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January
20, 2006 – The junior exploration sector led by the gold explorers are
finally beginning to come to life. As a group they peaked in early 2004. That
ended a stage when these small companies were discovered by the first few,
farsighted investors. Company after company saw their share prices rise not
by10%, 20% or 30%, which would have made normal investors happy, but in many
cases by a multiple of one, two, three or even five or ten times their share
prices of but only a year or so earlier. This early phase of the exploration
stock’s Bull Market was led by gold and the other precious metals, as
well as by the various base metals and members of the energy complex. These
metals and other commodities all left their lows behind, and excited the
world with their electrifying Bull Market price advances.
The
enormous price rises bestowed substantial profits upon those who invested
early in these nascent explorers, and took profits as their prices crested.
Unfortunately, the overzealous investors who drove these stocks to dizzying
heights sowed the seeds for the following grueling, seemingly interminable
period that we are just exiting. This was a time when junior stock investors
greatly suffered as they watched their stocks experience across the board
price declines, or in some cases price collapses.
The
nearly two year period between early 2004 and the past several weeks acted to
squeeze all of the froth, excitement, overconfidence and overextended prices
from the resource market. Numerous companies found themselves trading at 50%
of their earlier highs. Others eroded in price by 80% or more from their
former peaks.
During
much of this time-frame, whenever a company reported any form of important
progress, by either announcing a major acquisition or some sort of exploration
success, the bids that entered the market for their stock were quickly
filled. This was by anxious investors who were waiting on the sidelines for a
buyer to appear so that they could sell some of their shares without driving
the stock lower, and thereby inflicting greater losses upon the remaining
stock that they held.
For
newcomers to the junior market, a substantial number of buyers are only
normally present when prices are in a rising mode. Whenever stocks decline or
even stagnate for a time, investors typically step aside. The term “no
bid” symbolizes these periods! Similarly, trading volumes evaporate and
fall to a fraction of those that attended the earlier exciting price
advancing era. This is the reason why I repeatedly stress in “Financial Insights” that
great price advances in either an individual company or the group, are
periods when at least partial profits should be taken. If an investor waits
until prices crest to sell, he will normally find that few buyers exist. The
rest will have pulled their bids, and he will be left standing on the edge of
a precipice, when he initiates his sell orders.
The
junior companies began to probe for their individual correction lows during
the summer of 2005. This was when the major gold producers struck their
nadirs. With each upward pulse of gold and the producing company stocks, the
juniors appeared to gain strength. However, time and again, whenever gold and
the producers hesitated or slightly declined, the exploration companies were
again beset with further selling. This drove the equities of numerous small
companies, to repeatedly test and in many cases violate their earlier lows.
Yet
as time passed a major event began to unfold. This started in early fall
2005, when individual exploration or development companies that made
important progress began to experience more buyers than sellers. They
witnessed their stocks trend higher in price. Those who lived through this
difficult time-frame saw an increasing number of companies rise from their
correction low points and post a series of higher highs. Further, companies
that were either developing a mine or that appeared to be on the verge of so
doing, began to attract even greater investor attention. They watched as
their shares were accumulated by an ever larger contingent of buyers, while
the number of sellers seemed to dwindle. Finally, exploration success again
began to count! This first occurred in November, 2005.
The
past month saw several exploration companies attract not only important
investor interest but also extremely strong buying demand. Companies
reporting significant drill results were no longer met with a yawn! Now these
announcements caused investors to fall over each another in their effort to
buy their stocks. One by one, these companies watched their shares multiply
in price as their volumes swelled into the multi-hundred thousands if not
millions of shares on a daily basis. Even companies that had no important
news to report saw the buyers appear. Of utmost importance was the fact that
the sellers finally began to exit the market, and trading volumes
began to swell.
The
past many months of minimal volume and backing and filling by the majority of
junior exploration sector companies, appears to finally be approaching an
end. The plethora of latent sellers, who only awoke when the occasional buyer
entered the market, no longer appear anxious to sell. I believe that this
denotes the fact that they have finally sold whatever shares that they
desired. Now, we wait for them to transform into buyers! And, the final
factor that I believe is required to light a roaring fire under this exciting
market, is for gold to resolutely remain above $500.
The
Impact When Stock Investors Accept a $500 Gold Floor is Monumental
When
gold first approached $500 in early December 2005, and then quickly surpassed
it, I was struck with an important thought that I will discuss below. A few days
later the yellow metal collapsed to retest $500. It briefly violated it
before turning sharply higher, and then resumed its upward path.
In
my December 15, 2005 article, “It’s Always Darkest Before
the Dawn” I wrote, “I believe that gold’s
present plunging price is setting the stage for a major extension of
it’s Bull Market! When it ends, and gold resumes its northward advance,
it will be reviewed as having firmly established $500 as a major support
area. This will be critical to the market because it will change the
perceptions of it’s players. For stock investors it will make them
consider revaluing the worth of the ore reserves, and the profit potential,
of their companies to that price. I am confident that it will spark a major
broad-based advance when this realization begins to permeate the market. For
gold investors it will foster greater confidence. They will view their
downside risk in a less frightening light. As with the stocks, it will become
the impetus for a major gold advance.”
I
believe that when it appears firmly entrenched above $500, gold will be
increasingly viewed in a different fashion. $500 will no longer be seen as
offering major resistance in the eternal metal’s upward bull climb, as
it has for two decades. Instead, it will be perceived as being a zone of
substantial if not impenetrable support!
