-- Posted Wednesday, 17 September 2008 | Digg This Article | Source: GoldSeek.com
It sure has been a brutal year for the junior sector so far. The horror show has decimated most juniors and many are trading at levels not seen since the beginning of this bull market in 2001. Does it mean the death of the juniors? Although most people would tend to believe that would be the case indeed one has to remember that we were there before in 2001/2002. Juniors were trading at penny levels coming down from multiple dollar levels the years before. In 2003 however many juniors caught tail wind and appreciated by 1000% or more in just a year. It's all about perception.
Let me give an example here:
Company XYZ, a junior exploration company that Iíve been following for years traded at 5 cents back in February 2002. Its market cap had evaporated by more than 98% over the years before. You may guess what sentiment was at that time. Well, I can tell you, it wasnít good. But then suddenly out of the blue its share price jumped by 100% in a single day to 10 cents and within 18 months the stock appreciated to a high of $1.60. The company didnít show off any drilling results during that period and nothing spectacular had happened. So what did cause the run (along with the entire junior sector) then? The answer is simple. Perception changed. You simply canít value a junior without proven resources, itís all about perception and expectations. Perception can change overnight and once it does change things can go very fast. Now fast forward to today, needless to say that sentiment has rocked bottom again but the same applies today as it did in 2002. Once perception changes, things can go up fast again. John Embry recently said in an interview with The Gold Report:
Things have gone much farther down than I could have imagined in my worst nightmare. If you are confident that the gold price is going higher, this is an ideal time to be picking away and buying a diversified list of very good quality, cheap juniors. I've made the most money in my life buying things that are out of favor because there's no downside risk, certainly from a fundamental standpoint. When the worm turns, these things could double very quickly. When that happens it'll be hard to buy. Start picking away now, as long as you share my opinion that the gold will see a hefty price rise over the next 12 months.
As John Embry says you have to be a believer in much higher gold prices since rising gold prices remain the single most important driver for higher gold stocks.
Yes, I know many will argue that the junior problems these days are related to the credit crisis which will wipe out most juniors. A junior not able to finance its ongoing exploration projects will bleed to death.
Although these concerns are justified still many juniors out there are positioned well and have secured their exploration budgets for years to come. Other juniors (producers) donít have to worry at all since they generate enough cash flow themselves in order to get things moving forward.
So what could change perception then these days? Well, thatís hard to tell, it could be a spark generated by a new world class discovery, it could be record high gold prices, it could be a chain of acquisitions by the major producers.
The bottom line is youíll be investing in juniors because:
- The industry is not replacing the reserves it is mining every year so majors are forced to acquire juniors because of the need for more reserves
- 75% off all new discoveries are made by juniors
- History says the time to buy is when sentiment hits rock bottom
- Buying juniors in early 2002 has paid off tremendously
- Buying juniors now will be paying off most likely within 12 months from now
This is all described in detail in my piece:
The Investment Case For junior Mining Companies Ė part II
So juniors can be picked up almost for free these days and itís my strong believe that some of them will show off stellar returns indeed within the next 12 months or so just like we saw in 2003. Again, big up-moves always start from extreme depressed sentiment levels.
Now you donít have to be an Einstein in order to recognize that we find ourselves at extreme depressed levels indeed as most juniors couldnít escape the wave of capitulation selling that has haunted the TSX venture exchange for many months now. People might wonder at what point the selling pressure finally eases, in other words when can we expect to see the sign ĎSOLD OUT Ė No More Shares Availableí hanging out in front of our beloved junior mining companies. Letís face it, at one point most sellers will be gone which will result in a sharp contraction in volume of traded shares. What weíve been witnessing lately are sharp waterfall sell-offs on high volume of traded shares. Once this volume of traded shares dries up itíll be a sign that most desperate sellers have done their dirty job.
Please keep in mind that most of the selling arises from redemption pressure. John Embry of Sprott Asset Management admitted lately that his own Gold Fund was subject to redemption pressure as well. Itís not that he wants to sell his juniors but he is forced to do so through his clients. Again, at one point the selling pressure simply eases because the stock will be sold out. What happens next is rather predictable. No aggressive sell orders, only a very few offers on ridiculous low price levels. This simply means that someone who wants to buy shares at that point in time has to bid up the price. In other words, we can see sharp recoveries just upon low volumes of traded shares. Believe it or not but many juniors did pop up lately to the tune of 30%, 40% and more in just a single day on just a few thousand shares. This should tell you something, it should tell you that the selling pressure has eased indeed.
This seems to be good news for the depressed share holder but where to go from here, why should you hold on to a particular junior (or start buying), what chances does your company have to survive, what chances do they have to come up with some real goodies that will trigger some serious interest in the stock, in what time frame you could expect some real excitement, how will management secure the funding of its ongoing exploration effortsÖ
Enough questions but letís start off with what a junior should be worth, in order words, juniors that traded several dollars last year, where they overvalued? Or are they undervalued now since theyíve dropped to a few pennies only? What should be fair value? The answer is already stated above, itís all about perception and expectations, you simply canít value a junior without proven resources, you just trust your hard earned money to companyís management because you trust them to deliver you what you expect them to in letís say a two/four year time frame. Yes, the bottom line is you invest in a small cap exploration company because you have faith in management to deliver you a world class discovery which will enable you to cash in on a 1000+% profit.
