I believe that the vast majority of exploration shares have posted their correction lows. They are now in the process of building important bases before resuming their Bull Market. After staging a major price rise between the summer of 2005 and May, 2006, the wind was abruptly let out of their sails as they followed gold sharply lower. Now, I am confident that the tide has begun to change in their favor.
The yellow metal peaked at $730. It then began a downward journey and quickly found itself at its July $550 low. Today, the eternal metal is priced $75 above that nadir. Yet, the junior resource stocks continue to languish. Given the large paper and real losses sustained by most investors, why shouldn't we all just throw in the towel and liquidate our stockholdings like so many commentators suggest? It would certainly lessen the pain.
Why? Because this is likely the worst possible moment to take such action. Great Bull Markets tempt onlookers by laboriously working higher over an extended period. This moves numerous observers to berate themselves for not having the courage to earlier invest.
They watched from the sidelines while others garnered substantial profits. Gradually, one by one, many of these investors are drawn in by the fear of missing the entire Bull Market or by the allure of fast, easy profits. Purchases that are fostered by these motivating factors typically occur during a periodic, exciting up-wave such as we experienced leading to the May peak, or at a Bull Market top. Unfortunately, these investors tend to not only add to the frantic price rise, but they typically find themselves making their purchases near or at its ultimate high.
Later, after suffering large losses and all of the froth and excitement is drained from the market, they may even sell. They will do this for fear of sustaining even greater damage to their asset base. The average investor is ruled by his emotions. This is why he historically buys near market tops and sells at lows.
If individuals truly believed that the Bull Market was real they would not act in this fashion. Even if they did and chose the very peak of any intermediate up-wave to make purchases, the bull would ultimately carry them with him and turn their paper losses into real profits. If they only had the courage to believe in the Bull Market, they would ride it towards its ultimate breathtaking high.
Herein lies the rub of remaining invested in any Bull Market! Prior to the final stage, all Bull Markets experience one or a number of periodic, terrifying price and breadth declines. These generate sufficient fear or doubt in investor's minds to force all but the greatest believers from the bull's back. It is damaging to those, who left the market licking their wounds, but is good for the future of the market and those investors who remain.
In this fashion hoards of interested onlookers are available to plunge into the market during its final, excited ascent. Even those who sustained earlier losses may return, caused by the allure of a later major bull advance.
Terminal periods in all Bull Markets are accompanied by not only wild excitement, overinvestment, and outlandish price predictions, but by a general feeling of euphoria and the belief that this bull will live forever. Further, is at these times when comments such as "we're in a new era" or "this time it's different" become the mantra of the day. These act to soothe and placate the fears that begin to well up in the hearts and minds of those who sense that something isn't right, and that prices have lost touch with reality. This keeps many of them fully invested as they approach the precipice.
At the end of all Bull Markets greed-driven feelings have replaced the fearful ones which prevented their owners from taking earlier investment positions. Only then do these emotions emerge to take control of their masters. This causes them to jump aboard the bull, and drive prices to their final dizzying heights.
Eventually, the last bullish investor invests his last dollar. The rest is history! The Bear Market is then born, and losses accrue to all those who remain invested and are carried by the bear on his inexorable downward journey.
Any experienced resource stock investor, or for that matter any sophisticated market player, has many times been through trying periods such as face us today. These act to test our mettle! If I am correct, this is but another hair-raising price decline that this resource bull has placed in our path. Be prepared, it will not be the last!
"All price movements whether primary or secondary are ultimately corrected." The recent explosive price run that ended in May was destined to be followed by a corrective phase. They always are! These act to remove the earlier excessive enthusiasm, reduce the overextended prices, and allow the market to stabilize at a new higher level. This is normal price action for all markets.
THE PRESENT PRICE REVERSAL
IS THIS BULL MARKET'S MOST SEVERE
The first major resource stock decline began in the spring of 2002. It lasted about twelve or thirteen months before a broad-based, multi-month advance permeated the sector's stock board. The next great down-wave had its birth in the spring of 2004. This one took over fifteen months before the excesses of the earlier great price advance were bled from the market, and an across the board skyward rise ensued. In both of these primary corrections it was not surprising for a junior company to fall 60% or more from its earlier peak.
The current price reversal stands alone to date. This is due to the rapidity with which these nascent companies shed their earlier hard fought for gains. The first important declines unwound like slow, grinding water tortures, compared with the recent waterfall-like breadth collapse. The present one saw many solid junior companies fall 40% to 50% or even more from their peak prices, in the space of but a few brief months. In both of the earlier cases once the stocks resumed their northward trend, a multitude of stocks struck new bull highs, and many of the more successful companies multiplied in price.
I believe that the recent historic price collapse has reversed investor sentiment. It is now near comparable levels where stocks arose from the two earlier major declines. If I am correct, the junior companies are now on the bargain counter for the taking.
True to form, few investors today have any interest in making purchases. This can be attested to by the low level of trading volume, and general indifference if not disgust with which most investors view this market. The resource bull has been successful in disillusioning and chasing from his arena all but the most staunch believers of his existence!
As difficult as it might be to believe, it is at times like these for which seasoned investors and traders yearn. This is especially true of resource stock investors.
