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March 17, 2006 - Recently, I have been scrutinizing the junior resource sector far
more keenly than even I am prone to do. Gold posted its recent peak at $572
on February 2. The HUI, which represents a number of major gold and silver
producing companies, touched its similar $349.48 top on January 31. Yet,
despite the fact that both of these markets have entered secondary
corrections, the small exploration and development companies have not
performed as one should expect given their long, consistent history.
Under normal conditions these tiny companies are driven by the price
of gold. After the yellow metal and its producers enter uptrends, the
explorers eventually follow them with larger percentage gains. Similarly,
gold declines, or even periods of a stagnating gold price, usher in a time
for these small companies where at best their prices erode. Or, at worst,
they experience waterfall collapses. It is as though no sooner than the
soaring gold impetus is removed, that they quickly lose steam and fall back
to earth.
I have increasingly pondered the thought during the past month, that
could this time possibly be different? Whenever I contemplated this topic my
thoughts went to the possible reasons why these emerging companies have
remained so resistant to decline. This, in the face of obvious weakness in
both gold and the major gold producer stocks.
I purchased my first gold stock in1972, and began speculating in
exploration shares in the mid-1970's. Since that era I cannot recall a
precedence when six weeks after the eternal metal entered a correction, that
these small companies continued to attracted so great a number of active
buyers.
Upward momentum always evaporated within a few weeks of gold entering
a correction! By this stage in a down-turn they usually experienced ongoing
across the board mark-downs after the buyers went on strike.
During periods of weakness since gold’s1999 Bull Market
inception, even spectacular drill results or major acquisitions have but
briefly attracted investors to the reporting company’s stock. Then, no
sooner than its initial price spike abated, the fortunate stock would be
inundated with selling. This would arise from those who needed money and were
offered a bid to hit. They would then join the other juniors that were
trending ever downward in price. In fact, they often greatly suffered as the
short sellers continued to pound their stock until the last bidders were
routed. This is indeed a first for their Bull Market.
Numerous thoughts have consumed me during the past month regarding the
reasons behind the exploration sector’s unparalleled strength. I
discussed in my recent article, The Resource Market’s
Transformation, that more investors have begun
to focus on these stocks. I stated that an increasing number of individuals
now harbor the expectation that some of them will develop market
capitalizations comparable with those of the major or secondary producers.
Is it an overflow of this enthusiasm that has continued to attract
capital to this market? In this case has greed overtaken their better
judgment and driven investors to continue to throw capital at these shares?
But, when the climactic vestige of profit lust subsides in the final
investor’s bosom, will the last bids be withdrawn, thereby removing the
floor that has to date supported them? Will they then suffer an onslaught of
selling that finally produces broad price reductions as I have always
witnessed in the past?
On a positive note, could the juniors be signaling that the gold
correction is destined to be shallow and short? Or, could we have truly
entered a new era for this stock sector? Will they now act in a stand alone
fashion with a new following of determined investors influencing their shares
with little or no regard for the movement of gold? If either of these latter
conditions is true it would indeed be unprecedented!
The real answers will become obvious at a later date. However, what I
do know is that they are presently exuding outstanding relative strength that
has kept a number of companies within striking distance of their cyclical
high points. In fact, as a group the companies that I follow have not fared
far worse than their producing counterparts. Impressively, those companies that
report either important acquisitions or exploration results continue to be
rewarded with far higher share prices.
I made some comments a few weeks ago in the March issue of Financial
Insights, when gold was trading at $558 and the HUI was at 320, that I would
like to share. I stated, “...be prepared for gold to test lower levels
before it again moves substantially higher in price. While I doubt that the
$500 area will be tested, $525 is not out of the question”.
In the same Letter one of my statements has already been proven wrong
when I noted that, “The 295-300 zone (of the HUI) should offer strong
resistance to any decline”. The HUI broke below 295 in a heartbeat.
However I also wrote, and remain of the belief that, “there is an
outside possibility that the 240-260 zone may be attacked, but I deem this
quite remote. Even if this area is struck it will not jeopardize their Bull
Market”.
If gold and the HUI are destined to extend their present corrections
in time and/or depth, I believe that the likely reason for continued
exploration sector strength can only be caused by a change in the psychology
of those who invest in this tiny stock segment. Further, if I am correct,
this indicates that resource stock investors have lost much of their fear of
lower gold prices, and are now confident that the $500 range has become a
long-term support for the eternal metal. Now they await the substantial
profits that they believe will be bestowed upon them when the next company “pulls
a hole”, and investors drive its stock towards the moon.
There is anecdotal evidence that the above theory is correct. The
large majority of companies that I follow in Financial Insights continue to
attract bidders whenever stock is offered on the market. This indicates that
there are numerous buyers who are waiting in the wings vying for the limited
supply of stock that is sold. Further, large sell orders are rarely
encountered. This suggests that the resource funds are maintaining their
positions if not adding to them. Additionally, a number of generalist funds
are beginning to take their early positions in the junior stocks. This market
smacks of accumulation! I believe that it is this new mind-set that keeps
investors buying and supporting these nascent companies, during a time-frame
when heretofore they would have gone begging for buyers.
Again, and of utmost importance is the fact that investors are
continuing to purchase these highly speculative shares long after gold and
the major companies entered a down-phase. This indicates to me that going
forward in their Bull Market, companies that either report important
acquisitions or better yet exceptional drill hole results will be richly
rewarded.
This will be by the new breed of investors. They will now count their
future profits using limited information, and will project enormous stock
valuations for any fortunate exploration company that gives them nothing more
than a fleeting “sniff” of success. All that they will need is a
good reason to become avid and aggressive buyers, and I am confident that
they will be given ample opportunity to do so.
This is what I believe the surprising strength in the junior mineral
exploration companies is telling those who will listen. If this condition
persists, the next gold up-wave should make earlier profits in these
companies pale by comparison.
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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