decade before I recognized its existence, and another decade plus before I
first benefited from it.
I believe that there are three distinct primary investor groups that trade in
the gold related markets. The membership in each is determined by the
differing mind-sets of their members.
The first group consists of
those who purchase physical gold. They are typically very conservative and
acquire gold primarily as a hedge against the threat of the dollar’s loss of
purchasing power, or to protect themselves from an economic or financial
disaster. These individuals are not greatly interested in gleaning profits
from their gold holdings. Rather, they are motivated by the desire to preserve
the purchasing power of the capital that they already possess. They tend to
be long-term and steadfast holders of gold and rarely trade.
The second group consists of
some individuals from the first, who are willing to place a portion of their
available funds at risk in the hope of greater gains. They are joined by a
far larger number of investors. These people also share the former
contingent’s desire to protect themselves from the excessive creation of
dollar credits. However, instead of investing in gold bars or gold coins they
utilize producing gold mining shares to achieve a similar end.
Those who invest in the stocks
of the gold producers see an opportunity to not only protect themselves from
their government’s profligate spending, but to enhance their profits by the
perceived leverage offered by the gold stocks. How many times have we heard
statements describing the greater rewards that can be achieved with gold
producing company stocks, compared to a rise in the yellow metal? After all,
a higher gold price should largely drop to the bottom line of a mining
company’s balance sheet. And, by the price/earnings multiplier, won’t the
astute investor realize a far larger percentage gain with his shares compared
with any gold price rise? These are the thoughts that drive diehard gold
investors to purchase the major gold stocks.
These individuals are
generally conservative investors who also believe that gold is destined for
far loftier levels. They are willing to take greater risks than the first
group and are often the most nimble in trading the eternal metal. Their goal
is to magnify their profit by purchasing the companies that rend it from the
bowels of the earth, instead of from ownership of the yellow metal itself.
The third contingent consists
primarily of speculators of one degree or another. The allure for these
individuals is the potential for huge and hopefully obscene profits. This
group cannot be called conservative by any stretch of the imagination. The
motives for their involvement in any form of gold investments range from
being true believers in gold’s Bull Market, to being opportunists who desire
to profit from improving gold momentum. Members of this coterie are searching
for the most profitable and highly leveraged fashion to “play” the gold
market.
Many within this grouping
don’t even believe that gold is worth owning. Yet, they recognize that a
large number of investors believe it is, and they try to ride on the
coattails of the “gold bugs”. When these speculators see gold rising they target
their favorite and most leveraged gold investments. These people are often
quite skittish and can be viewed as the weakest hands in the gold market.
They are the last to enter the market and the first to exit it. This, because
they always have one foot out the door.
The members of this truly speculative contingent are often little concerned
about picking a bottom or a top. Many within this category are solely
interested in trying to make their purchases somewhere near the lows of a
price movement. They hope to exit with a profit before the run-up ends. These
players are typically latecomers to a major gold up-wave because they are
largely drawn to the market by the excitement generated by already
upward-trending gold and gold stock prices. Among the vehicles of choice for
this group are gold options, gold futures or shares of the junior gold
exploration companies.
Those within the second group
of gold investors tend to be among the first to sense major turning points in
the gold price. From my experience they are best at recognizing approaching
important lows, while on occasion they are the first to exit the market prior
to the posting of major peaks.
What does all of the above
have to do with my topic? I have attempted to describe the abilities, reasons
for investing, mind-sets, investment vehicles of choice, and the driving
forces behind each of the three major contingents that invest in gold related
markets. The various factors that motivate each of these groups often express
themselves in the following pattern:
Prior to or shortly after gold
posts an important low, the keenest gold investors sense that the current
gold correction has basically run its course. These members of our second
group begin accumulating stock of their favorite major gold producing
companies. This is why the primary gold producers often strike their
low-points a few or more months before that of the eternal metal. Then, after
gold begins to rise from its low, these investors gain confidence from their
earlier correct analysis. The result is that both gold and the major gold
companies begin to simultaneously rise.
