2005, The Year of the Junior Mining Stocks
December 26, 2004 - As difficult and trying that this year has been for junior exploration company investors, I believe that the approaching one is destined to provide us with substantial rewards. If I am correct, these nascent companies will more than compensate us for the frustration, suffering and losses that we have endured as we watched our portfolios dwindle in value as the year 2004 wore on.
To my mind, given how events have transpired during the year, the odds now highly favor an important junior exploration sector price advance beginning shortly. It could be modest, with a significant number of companies adding 20% to 30% to their share prices before the uptrend aborts. Or, it could be spectacular and the beginning of the long-awaited resumption of their nearly four- year old Bull Market. The latter scenario is the one that expect to unfold.
We are presently in this stock group's second major correction since the birth of their 2001 Bull Market. Be prepared, because there will be others! After arising from the ashes of their five year long Bear Market and sharply rising, the first major junior price set-back began in early 2002, and ended in July, 2003. It lasted about 16 months. Secondary corrections within the context of a primary Bull Market are typically quite frustrating and agonizing periods. However, in the case of the junior mineral exploration market they can be nothing short of brutal, as can be attested to by the 2002-2003 experience and our current one.
In the course of the earlier price reversal most junior companies retraced over 50% from their interim highs, while numerous stocks plummeted 65% or more. However, on the positive side when the first seemingly interminable downturn ended, a legion of companies quickly multiply in price by two, three, or even more times within the space of less than six months.
The reason for the wide price movements in this segment is multifold. The primary underlying factor is the relative thinness of the markets in the individually traded stocks. Most shares trade an average of 50,000 or less per day. This creates a condition where large price movements can occur if only a block of a hundred thousand shares are either offered for sale or are sold into the market. Of major importance is that during times of weakness and disinterest, prices will generally drift lower This results when periodic small amounts of selling are met with little or no buyers. If the lack of buying lasts more than a few months, share prices will face the likelihood of gradually spiraling lower the longer that the correction progresses.
Another reason for its great volatility is the fact that this market is largely emotionally driven. Those who invest in this arena aren't really investing. Instead, they are speculating at best and gambling at worst. This distinction is determined by each trader's various level of understanding and market expertise, and the acumen and deftness of their advisors. Thus, realizing their individual limitations, the mind-set of the majority of its participants are kept in a state of uncertainty. They want to be players in this sector because of the enormous profits that they know are available, but most also recognize that they don't fully understand the market and therefore lack confidence in their judgement. This sets them up to be easily frightened and causes them to jettison their shares at the slightest sign of a downturn. To compound the problem, in the case of those who enter this market as a means of hopefully outperforming a gold price advance, many of these individuals will sell their junior stocks if they experience or even sense an impending decline in the yellow metal.
Most of the companies in the exploration industry posted their high points in December 2003 or in the early months of 2004. From those peaks, despite gold subsequently moving to a new high, these small companies experienced a broad-based price decline. The majority of the juniors are now trading at a fraction of their early, 2004 highs. Losses from their high points of 30% to 50% or more are all but too common. It should be pointed out, however, that a number of stocks actually improved in price during this period. This was due to the positive advancement of their projects or from important acquisitions that excited the market. It is from some of these superior price performers that I believe will shortly emerge the leaders of the next major junior price advance.
Tax Loss Selling Enters The Picture
After gold completed a double top at about $332 in April, 2004, the junior market staged a sharp price retreat. Despite occasional brief periods of strength, most companies witnessed their shares whither in price as the year wore on. This set the stage for the final sell-off.
For many of the companies sporting the greatest losses, tax-loss sales acted to drive many of their prices to even greater depths. During the closing months, investors have the opportunity to sell losing stocks to offset profits that they made during the year. This is an annual occurrence and should be anticipated. Unfortunately, they often base their selling decisions upon nothing more than liquidating those shares that show the greatest losses. Further, they recognize that they can again repurchase the companies 31 days later, and still book a tax purpose loss. Thus, many of the stocks that suffered the worst through the year, become the candidates which are forced to again experience a barrage of their shares entering the market. Due to these events, I anticipate that a number of the most oversold and undervalued companies will show significant price advances early in the new year. This, as investors reacquire their shares in order to reposition themselves. But, what will happen from there?
As with all markets, prices tend to run from levels of extreme undervaluation to those of great overvaluation, and back again. This cycle repeats itself through the various cyclical waves within all great Bull and Bear Markets as well as dictates the limits of the Bull and Bear Market's themselves. Bull Markets end when stock prices have been bid to greatly overvalued levels and investors are besides themselves with joy. Conversely, Bear Markets terminate after prices have fallen to grossly undervalued levels and when investors loathe the day that they ever invested in stocks..
It is my contention that resource stocks have gone full circle, and are now in trading ranges where they offer excellent relative values when compared to their historic pricing. I stress the term "relative values" because few within this group possess anything quantifiable from which accurate valuations can be applied. If I am correct, we are at a juncture where the junior mining stock universe has passed its lows.
This does not mean that they will immediately soar in price! However, I do believe that we will at minimum enjoy a "dead cat bounce" into January, 2005. This will primarily be the result of the end of the tax-loss season and the attending disappearance of sellers.
Of major significance after carefully observing this market, I believe that the shares of numerous companies would NOW be much higher had it not been for another very important reason. That is many seasoned, astute market players recognized the acutely oversold nature of this market and the effect that tax-loss selling would have upon its stocks. They chose to take advantage of this situation and reasoned, "why should I pay up to buy my favorite companies if I can patiently wait for the tax-loss sellers to sell me their stock at discount prices".
Given that tax-loss selling ended in Canada on December 24, and will end on December 31 in the United States, I am confident that a large pent-up demand from these and other market participants will shortly emerge. This will carry numerous stocks within the exploration market substantially above their presently depressed levels and will allow savvy investors, I believe, to reap great profits in the approaching new year.
Gold Is Building A Base
An item that is rarely discussed but that I believe is of monumental importance, is that gold finally rose impressively above the $415 to $430 barrier that repelled all of its advances since 1989. Gold's $875 all-time high in early 1980 was followed by the long, devastating Bear Market that ended in August, 1999. After posting a major bottom at $283 in1985, it rose briefly to about $510 in1987, only to fall back into the $350's. From there it rallied and fell but was never capable of rising above $430 until it finally broke out in November. To me this signaled a secular change in the character of the market. It has converted the earlier $415 to $430 zone of resistance into an area of great support.
Gold may continue to work in its present range or drift lower for a few weeks or for several months. However, if my analysis is correct, we are fated for far higher levels before the year 2005 fades into history. As this occurs investors will again be emotionally driven to aggressively buy the junior sector shares. Due to the fact that resource stocks gain much of their strength from a rising gold price, I believe that they too will amaze us with numerous companies rising to new and substantially higher record levels.
The above was excerpted from the January 2005 issue of Financial Insights © December 26, 2004.
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.
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