It
is true that the $500 level may again be retested. Given gold’s recent
breathtaking nearly vertical ascent and current overbought state, it should
be expected. This would be similar market action such as we have repeatedly
experienced since the gold Bull Market’s inception in August, 1999.
However,
since surpassing $500, I have sensed a sea change in the price action of the
eternal metal. Serious buyers from around the world are waiting in the wings
to quickly acquire gold that enters the market during each price break. This
is best witnessed by the two-day $20 decline that was immediately followed
yesterday, with gold’s second or third largest daily Bull Market price
rise to date. The buyers now appear to be acting with a sense of urgency
in their purchases! For this reason, the bears may be unable to take the
yellow metal decisively lower. If this condition continues I would not be
surprised if we shortly experience far higher gold prices!
Given
the enormous amount of buying that appears with the advent of even a
temporary set-back, I believe that a change in the psychology unpinning the
gold market has occurred. As gold becomes firmly entrenched above this
important price, even if it sharply declines to again test it, the various
sectors of the gold complex will respond in distinct and strongly bullish
fashions.
I
am confident that the junior exploration companies are on the verge of
staging a broad-based, explosive advance. Their nearly two year correction
has produced a condition where the better exploration companies can be
launched to multiples of today’s prices. In fact, I believe that this
has already begun!
Yes,
there will be set-backs along the way! However, I strongly feel that the
stage is now not only set, but it has been ignited into motion. The longer
that gold remains above the $500 level, the greater the number of investors
that will upward revalue their companies, both major and junior.
For
the producers, investors will anticipate far greater earnings as well as
attribute an increased value to their ore reserve bases. They will also raise
their earnings potential projections for the perceived, nascent gold
producers based upon $500, rather than $450, $400 or lesser gold price that
they currently use.
In
the increasingly remote possibility that gold declines and retests $500, I
doubt if the juniors will do little more than pause. They are in the process
of decisively breaking out from their massive, extended bases and will likely
not be significantly affected. But if they do, I expect them to quickly
bounce back and post new highs when gold resumes its bull advance.
With
$500 gold accepted by investors, companies that have “pulled a
hole” or two and may be in the progress of defining an economic
orebody, will see their shares trade sharply higher. For these and the other
explorers, higher price projections will evolve due to gold’s newly
perceived elevated base price or floor. This will result because it will
increase the likelihood for all of these companies to develop an economic ore
reserve.
When
The Junior Golds Move Higher The Other Mineral Explorers Will Follow
I
would be remiss if I did not mention the effect upon non-gold related junior
companies of a higher “presumed” gold price. The Toronto Venture
Exchange is replete with companies that search for not only gold but silver,
copper, nickel, uranium, molybdenum, zinc and a plethora of other base and
precious metals. It is indeed a universe unto itself in the junior mining
sector.
It
is normal during a gold Bull Market for the majority of companies trading on
this exchange to benefit. This is irrespective of the specific item for which
they search, and is enhanced today by the Bull Markets of numerous metals.
Historically, this condition is due to the excitement generated by upward
trending gold companies, which tends to overflow and stimulate demand for
most of the companies in this market.
All
markets have a number of investors that are forced to raise capital at any
given time. If you view the exploration market as a somewhat closed system it
might be easier to understand what I am about to discuss.
Investors
and speculators who acquire junior gold companies often own other mineral
exploration shares. If the gold juniors are down and out and an investor is
forced to raise cash, he will look at all of his holdings to determine what
he should sell. If his gold stocks are illiquid, which will be the case under
this circumstance, he may sell a stock that is searching for copper, nickel,
uranium or platinum. The determining factor will be which company actually
has a bid that he can “hit”! This is the reason why a large
number of non-gold companies in this sector also performed poorly during the
past nearly two years, despite the fact that the metal for which they
targeted was in an advancing bull state..
Throughout
this period when a different sector became a market darling, such as uranium
in late 2004 through early 2005, the majority if not all of these stocks did
not perform as well as they should. This is because the bids that were
generated by the excitement allowed gold investors the opportunity to raise capital,
and many of them did by selling their uranium shares.
I
am confident that as frustrating and trying as the past twenty plus months
have been for those invested in the junior mining sector, we are on the verge
of experiencing the mirror image of that time. If I am correct, and $500
becomes increasingly viewed as a “floor” under gold, investors
will progressively factor that price into their junior and producing company
valuations. As time passes those who stubbornly retained their gold share
positions, or added to them at current levels, should be richly rewarded for
their foresight and perseverance.
I
believe that we are already witnessing the initial wave of capital entering
the downtrodden stocks of these tiny, exploration and developmental companies.
With each passing day, more equities are moving higher on surprisingly little
volume. After long languishing they move up 25% or 50% in a few days time.
They then fall back slightly and enter a new, higher trading range. To my
mind, this indicates that the sellers are in the process of exiting the
market, if they have not already done so, and more investors are becoming
buyers.
The
pain and suffering that we resolute believers in gold have been long forced
to endure is fading fast, and will likely shortly become but a dim memory. If
I am correct, we will soon be rewarded for our understanding of the factors
underlying the eternal metal’s Bull Market. Gold and the gold share
universe appear to me poised to stun the world.
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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