Exploration and development companies require long time-frames to advance their projects. All companies are faced with extended down-times when the flow of news virtually halts. Time delays may occur when a company is waiting for the exploration season to begin. It may take many months before a geologist can even set foot on a project. Explorers must first receive government permits, create an adequate access to their property, or acquire a drill-rig or a seasoned crew. Or, they may be delayed by the need for a replacement part, waiting for assays from a lab before planning their next step, or for any number of other reasons. All of these issues often work to the detriment of their share price, but they can benefit an astute investor.
No matter how important the project, the absence of positive news is normally met with gradually declining share prices. This is accentuated during weak market periods. In fact, recently, many instances where companies presented good news to the market were met with yawns if not sales. Sell orders, because the news generated some buying. This allowed anxious individuals who were forced to raise capital the opportunity to do so. They could liquidate some of their stock without seriously affecting its share price. This maintained the value of their remaining stockholdings in the equity. If they sold other stocks they would find few bids. This would drive the stock price lower before they could sell their entire position, and widen their losses.
Knowledgeable investors look forward to periods such as now after the resource stocks have suffered severe declines. They also wait until trading volumes are low and the selling appears to have subsided. This allows them to acquire solid companies that have sustained the most severe losses, or those that had the opportunity to importantly advance their major projects, without a commensurate increase in their share prices. In both instances, wise investors can pick and choose the best risk vs. reward candidates in which to invest, knowing that they should lead the next advance.
Adding to the softness of the resource sector is the fact that we are in the period known as "the summer doldrums". This is characterized by vacations when time spent with the family dominates the minds of most investors and brokers. This timeframe ends in early September when all of the players return and are ready for action.
Historically, the junior market begins to firm by mid-September. It then launches its seasonal Fall rally that normally continues to the end of October or into November. In fact, the past three years have witnessed strong price advances in the major and junior mining stock groups during this time.
HIGHER PRICES ARE IN THE OFFING
There are a number of factors that lead me to believe that we are destined for sharply higher share prices in the foreseeable future, if not within the next few months. First, I do not believe that the current prices for both the precious and base metals have been fully factored into the stock prices of the companies which mine or explorer for them. Copper is trading at $3.40, nickel at $15 and zinc is priced at $1.50. Nickel is posting all-time highs while copper and zinc are within striking distance of their recent record high prices.
Despite the fact that these and other metals are at historic highs, neither the marketplace nor most experts believe that they are lasting. To my mind, barring a major worldwide economic slowdown, I believe that the rise of China, India, and Brazil as well as a number of other countries will continue to place upward pressure on these and other metals for at least the next several years. If this analysis is correct, investors will eventually realize this inevitability and re-price upward these companies. When this occurs, a virtual stampede into the junior exploration sector will ensue.
Gold and silver stocks are not immune to this occurrence! The term "gold fever" is a euphemism that has been repeated throughout mankind's history. During times of fear or uncertainty, and whenever a government destroyed the purchasing power of its currency such as the U.S. is now in the process of achieving, gold was a major beneficiary.
The common man purchases gold in his effort to protect himself. "Gold fever" occurs whenever a sufficient number of ordinary citizens become frightened by the declining purchasing power of their local monetary unit. When this tipping point arrives they jettison their nation's currency for the safety of gold.
Silver on the other hand has been in an ongoing supply deficit for over a decade and a half. Further, virtually all of the available above ground stocks have been absorbed to fill this gap. Additionally, if Ted Butler, Gold Antitrust Action Committee (GATA.org) and other experts are correct as I believe they are, the white metal's short interest is at a record level. These conditions set the stage for a breathtaking silver price rise. If these beliefs are true, both gold and silver stocks will follow the approaching explosive rises of their respective precious metals.
Another reason I anticipate higher exploration stock prices this Fall is that gold should soon add wind beneath their wings. We are entering the period that is typically marked by a vibrant gold market. This is spurred by jewelry and other companies when they purchase the yellow metal to satisfy their Christmas Season needs.
Further, the past few years have witnessed resource companies spend billions upon billions of dollars in exploration. This has allowed a number of companies to progress to the point where I believe the odds greatly favor the announcement of one or more major discoveries. These may come as soon as during the present field season. This market is driven largely by greed. I believe that the reporting of one or more such events has the potential to explosively ignite this small market. When investors see vast fortunes accrue to other shareholders caution is often thrown to the wind, and their purchases soar in the hope of achieving similar personal success.
Finally, Barrick Gold announced a hostile take-over bid for Nova Gold. If they or a yet-to-be announced "white knight" succeed, Nova's shareholders will be rewarded with $2 C. billion or more by the sale of the their stakes in their company. Most of Nova Gold's shareholders will use some or all of their proceeds to acquire other junior resource companies. They will do this in the hope of finding yet another Nova Gold, and similarly riding it from the pennies it was worth but four years ago when many bought it, to its $19 C. range of today. This amount of fresh money reentering the exploration market is sufficient to alone launch a major sector advance.
The summer is still with us and we are continuing to experience weakness among the junior shares. Yet, despite this fact it is difficult to acquire important positions in many of these companies without driving their prices substantially higher. I believe that we are witnessing an important watershed. The selling is drying up and the buyers are slowly beginning to return. It is only a matter of time before the share prices begin to rise and reflect this occurrence.
I am confident that the resource bull is far from dead. We will again be rewarded for our courage and belief, as one by one the above factors come together and incite him with a vengeance, back into action.
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.
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