The Junior Stocks Begin to Stir

By Dr. Richard S. Appel              January 20, 2006 www.financialinsights.org

January 20, 2006 – The junior exploration sector led by the gold explorers are finally beginning to come to life. As a group they peaked in early 2004. That ended a stage when these small companies were discovered by the first few, farsighted investors. Company after company saw their share prices rise not by10%, 20% or 30%, which would have made normal investors happy, but in many cases by a multiple of one, two, three or even five or ten times their share prices of but only a year or so earlier. This early phase of the exploration stock’s Bull Market was led by gold and the other precious metals, as well as by the various base metals and members of the energy complex. These metals and other commodities all left their lows behind, and excited the world with their electrifying Bull Market price advances.

The enormous price rises bestowed substantial profits upon those who invested early in these nascent explorers, and took profits as their prices crested. Unfortunately, the overzealous investors who drove these stocks to dizzying heights sowed the seeds for the following grueling, seemingly interminable period that we are just exiting. This was a time when junior stock investors greatly suffered as they watched their stocks experience across the board price declines, or in some cases price collapses.

The nearly two year period between early 2004 and the past several weeks acted to squeeze all of the froth, excitement, overconfidence and overextended prices from the resource market. Numerous companies found themselves trading at 50% of their earlier highs. Others eroded in price by 80% or more from their former peaks.

During much of this time-frame, whenever a company reported any form of important progress, by either announcing a major acquisition or some sort of exploration success, the bids that entered the market for their stock were quickly filled. This was by anxious investors who were waiting on the sidelines for a buyer to appear so that they could sell some of their shares without driving the stock lower, and thereby inflicting greater losses upon the remaining stock that they held.

For newcomers to the junior market, a substantial number of buyers are only normally present when prices are in a rising mode. Whenever stocks decline or even stagnate for a time, investors typically step aside. The term “no bid” symbolizes these periods! Similarly, trading volumes evaporate and fall to a fraction of those that attended the earlier exciting price advancing era. This is the reason why I repeatedly stress in "Financial Insights" that great price advances in either an individual company or the group, are periods when at least partial profits should be taken. If an investor waits until prices crest to sell, he will normally find that few buyers exist. The rest will have pulled their bids, and he will be left standing on the edge of a precipice, when he initiates his sell orders.

The junior companies began to probe for their individual correction lows during the summer of 2005. This was when the major gold producers struck their nadirs. With each upward pulse of gold and the producing company stocks, the juniors appeared to gain strength. However, time and again, whenever gold and the producers hesitated or slightly declined, the exploration companies were again beset with further selling. This drove the equities of numerous small companies, to repeatedly test and in many cases violate their earlier lows.

Yet as time passed a major event began to unfold. This started in early fall 2005, when individual exploration or development companies that made important progress began to experience more buyers than sellers. They witnessed their stocks trend higher in price. Those who lived through this difficult time-frame saw an increasing number of companies rise from their correction low points and post a series of higher highs. Further, companies that were either developing a mine or that appeared to be on the verge of so doing, began to attract even greater investor attention. They watched as their shares were accumulated by an ever larger contingent of buyers, while the number of sellers seemed to dwindle. Finally, exploration success again began to count! This first occurred in November, 2005.

The past month saw several exploration companies attract not only important investor interest but also extremely strong buying demand. Companies reporting significant drill results were no longer met with a yawn! Now these announcements caused investors to fall over each another in their effort to buy their stocks. One by one, these companies watched their shares multiply in price as their volumes swelled into the multi-hundred thousands if not millions of shares on a daily basis. Even companies that had no important news to report saw the buyers appear. Of utmost importance was the fact that the sellers finally began to exit the market, and trading volumes began to swell.

The past many months of minimal volume and backing and filling by the majority of junior exploration sector companies, appears to finally be approaching an end. The plethora of latent sellers, who only awoke when the occasional buyer entered the market, no longer appear anxious to sell. I believe that this denotes the fact that they have finally sold whatever shares that they desired. Now, we wait for them to transform into buyers! And, the final factor that I believe is required to light a roaring fire under this exciting market, is for gold to resolutely remain above $500.

