Friday, 1 February 2008

The Juniors– “Ready to Hit the Radar Screen”

This article by I Cohen was posted by Fullgoldcrown at Goldtent yesterday. It's an interesting read.

The Juniors "Ready to Hit the Radar Screen"

One of the great mysteries of this bull market in gold since late 2001 has been the relative poor behavior of the junior and exploration company shares. All through this huge move in the metal, except for a couple of lunges upward, these shares have remained seemingly unconnected to the gold’s price. If you looked at the charts for the past two years and were unaware of this fact, you would guess that the price of gold is hovering somewhere around $500 instead of approaching $1000. In fact, it seems that the higher gold goes, the worse the action has been in these shares. Recently, there have been days when gold is up $10 or so and the juniors actually open down. Most close on down ticks or don’t even trade.
To myself and most of you who are disproportionately invested in this sector, it is not just frustrating but incredibly annoying. I know I sometimes say to myself (at least I am a good listener;) Doesn’t everyone know that these companies are fantastically undervalued and represent the buy of a lifetime? But my opinion, and probably yours, is obviously a minority in the unfolding drama of a unraveling financial system.
Why is this so? This pattern has suspended all logic of how markets behave. Let me give you several reasons why I believe it has continued for so long and why it is about to change.
First, I believe it represents the overall sense that gold can’t go much higher. After all, who will go to a coin dealer and drop $925 for an ounce of a metal that was just $500 and back in 2001 sold for about $250? So many who have watched gold climb are now convinced that since the smaller shares are so disappointing, there is little chance of them coming to life. In addition, you have received nothing but discouragement from the media since the bottom. After all, you can remember how often they also warned you about the impending collapse in the tech area in 2000 and more recently the housing disaster. Now that gold is over $900, almost all of the “pundits” remind you that it much too late to get on the train. (Just a little vented sarcasm).
Second, I view this behavior as a reverse of the speculation at the top. Gold is still at the bottom of what will prove to be an incredible and historic move as the system continues to break apart. This extreme point might be difficult to grasp, but if you can remember back to 2000, how improbable was it that the Nasdaq would soon fall 90%? Outside of the gold lunatic fringe, it was perhaps 1 in a million.
Third, this section needs and will receive new buyers, and I don’t mean those of modest means who jump in on a excitable whim to buy $5000 of a penny stock. Many of these early buyers have been sufficiently discouraged to be totally flushed out of the market, and are unlikely to reenter. Instead, the days are coming when the buyers of these companies will be large hedge funds, wealthy individuals from Russia, China and the Middle East who understand the historic role of gold, and realize that the US system is without remedy. After all, it hasn’t been the debt attached Americans who have pushed up the metal, but instead cultures that value gold as a store of value and represent true money. It follows that they if they have been wise enough to buy the metal, they will be soon drawn to the producers. And these people do not think in terms of thousands of dollars. They are not small thinkers and they are patient. If they are now billionaires what is $10 or even $50 million?
Fourth, most of the juniors have had to raise capital during unpopular times, so management had to dilute the shares over and over. Many of these shares, since a lot of them were practically free, have repeatedly hit the market, as have many of the options that management exercised. I can’t blame management because a lot of their salaries are minimal. This should be a tiny factor in the days just ahead.
Fourth, sooner or later a gold price in the thousands of dollars and exploding against all currencies will move all boats. It is totally illogical to think that this will not spark a gold rush of historic means. Do you recall those photos of the gold camps in California and Alaska when thousands of prospectors went crazy with “gold fever” as they heard of the fortunes that were being made. Can’t you see it coming in the junior and exploration arena?
Finally, let’s speculate and dream what the landscape will be like in a year or two. Perhaps, gold will be around $2000, or as I believe, even higher. Some of these companies that now hold a market cap of $8 to $40 million, and perhaps have real reserves of a couple of million ounces, are now making $50 to $100 million in profits just in one year. And then throw in the irrational exuberance that eventually comes in an incredibly speculative environment. With the world financial structure in tatters or even chaos, what will those shares be selling for? That is why I have written that 10 times or even 100 times move will not be a fantasy.
Remember, if you have 10 small exploration companies with your investments spread evenly, you don’t have to have supernatural fortune. A batting average, just as in baseball, of .333 will be enough even though I believe it will be much higher. I’ll give you a personal example. At one time I had an equal amount of Pelangio (PLG.TO) along with my other exploration companies. As their results came in, I bought some more. Most of the other similar companies have languished, but now Pelangio has begun to climb and has compensated for the others.
Finally, most bull markets begin without notice and with a great amount of skepticism, since they have followed a long period of terrible performance. It is only at a point when it becomes obvious and when alternate investments are doing poorly that the public finally takes notice. The difference this time is that by the time America realizes what has been going on, most persons won’t be able to be a part of it. They will have been fleeced by the American mantra of going into debt and leave the savings up to the rest of the world.
As we have constantly written, the world has entered into not just uncertain times but totally unchartered ones. During the unthinkable turmoil, those who are wise will be drawn to an anchor. In the material world, it is gold; in the eternal and spiritual world, it is only God.
Please contact me if you are looking for professional help. Chuck

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About Me

I teach Film, Media and English Lit.