2005, THE YEAR OF THE JUNIOR MINING STOCKS
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
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
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
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
Gold Is Building A Base
From Which It Will Further Advance,
And Will Carry The Junior Companies With It
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 early1980 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.
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
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.
© 2004 by Dr. Richard S. Appel. All rights are reserved.
Parts of the above may be reproduced in context, for inclusion
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