The Impact When Stock Investors Accept a $500 Gold Floor is Monumental

When gold first approached $500 in early December 2005, and then quickly surpassed it, I was struck with an important thought that I will discuss below. A few days later the yellow metal collapsed to retest $500. It briefly violated it before turning sharply higher, and then resumed its upward path.

In my December 15, 2005 article, "It's Always Darkest Before the Dawn" I wrote, “I believe that gold’s present plunging price is setting the stage for a major extension of it’s Bull Market! When it ends, and gold resumes its northward advance, it will be reviewed as having firmly established $500 as a major support area. This will be critical to the market because it will change the perceptions of it’s players. For stock investors it will make them consider revaluing the worth of the ore reserves, and the profit potential, of their companies to that price. I am confident that it will spark a major broad-based advance when this realization begins to permeate the market. For gold investors it will foster greater confidence. They will view their downside risk in a less frightening light. As with the stocks, it will become the impetus for a major gold advance.”

I believe that when it appears firmly entrenched above $500, gold will be increasingly viewed in a different fashion. $500 will no longer be seen as offering major resistance in the eternal metal’s upward bull climb, as it has for two decades. Instead, it will be perceived as being a zone of substantial if not impenetrable support!

It is true that the $500 level may again be retested. Given gold’s recent breathtaking nearly vertical ascent and current overbought state, it should be expected. This would be similar market action such as we have repeatedly experienced since the gold Bull Market’s inception in August, 1999.

However, since surpassing $500, I have sensed a sea change in the price action of the eternal metal. Serious buyers from around the world are waiting in the wings to quickly acquire gold that enters the market during each price break. This is best witnessed by the two-day $20 decline that was immediately followed yesterday, with gold’s second or third largest daily Bull Market price rise to date. The buyers now appear to be acting with a sense of urgency in their purchases! For this reason, the bears may be unable to take the yellow metal decisively lower. If this condition continues I would not be surprised if we shortly experience far higher gold prices!

Given the enormous amount of buying that appears with the advent of even a temporary set-back, I believe that a change in the psychology unpinning the gold market has occurred. As gold becomes firmly entrenched above this important price, even if it sharply declines to again test it, the various sectors of the gold complex will respond in distinct and strongly bullish fashions.

I am confident that the junior exploration companies are on the verge of staging a broad-based, explosive advance. Their nearly two year correction has produced a condition where the better exploration companies can be launched to multiples of today’s prices. In fact, I believe that this has already begun!
Yes, there will be set-backs along the way! However, I strongly feel that the stage is now not only set, but it has been ignited into motion. The longer that gold remains above the $500 level, the greater the number of investors that will upward revalue their companies, both major and junior.

For the producers, investors will anticipate far greater earnings as well as attribute an increased value to their ore reserve bases. They will also raise their earnings potential projections for the perceived, nascent gold producers based upon $500, rather than $450, $400 or lesser gold price that they currently use.
In the increasingly remote possibility that gold declines and retests $500, I doubt if the juniors will do little more than pause. They are in the process of decisively breaking out from their massive, extended bases and will likely not be significantly affected. But if they do, I expect them to quickly bounce back and post new highs when gold resumes its bull advance.

With $500 gold accepted by investors, companies that have “pulled a hole” or two and may be in the progress of defining an economic orebody, will see their shares trade sharply higher. For these and the other explorers, higher price projections will evolve due to gold’s newly perceived elevated base price or floor. This will result because it will increase the likelihood for all of these companies to develop an economic ore reserve.

When The Junior Golds Move Higher The Other Mineral Explorers Will Follow

I would be remiss if I did not mention the effect upon non-gold related junior companies of a higher “presumed” gold price. The Toronto Venture Exchange is replete with companies that search for not only gold but silver, copper, nickel, uranium, molybdenum, zinc and a plethora of other base and precious metals. It is indeed a universe unto itself in the junior mining sector.

It is normal during a gold Bull Market for the majority of companies trading on this exchange to benefit. This is irrespective of the specific item for which they search, and is enhanced today by the Bull Markets of numerous metals. Historically, this condition is due to the excitement generated by upward trending gold companies, which tends to overflow and stimulate demand for most of the companies in this market.

