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August 24, 2006 – I believe that the
vast majority of exploration shares have posted their correction lows. They
are now in the process of building important bases before resuming their Bull
Market. After staging a major price rise between the summer of 2005 and May,
2006, the wind was abruptly let out of their sails as they followed gold
sharply lower. Now, I am confident that the tide has begun to change in their
favor.
The
yellow metal peaked at $730. It then began a downward journey and quickly
found itself at its July $550 low. Today, the eternal metal is priced $75
above that nadir. Yet, the junior resource stocks continue to languish. Given
the large paper and real losses sustained by most investors, why
shouldn’t we all just throw in the towel and liquidate our stockholdings
like so many commentators suggest? It would certainly lessen the pain.
Why?
Because this is likely the worst possible moment to take such action. Great
Bull Markets tempt onlookers by laboriously working higher over an extended
period. This moves numerous observers to berate themselves for not having the
courage to earlier invest.
They
watched from the sidelines while others garnered substantial profits.
Gradually, one by one, many of these investors are drawn in by the fear of
missing the entire Bull Market or by the allure of fast, easy profits.
Purchases that are fostered by these motivating factors typically occur
during a periodic, exciting up-wave such as we experienced leading to the May
peak, or at a Bull Market top. Unfortunately, these investors tend to not
only add to the frantic price rise, but they typically find themselves making
their purchases near or at its ultimate high.
Later,
after suffering large losses and all of the froth and excitement is drained
from the market, they may even sell. They will do this for fear of sustaining
even greater damage to their asset base. The average investor is ruled by his
emotions. This is why he historically buys near market tops and sells at
lows.
If
individuals truly believed that the Bull Market was real they would not act
in this fashion. Even if they did and chose the very peak of any intermediate
up-wave to make purchases, the bull would ultimately carry them with him and
turn their paper losses into real profits. If they only had the courage to
believe in the Bull Market, they would ride it towards its ultimate
breathtaking high.
Herein
lies the rub of remaining invested in any Bull
Market! Prior to the final stage, all Bull Markets experience one or a number
of periodic, terrifying price and breadth declines. These generate sufficient
fear or doubt in investor’s minds to force all but the greatest
believers from the bull’s back. It is damaging to those, who left the
market licking their wounds, but is good for the future of the market and
those investors who remain.
In
this fashion hoards of interested onlookers are available to plunge into the
market during its final, excited ascent. Even those who sustained earlier
losses may return, caused by the allure of a later major bull advance.
Terminal
periods in all Bull Markets are accompanied by not only wild excitement,
overinvestment, and outlandish price predictions, but by a general feeling of
euphoria and the belief that this bull will live forever. Further, is at
these times when comments such as “we’re in a new era” or
“this time it’s different” become the mantra of the day.
These act to soothe and placate the fears that begin to well up in the hearts
and minds of those who sense that something isn’t right, and that
prices have lost touch with reality. This keeps many of them fully invested
as they approach the precipice.
At
the end of all Bull Markets greed-driven feelings have replaced the fearful
ones which prevented their owners from taking earlier investment positions.
Only then do these emotions emerge to take control of their masters. This
causes them to jump aboard the bull, and drive prices to their final dizzying
heights.
Eventually,
the last bullish investor invests his last dollar. The rest is history! The
Bear Market is then born, and losses accrue to all those who remain invested
and are carried by the bear on his inexorable downward journey.
Any experienced resource stock
investor, or for that matter any sophisticated market player, has many times been
through trying periods such as face us today. These act to test our mettle!
If I am correct, this is but another hair-raising price decline that this
resource bull has placed in our path. Be prepared, it will not be the last!
“All
price movements whether primary or secondary are ultimately corrected.”
The recent explosive price run that ended in May was destined to be followed
by a corrective phase. They always are! These act to remove the earlier
excessive enthusiasm, reduce the overextended prices, and allow the market to
stabilize at a new higher level. This is normal price action for all markets.
THE PRESENT PRICE REVERSAL IS THIS BULL
MARKET’S MOST SEVERE
The
first major resource stock decline began in the spring of 2002. It lasted
about twelve or thirteen months before a broad-based, multi-month advance
permeated the sector’s stock board. The next great down-wave had its
birth in the spring of 2004. This one took over fifteen months before the
excesses of the earlier great price advance were bled from the market, and an
across the board skyward rise ensued. In both of these primary corrections it
was not surprising for a junior company to fall 60% or more from its earlier
peak.
The current price reversal stands alone
to date. This is due to the rapidity with which these nascent companies shed
their earlier hard fought for gains. The first important declines unwound
like slow, grinding water tortures, compared with the recent waterfall-like
breadth collapse. The present one saw many solid junior companies fall 40% to
50% or even more from their peak prices, in the space of but a few brief
months. In both of the earlier cases once the stocks resumed their northward
trend, a multitude of stocks struck new bull highs, and many of the more successful
companies multiplied in price.
I
believe that the recent historic price collapse has reversed investor
sentiment. It is now near comparable levels where stocks arose from the two
earlier major declines. If I am correct, the junior companies are now on the
bargain counter for the taking.
True
to form, few investors today have any interest in making purchases. This can
be attested to by the low level of trading volume, and general indifference
if not disgust with which most investors view this market. The resource bull
has been successful in disillusioning and chasing from his arena all but the most staunch believers of his existence!
As
difficult as it might be to believe, it is at times like these for which
seasoned investors and traders yearn. This is especially true of resource
stock investors.
Exploration
and development companies require long time-frames to advance their projects.
