Juniors are still in flat-line mode (on a good day). A bunch of new
resource estimates were not enough to make much difference though in my
experience they often don't. There are enough people tracking most stocks
that the market tends to have a fair idea of what a resource estimate will
look like. Weakening gold and silver prices dampened the impact of even good
numbers.
I had hoped to come away from the January conferences with some new
idea. There are a few stories I'm going through due diligence on but nothing
jumped out at me. I'm hoping something does as I have become more and more
convinced that what this market really needs is something new. I wouldn't
expect traders to pay up for anything ahead of results but a story that
hasn't been worked over by the market seems to be on most traders wish lists.
Companies on the HRA list with new targets should all be drilling within 2-3
months. Hopefully one of these delivers the positive surprise the juniors
desperately need.
I still expect at least a moderate rally in the juniors later but the
sector is back in the danger zone. We need to see a bounce from current
levels soon for that narrative to maintain any validity. If this year does
turn out to be a "2009-lite" we should start seeing evidence in the
next month or so.
Six weeks into the new year and there is still no joy for junior
resource traders. In the large markets there has been plenty of good news, with
several exchanges hitting multi year highs. In our little corner of the
market however, gloom predominates.
I've noted in print and in a couple of recent investor presentations
that the current conditions remind me in some ways of 2009. I'm referring to
the junior market specifically when I say that.
The chart below shows the TSXV index for the year 2009. Before going
farther I should stress that I am not expecting a gain for the year in 2013
anything like that the Venture delivered in 2009. That would be nice but it's
very unlikely. My references to 2009 have to do with market conditions at the
start of that year which were unusual.
Keep in mind also that we're talking about the Juniors specifically.
The economic and major market backdrop was obviously much different in 2009.
As the chart on the next page shows there was a "Santa
Claus" rally that lasted into mid-January before the first pullback. The
first rally was a reaction to both the tail end of a four month up leg in the
gold price and a horrendous tax loss selling season. Strong though the short
term rally was, it is better classified as a "dead cat bounce". It
wasn't until sometime later a real rally started.
Larger Image
Gold price moves sustained a second short rally into February 2009
until it was knocked back by the final drop in the major markets and a
simultaneous pullback in gold prices. All in all, the market really went
nowhere for the first quarter of 2009.
So far this year, we've definitely held to the "going
nowhere" part of the script. The Venture index is now back
to the range it bottomed at in December and the summer of last year. If we do
manage to generate any upward momentum it's unlikely we'll have to worry
about a "PDAC Curse" this year. Like 2009, there would not have
been enough of a rally by the end of February for that to be an issue.
In 2009, the market turned up in mid-March and with the exception of
2-3 small pullbacks never really looked back until 2010. The Juniors were
following the senior markets and commodity prices, both of which had similar
rallies.
This time around the major markets are close to the highs they started
their 2008 falls from. While I expect the large markets to have an ok year
there certainly won't be a monster 2009 style rally to drag the juniors
higher.
There should be enough good news on the economic front to move some
commodities higher. We noted strong rallies in iron ore in the last issue.
Base metals have held up relatively well. This means most of them, like the
large indices, aren't in a position to stage major up moves from here.
The market has not been paying up for base metal discoveries lately
anyway, unless there is a good precious metals kicker. That could change but
I don't expect much help from that sector as it is small.
With those drivers discounted, what do we have left? To my mind we
have three potential game changers; precious metal prices, discoveries and
...boredom.
Gold and silver have not behaved well recently. That is one reason for
the latest failed rally. With the US performing relatively well there is no
reason to expect gains from a falling US Dollar. The most recent down move
resulted from stories that the G7 would act to stop members from devaluing
their currencies.
The obvious target for that was Japan. In the end though, the G7
backed off and I suspect when the G20 has its meetings it will leave Japan
alone too. Everyone recognizes Japan has to find a way out of a deflationary
spiral and the Yen has been expensive anyway. If further falls in the Yen
help Japan out of the corner its painted itself into
most governments are willing to live with it.
The more cynical reason for leaving Japan alone is that other major
currency blocks will keep printing themselves. Some of the recent drop in the
gold price should resolve itself when the market comes around to accept that.
The move will be larger if Europe can get through some of its
political issues. This has weakened the Euro. There have been calls from some
quarters in Europe to weaken the Euro as a response to Japan's Yen moves.
This isn't likely to happen. Germany is still the most powerful force in
Europe and Germans are dead set against the idea of large scale QE. They are
still terrified by the idea of inflation.
That terror is shared by few other central bankers and no politicians.
Whatever the risks of QE and activist monetary policy, it's what worked in
the last three years. That lesson is lost on no one.
Japan is again a prime example for politicians in other states.
Deflationary spirals are extremely difficult to break out of. G20 politicians
are far more worried about 20 years of Japanese style stagnation than they
are about higher inflation. Make no mistake; most central banks will keep
printing money.
The physical gold and silver markets remain stronger than the paper
one and as several observers have noted, gold has built up a very large short
position. It is a good set up for a strong upward move if a catalyst appears.
That could be strength out of Europe, more QE from just about anywhere else
or "risk on" buying accompanying an equities rally.
I haven't expected large upward moves from gold or silver but the
short position in the physical market and ascent of activist central bankers
in Japan and Britain could generate a good sized rally with a bit of a push.
Gold and silver moving back up could stop the bleeding in the juniors
but it will take news flow and new discoveries to keep things moving.
In strict percentage terms, the current junior stock bear is milder
than the last one but it doesn't feel that way to traders. The main reason
for that is longevity.
Larger Image
When the junior sector collapsed along with global markets in 2008 the
drop was very steep and very fast. Stocks dropped 75% in the space of a few
months. The bottom after that fall was brief, lasting a few weeks.
The fall so far this time (ignoring some intervening rallies) the bear
market has been two years in the making. The bottom, assuming that is where
we are, as been forming for close to eight months now.
There is no reliable way to determine how long a bottom will last. It
could go on for a while longer, but I suspect it won't. There are plenty of
us sitting on underwater positions but there are also many with cash on the
sidelines. Traders are getting bored and brokers are worried because they are
not generating commissions. Both groups want to see something happen.
The most likely beneficiary of this situation will be companies with
new discoveries that have not disappointed the market. The moves made by Goldquest and Reservoir last year indicate trader's
willingness to pile into a successful exploration play. There were a number
of these in early 2009 that definitely contributed to the strength of that
market. So far this year I have not seen one.
Companies with discoveries will get attention--those with discoveries
that don't need financing will receive even more. Pre discovery, attention
will be focused on the strongest management groups and project sets.
In 2009 many predicted wholesale disappearance of junior companies. It
didn't happen because the financing window reopened fairly quickly. That
hasn't happened this time. I think the prediction of several hundred
companies disappearing is much more likely to come to pass now. The only
thing likely to hold it back is the TSX giving reprieves because it too is a
public company now and wants to be able to book the potential listing fee
revenues.
Short term painful but long term good. There are way too many junior
explorers out there. Far too many companies did multiple spin out
transactions of weak project sets they cannot finance now. There are only so
many good projects and management/financing groups. I don't know what the
number is but it's a lot less than the 2000 companies floating around out there.
Fading companies will hold back the Venture Index. Volumes are not bad
over all compared to 2009. If gold can fight its way back to $1700 a base
should be built and companies with good resources will see some gains. Like
2009 however, the best gains may be reserved for those with new discoveries.
The intersection of hope and greed that new discoveries represent could be
the catalyst so many have been waiting for. I'm hoping they start coming soon
enough to finally make the market turn.
Eric Coffin
HRA Advisories,
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