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
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
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
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
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
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 in other publications
if the publisher's name and address are also included for