Later, the third, speculative
group begins to enter the market. This occurs after they’ve observed both
gold and its primary stocks rising together for a time. Finally, as the
prices of all gold investment vehicles move higher, more money enters the
various markets in unison, and drives them all northward in price.
The primary reason that the
junior exploration companies exhibit the sharpest price increases is due to
their lack of liquidity. Their share structures and market capitalizations
are minuscule compared with those of the gold market or of the major
producers. Thus, a small amount of buying pressure can have an enormous
impact on the share price of any nascent company that reports either
important exploration success to the market, or a major acquisition.
If I am correct, we are
presently in the early to mid-stages of a major rise in the gold market. As a
group, the gold producing companies struck their lows in mid-May. Gold on the
other hand touched its absolute nadir in mid-February at about $411. It later
successfully tested this low when it retreated to $415 at the end of May and
then reversed course. From these important lows both gold and the major gold
shares have worked to progressively higher levels until their recent
explosion during the past week. The junior sector on the other hand has only
recently begun to stir!
I believe that a group of
major factors are converging to ignite an explosive rise in the prices of the
best managed junior gold exploration companies. As an aside, silver and the
most advanced base metal resource companies will also greatly benefit from
any renewed investor interest in this market.
The junior resource sector has
been in a major secondary correction for nearly eighteen months. The majority
of these companies are trading for a fraction of their end 2003, to April,
2004 highs. In many instances they have experienced 50% to 80% price declines
to their lows.
Of great importance for the
investor is the fact that during this period a number of companies have been
able to positively progress their projects or to acquire major new ones.
Further, the most influential players in this sector have recently returned
from their summer holidays and are beginning to acquire shares in their
favorite junior stocks. Additionally, gold is now trading above $450 an
ounce. This condition moves numerous marginal gold projects within the realm
of becoming economic. Add to these factors a new up-leg in gold’s Bull Market
and, I believe, the stage is set for a substantial junior gold share price
advance.
Finally, the past few weeks
have begun to witness a metamorphosis in the exploration stocks. Companies
that report exceptional drill results are actually seeing their share prices
positively respond. We have not experienced such a condition for quite some
time. More than a few companies that I follow in Financial Insights have
already experienced 50% to100% price increases with such success, during the
past several weeks.
I believe that all of the
factors needed for an exciting advance in the junior sector are in place.
Both gold and the major gold producers have posted their corrective lows.
Gold has moved from about $415 to its recent $469 spot price high. The HUI
has sharply risen from166 to nearly 250, while the XAU rose from 78 and
approached 115. Further, the moving average studies of gold and the major
gold stock indices all exhibit Bull Market advance set-ups. Additionally,
gold in euros, yen, British pounds, Swiss francs and a number of other
currencies have surpassed their earlier Bull Market highs. This is destined
to bring a substantial amount of additional buying into the gold market from
investors in those nations. All of this has occurred while the juniors have
essentially languished!
We may need one final
shake-out in gold to test its $456 break-out point before the gold
exploration sector begins to join the action. This may be what is needed to
convince this excitable gold speculative contingent to aggressively begin
acquiring the shares. To my mind, we are in one of the best risk vs. reward
periods that the junior stocks can offer investors. Don’t miss it, I
certainly won’t!
*******
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.
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
information contained herein is at the risk of the reader without
responsibility on our part. Past performance does not guarantee future results.
Dr. Appel does not purport to offer personalized investment advice and is not
a registered investment advisor. The information herein may contain
forward-looking information within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. In accordance with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the statements contained herein that look
forward in time, which include everything other than historical information,
involve risks and uncertainties that may affect the company's actual results
of operations. © 2005 by Dr. Richard S. Appel. All rights are reserved. Parts
of the above may be reproduced in context, for inclusion in other
publications if the publisher's name and address are also included for
credit.
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