Sure enough when sentiment turns south the small cap exploration company could drop by 50% or more and when sentiment turns to the better that same company could appreciate again by multiples of 100%, see SAMEX example in introduction above. The bottom line is you shouldnít invest in juniors in order to enjoy sentiment changes but for discovery chances only. So if you see your favorite junior dropping down fast your only worry should be if they will survive and if they will be able to continue to do what you paid them for which is to explore for new discoveries.
Many juniors are putting their exploration projects on hold these days in order to preserve their remaining cash. As a share holder I wouldnít be too happy about that since that leaves only sentiment change being able to raise share prices. In other words, I wouldnít invest in juniors who have put everything on hold. Once the market turns you want to be invested in juniors who have done their exploration work already instead of those that still have to start.
Coming weeks we will cover some companies that could benefit most of a market turnaround. If you want to participate you can join us HERE (special offer till Oct 01)
It seems the gold market is bottoming here. Although itís still to early to tell but I donít see gold drop much further against sky-rocketing physical demand and extreme dollar bearish news brought to you by Lehman Bros, AIG, Fannie, Freddie and hundreds of other banks that will follow suit.
On Saturday September 13 we send out the charts below to our members that support the view of gold to be bottomed out at $730+ and HUI to be bottomed out at 250+
GOLDDRIVERS Charts Update September 13, 2008
When gold approached its $850 support level in August and the HUI its 350 support level there was hope that the correction that started in July was nearing its end. We all know by now what happened next since these support levels didn't hold and a wave of massive selling pushed gold and HUI to the next levels of major support thereby leaving most gold share holders in a state of mental shock.
As painful as it is we just have to deal with it and keep the big picture in mind which says the gold bull market is far from over ( see 'Gold - Fundamentals still pointing towards $2000+'). Gold has traded 9 out of last 10 sessions down and approached its 2006 high of $730. The HUI started to perform well against gold as of last Wednesday which usually marks the end of a long correction. Could it be we've seen the Gold/HUI low's indeed?
Sure enough it's too early too tell but from a technical point of view it seems that that could be the case indeed. Now let's take a peek at the charts and see what they say:
My favorite indicator for spotting major bottoms concerns the relative gold chart. The relative gold chart has nailed all major bottoms of this gold bull market over the last 7 years. This time it flashed a major 'BUY' again in August (r-Gold value dropping below 1.0). Unfortunately the r-Gold value dropped even further to new low extremes and touched an incredible low of 0.84 on September 11. The rGold value recovered a bit on September 12 and clocked 0.86. Combined with a strong physical demand for gold the September 11 low for gold could very well proven to be the end of the correction indeed.
The r-GOLD chart is gold divided by its own 200 dma.It has proven to be a reliable indicator in spotting major bottoms for gold in the past 7 years
As this r-Gold chart clearly reveals, gold has been being pushed in its deepest over-sold territory since the bull market began in 2001.
Now let's take a peek at the TA gold chart and see where solid support is to be expected:
TA Gold chart
Whenever a long term resistance is being taken out it becomes a future support level. This has obviously been the case with the $730 level which took almost 16 months to be taken out. Now on September 11, 2008 gold approached this level again but bounced off sharply.
Will the $730 level proven to be the end of the brutal correction? Again, maybe too early to tell but given the fact we're witnessing record high demand for gold combined with an extreme over-sold condition the odds are $730+ could be the bottom indeed. Furthermore it should be noted that the HUI made an impressive bounce on Friday September 12 which usually marks the end of a severe correction. (HUI outperforming gold).
Now let's take a peek at the HUI charts:
r- HUI chart
The r-HUI chart is gold divided by its own 200 dma.It has proven to be a reliable indicator in spotting major bottoms for gold in the past 7 years
The HUI crashed down all the way to its 2005 break-out levels in the 250 - 260 range. Back in 2005 the 250 - 260 range had served as a long-term resistance level which took almost two years to be taken out. Again, long-term resistance levels being taken out will serve as support levels for future corrections. On September 11 the HUI touched 253 but bounced off sharply from there towards 290 on Friday September 12. This is really impressive and again, move like these (HUI sharply outperforming gold) usually marks the end of a severe correction.
During the correction the HUI dropped faster than gold which translates itself in an appreciating Gold/HUI ratio. By the time the correction end the HIUI starts outperforming gold as described above. Sure enough this results in a dropping Gold/HUI ratio.
When we take a peek at the gold/HUI ratio chart it becomes painfully clear how severe this correction has been. Of a more up-beat note it's good to see the gold/HUI ratio dropping fast since Wednesday September 10.
As mention above the HUI crashed all the way back to its 2005 break-out level of 250. The TA HUI chart visualizes this best:
TA HUI chart
Again, once a heavy long-term resistance has been taken out it will become future support. As mentioned above the HUI bounced off sharply from its support level (253) towards 290 in just one single day.
These are encouraging developments but sure enough we have to be patient until recent down-trends have been breached to the up-side.
Gold vs HUI chart
The last chart I want to show is the gold vs HUI chart which clearly demonstrates the disconnect between gold and HUI lately. The HUI was trading at levels not seen since gold traded at $520:
Also clearly visible on this chart is the extreme over valuation of the HUI back in December 2003 when the HUI clocked 250 levels while gold just touched the $400 mark
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-- Posted Wednesday, 17 September 2008 | Digg This Article | Source: GoldSeek.com