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Why Junior Resource Stocks are Ready to SoarDr Richard
Appel September 21, 2005 - There is a well-defined pattern that has repeatedly occurred throughout my participation in the gold market. In fact, I am certain that it predated my late 1960's entry into this field. Unfortunately, for me, it took nearly a decade before I recognized its existence, and another decade plus before I first benefited from it. I believe that there are three distinct primary investor groups that trade in the gold related markets. The membership in each is determined by the differing mind-sets of their members. The first group consists of those who purchase physical gold. They are typically very conservative and acquire gold primarily as a hedge against the threat of the dollar's loss of purchasing power, or to protect themselves from an economic or financial disaster. These individuals are not greatly interested in gleaning profits from their gold holdings. Rather, they are motivated by the desire to preserve the purchasing power of the capital that they already possess. They tend to be long-term and steadfast holders of gold and rarely trade. The second group consists of some individuals from the first, who are willing to place a portion of their available funds at risk in the hope of greater gains. They are joined by a far larger number of investors. These people also share the former contingent's desire to protect themselves from the excessive creation of dollar credits. However, instead of investing in gold bars or gold coins they utilize producing gold mining shares to achieve a similar end. Those who invest in the stocks of the gold producers see an opportunity to not only protect themselves from their government's profligate spending, but to enhance their profits by the perceived leverage offered by the gold stocks. How many times have we heard statements describing the greater rewards that can be achieved with gold producing company stocks, compared to a rise in the yellow metal? After all, a higher gold price should largely drop to the bottom line of a mining company's balance sheet. And, by the price/earnings multiplier, won't the astute investor realize a far larger percentage gain with his shares compared with any gold price rise? These are the thoughts that drive diehard gold investors to purchase the major gold stocks. These individuals are generally conservative investors who also believe that gold is destined for far loftier levels. They are willing to take greater risks than the first group and are often the most nimble in trading the eternal metal. Their goal is to magnify their profit by purchasing the companies that rend it from the bowels of the earth, instead of from ownership of the yellow metal itself. The third contingent consists primarily of speculators of one degree or another. The allure for these individuals is the potential for huge and hopefully obscene profits. This group cannot be called conservative by any stretch of the imagination. The motives for their involvement in any form of gold investments range from being true believers in gold's Bull Market, to being opportunists who desire to profit from improving gold momentum. Members of this coterie are searching for the most profitable and highly leveraged fashion to "play" the gold market. Many within this grouping don't even believe that gold is worth owning. Yet, they recognize that a large number of investors believe it is, and they try to ride on the coattails of the "gold bugs". When these speculators see gold rising they target their favorite and most leveraged gold investments. These people are often quite skittish and can be viewed as the weakest hands in the gold market. They are the last to enter the market and the first to exit it. This, because they always have one foot out the door. The members of this truly speculative contingent are often little concerned about picking a bottom or a top. Many within this category are solely interested in trying to make their purchases somewhere near the lows of a price movement. They hope to exit with a profit before the run-up ends. These players are typically latecomers to a major gold up-wave because they are largely drawn to the market by the excitement generated by already upward-trending gold and gold stock prices. Among the vehicles of choice for this group are gold options, gold futures or shares of the junior gold exploration companies. Those within the second group of gold investors tend to be among the first to sense major turning points in the gold price. From my experience they are best at recognizing approaching important lows, while on occasion they are the first to exit the market prior to the posting of major peaks. What does all of the above have to do with my topic? I have attempted to describe the abilities, reasons for investing, mind-sets, investment vehicles of choice, and the driving forces behind each of the three major contingents that invest in gold related markets. The various factors that motivate each of these groups often express themselves in the following pattern: Prior to or shortly after gold posts an important low, the keenest gold investors sense that the current gold correction has basically run its course. These members of our second group begin accumulating stock of their favorite major gold producing companies. This is why the primary gold producers often strike their low-points a few or more months before that of the eternal metal. Then, after gold begins to rise from its low, these investors gain confidence from their earlier correct analysis. The result is that both gold and the major gold companies begin to simultaneously rise. Later, the third, speculative group begins to enter the market. This occurs after they've observed both gold and its primary stocks rising together for a time. Finally, as the prices of all gold investment vehicles move higher, more money enters the various markets in unison, and drives them all northward in price. The primary reason that the junior exploration companies exhibit the sharpest price increases is due to their lack of liquidity. Their share structures and market capitalizations are minuscule compared with those of the gold market or of the major producers. Thus, a small amount of buying pressure can have an enormous impact on the share price of any nascent company that reports either important exploration success to the market, or a major acquisition. If I am correct, we are presently in the early to mid-stages of a major rise in the gold market. As a group, the gold producing companies struck their lows in mid-May. Gold on the other hand touched its absolute nadir in mid-February at about $411. It later successfully tested this low when it retreated to $415 at the end of May and then reversed course. From these important lows both gold and the major gold shares have worked to progressively higher levels until their recent explosion during the past week. The junior sector on the other hand has only recently begun to stir! I believe that a group of major factors are converging to ignite an explosive rise in the prices of the best managed junior gold exploration companies. As an aside, silver and the most advanced base metal resource companies will also greatly benefit from any renewed investor interest in this market. The junior resource sector has been in a major secondary correction for nearly eighteen months. The majority of these companies are trading for a fraction of their end 2003, to April, 2004 highs. In many instances they have experienced 50% to 80% price declines to their lows. Of great importance for the investor is the fact that during this period a number of companies have been able to positively progress their projects or to acquire major new ones. Further, the most influential players in this sector have recently returned from their summer holidays and are beginning to acquire shares in their favorite junior stocks. Additionally, gold is now trading above $450 an ounce. This condition moves numerous marginal gold projects within the realm of becoming economic. Add to these factors a new up-leg in gold's Bull Market and, I believe, the stage is set for a substantial junior gold share price advance. Finally, the past few weeks have begun to witness a metamorphosis in the exploration stocks. Companies that report exceptional drill results are actually seeing their share prices positively respond. We have not experienced such a condition for quite some time. More than a few companies that I follow in Financial Insights have already experienced 50% to 100% price increases with such success, during the past several weeks. I believe that all of the factors needed for an exciting advance in the junior sector are in place. Both gold and the major gold producers have posted their corrective lows. Gold has moved from about $415 to its recent $469 spot price high. The HUI has sharply risen from 166 to nearly 250, while the XAU rose from 78 and approached 115. Further, the moving average studies of gold and the major gold stock indices all exhibit Bull Market advance set-ups. Additionally, gold in euros, yen, British pounds, Swiss francs and a number of other currencies have surpassed their earlier Bull Market highs. This is destined to bring a substantial amount of additional buying into the gold market from investors in those nations. All of this has occurred while the juniors have essentially languished! We may need one final shake-out in gold to test its $456 break-out point before the gold exploration sector begins to join the action. This may be what is needed to convince this excitable gold speculative contingent to aggressively begin acquiring the shares. To my mind, we are in one of the best risk vs. reward periods that the junior stocks can offer investors. Don't miss it, I certainly won't! Dr Richard
Appel Appel Archives. 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. Disclaimer. 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.
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