All markets have a number of investors that are forced to raise capital at any given time. If you view the exploration market as a somewhat closed system it might be easier to understand what I am about to discuss.

Investors and speculators who acquire junior gold companies often own other mineral exploration shares. If the gold juniors are down and out and an investor is forced to raise cash, he will look at all of his holdings to determine what he should sell. If his gold stocks are illiquid, which will be the case under this circumstance, he may sell a stock that is searching for copper, nickel, uranium or platinum. The determining factor will be which company actually has a bid that he can “hit”! This is the reason why a large number of non-gold companies in this sector also performed poorly during the past nearly two years, despite the fact that the metal for which they targeted was in an advancing bull state.

Throughout this period when a different sector became a market darling, such as uranium in late 2004 through early 2005, the majority if not all of these stocks did not perform as well as they should. This is because the bids that were generated by the excitement allowed gold investors the opportunity to raise capital, and many of them did by selling their uranium shares.

I am confident that as frustrating and trying as the past twenty plus months have been for those invested in the junior mining sector, we are on the verge of experiencing the mirror image of that time. If I am correct, and $500 becomes increasingly viewed as a “floor” under gold, investors will progressively factor that price into their junior and producing company valuations. As time passes those who stubbornly retained their gold share positions, or added to them at current levels, should be richly rewarded for their foresight and perseverance.

I believe that we are already witnessing the initial wave of capital entering the downtrodden stocks of these tiny, exploration and developmental companies. With each passing day, more equities are moving higher on surprisingly little volume. After long languishing they move up 25% or 50% in a few days time. They then fall back slightly and enter a new, higher trading range. To my mind, this indicates that the sellers are in the process of exiting the market, if they have not already done so, and more investors are becoming buyers.

The pain and suffering that we resolute believers in gold have been long forced to endure is fading fast, and will likely shortly become but a dim memory. If I am correct, we will soon be rewarded for our understanding of the factors underlying the eternal metal’s Bull Market. Gold and the gold share universe appear to me poised to stun the world.

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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.

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.

CAVEAT

I expect to have positions in many of the stocks that I discuss in these letters, and I will always disclose them to you. In essence, I will be putting my money where my mouth is! However, if this troubles you please avoid those that I own! I will attempt wherever possible, to offer stocks that I believe will allow my subscribers to participate without unduly affecting the stock price. It is my desire for my subscribers to purchase their stock as cheaply as possible. I would also suggest to beginning purchasers of these stocks, the following: always place limit orders when making purchases. If you don't, you run the risk of paying too much because you may inadvertently and unnecessarily raise the price. It may take a little patience, but in the long run you will save yourself a significant sum of money. In order to have a chance for success in this market, you must spread your risk among several companies. To that end, you should divide your available risk money into equal increments. These are all speculations! Never invest any money in these stocks that you could not afford to lose all of

Please call the companies regularly. They are controlling your investments.

FINANCIAL INSIGHTS is written and published by Dr. Richard Appel and is made available for informational purposes only. Dr. Appel pledges to disclose if he directly or indirectly has a position in any of the securities mentioned. He will make every effort to obtain information from sources believed to be reliable, but its accuracy and completeness cannot be guaranteed. Dr. Appel encourages your letters and emails, but cannot respond personally. Be assured that all letters will be read and considered for response in future letters. It is in your best interest to contact any company in which you consider investing, regarding their financial statements and corporate information. Further, you should thoroughly research and consult with a professional investment advisor before making any equity investments. Use of any information contained herein is at the risk of the reader without responsibility on our part. Past performance does not guarantee future results. Dr. Appel does not purport to offer personalized investment advice and is not a registered investment advisor. The information herein may contain forward-looking information within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the statements contained herein that look forward in time, which include everything other than historical information, involve risks and uncertainties that may affect the company's actual results of operations. © 2005 by Dr. Richard S. Appel. All rights are reserved. Parts of the above may be reproduced in context, for inclusion in other publications if the publisher's name and address are also included for credit.