All companies are faced with extended down-times when the flow of news
virtually halts. Time delays may occur when a company is waiting for the
exploration season to begin. It may take many months before a geologist can
even set foot on a project. Explorers must first receive government permits,
create an adequate access to their property, or acquire a drill-rig or a
seasoned crew. Or, they may be delayed by the need for a replacement part,
waiting for assays from a lab before planning their next step, or for any
number of other reasons. All of these issues often work to the detriment of
their share price, but they can benefit an astute investor.
No
matter how important the project, the absence of positive news is normally
met with gradually declining share prices. This is accentuated during weak
market periods. In fact, recently, many instances where companies presented
good news to the market were met with yawns if not sales. Sell orders,
because the news generated some buying. This allowed anxious individuals who
were forced to raise capital the opportunity to do so. They could liquidate
some of their stock without seriously affecting its share price. This
maintained the value of their remaining stockholdings in the equity. If they
sold other stocks they would find few bids. This would drive the stock price
lower before they could sell their entire position, and widen their losses.
Knowledgeable
investors look forward to periods such as now after the resource stocks have
suffered severe declines. They also wait until trading volumes are low and
the selling appears to have subsided. This allows them to acquire solid
companies that have sustained the most severe losses, or those that had the
opportunity to importantly advance their major projects, without a
commensurate increase in their share prices. In both instances, wise
investors can pick and choose the best risk vs. reward candidates in which to
invest, knowing that they should lead the next advance.
Adding
to the softness of the resource sector is the fact that we are in the period
known as “the summer doldrums”. This is characterized by
vacations when time spent with the family dominates the minds of most
investors and brokers. This timeframe ends in early September when all of the
players return and are ready for action.
Historically,
the junior market begins to firm by mid-September. It then launches its
seasonal Fall rally that normally continues to the end of October or into
November. In fact, the past three years have witnessed strong price advances
in the major and junior mining stock groups during this time.
HIGHER PRICES ARE IN THE OFFING
There
are a number of factors that lead me to believe that we are destined for
sharply higher share prices in the foreseeable future, if not within the next
few months. First, I do not believe that the current prices for both the
precious and base metals have been fully factored into the stock prices of
the companies which mine or explorer for them. Copper is trading at $3.40,
nickel at $15 and zinc is priced at $1.50. Nickel is posting all-time highs
while copper and zinc are within striking distance of their recent record
high prices.
Despite
the fact that these and other metals are at historic highs, neither the
marketplace nor most experts believe that they are lasting. To my mind,
barring a major worldwide economic slowdown, I believe that the rise of
China, India, and Brazil as well as a number of other countries will continue
to place upward pressure on these and other metals for at least the next
several years. If this analysis is correct, investors will eventually realize
this inevitability and re-price upward these companies. When this occurs, a
virtual stampede into the junior exploration sector will ensue.
Gold
and silver stocks are not immune to this occurrence! The term “gold
fever” is a euphemism that has been repeated throughout mankind’s
history. During times of fear or uncertainty, and whenever a government
destroyed the purchasing power of its currency such as the U.S. is now in the process of
achieving, gold was a major beneficiary.
The
common man purchases gold in his effort to protect himself. “Gold
fever” occurs whenever a sufficient number of ordinary citizens become
frightened by the declining purchasing power of their local monetary unit.
When this tipping point arrives they jettison their nation’s currency for
the safety of gold.
Silver
on the other hand has been in an ongoing supply deficit for over a decade and
a half. Further, virtually all of the available above ground stocks have been
absorbed to fill this gap. Additionally, if Ted Butler, Gold Antitrust Action
Committee (GATA.org) and other experts are correct as I believe they are, the
white metal’s short interest is at a record level. These conditions set
the stage for a breathtaking silver price rise. If these beliefs are true,
both gold and silver stocks will follow the approaching explosive rises of
their respective precious metals.
Another
reason I anticipate higher exploration stock prices this Fall is that gold
should soon add wind beneath their wings. We are entering the period that is
typically marked by a vibrant gold market. This is spurred by jewelry and other companies when they purchase the yellow
metal to satisfy their Christmas Season needs.
Further,
the past few years have witnessed resource companies spend billions upon
billions of dollars in exploration. This has allowed a number of companies to
progress to the point where I believe the odds greatly favor
the announcement of one or more major discoveries. These may come as soon as
during the present field season. This market is driven largely by greed. I
believe that the reporting of one or more such events has the potential to
explosively ignite this small market. When investors see vast fortunes accrue
to other shareholders caution is often thrown to the wind, and their
purchases soar in the hope of achieving similar personal success.
Finally,
Barrick Gold announced a hostile take-over bid for
Nova Gold. If they or a yet-to-be announced “white knight”
succeed, Nova’s shareholders will be rewarded with $2 C. billion or
more by the sale of the their stakes in their company. Most of Nova
Gold’s shareholders will use some or all of their proceeds to acquire
other junior resource companies. They will do this in the hope of finding yet
another Nova Gold, and similarly riding it from the pennies it was worth but
four years ago when many bought it, to its $19 C. range of today. This amount
of fresh money reentering the exploration market is
sufficient to alone launch a major sector advance.
The
summer is still with us and we are continuing to experience weakness among
the junior shares. Yet, despite this fact it is difficult to acquire
important positions in many of these companies without driving their prices
substantially higher. I believe that we are witnessing an important
watershed. The selling is drying up and the buyers are slowly beginning to
return. It is only a matter of time before the share prices begin to rise and
reflect this occurrence.
I am
confident that the resource bull is far from dead. We will again be rewarded
for our courage and belief, as one by one the above factors come together and
incite him with a vengeance, back into action.
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______________________________
By
: Dr. Richard
S. Appel
www.financialinsights.org
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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