Gold Stocks Continue Long-term Basing Process

May 26, 1999

The drawn-out basing pattern throughout the speculative gold stock sector continues with some gold stocks experiencing incipient bull markets—a foreshadow of what is to come over the entire sector. The thing that appeals to us the most about the golds is thenice risk-to-reward ratio and the immense leverage that exists in them. For only pennies a share, an investor may participate in a rising sector that can exponentially augment his working capital in only a matter of days. We consider the golds to be among the most undervalued and rewarding sectors in the stock market today.

For investors who lack patience, however, the past year has been a particularly frustrating one as we have watched the golds meander sideways as they build a base of support for the next major advance. The refreshing aspect to this drawn-out lateral trend is that the longer a stock (or sector) takes to bottom out the more substantial its subsequent reversal. Based on the lateral movement that has been prevalent in the golds the past several years we should be looking at a major bottom and a considerable bull market once the gold stock sector picks up momentum.

Hindering this imminent reversal higher has been the wild speculative bubble in other stock sectors, most notably the Internet stocks. Once this mania dissipates, however, we fully expect widespread investor interest to turn to the golds. And for those who happen to be bearish on the near-term prospects of the physical gold market we continue to assert that there has developed a disconnect between gold prices and the speculative gold stocks in the past couple of years. For now at least, the prices of gold mining companies (excluding the "blue chips") remains unaffected by the yellow metal's fortunes and appears to be tied almost solely to speculative fervor and investor enthusiasm for stock ownership, regardless of business prospects. We continually reaffirm that now is the time to begin accumulating shares of the smaller gold mining companies in anticipation of the inevitable breakout, but watch carefully for those stocks that are currently the subject of distribution campaigns.

Aber Resources [ABERF:NDQ] is a speculative natural resource stock with low liquidity. For the investor who doesn't mind such speculative risk, however, Aber is well worth a look. Currently trading at $7 7/8, Aber's chart shows a bullish accumulation pattern. Even better, the tape for this stock shows undeniable signs of accumulation, with most of the trading volume flowing in to the upside. Overcoming $8 resistance on fairly heavy volume would do much to convince us Aber is heading for even higher levels.

Although not a gold stock, a promising stock in the natural resources sector (diamond mining) that we like is Rupert Resources [RUP:VNCVR]. Trading at just $0.60/share, Rupert has established a bottom pattern and appears to be heading higher, though gradually. Another speculative stock, Rupert's tape shows clear signs of a buying campaign underway. A potentially rewarding stock.

One particularly disturbing trend we feel we must warn you about that has developed in the past two weeks is the distribution of certain Canadian gold stocks that we had previously recommended. This is first noticed by looking at the charts for such stocks as Asia Pacific Resources [APQCF:NDQ], Camnor Resources [CMB:VNCVR], Eaglecrest Exploration [EEL:VNCVR] and Cumberland Resources [CMB:TO]. All of them have either a rounded-over appearance—indicative of distribution—or a sharp drop from recent highs on high volume. Even more telling is the tape for each of the above mentioned stocks shows a massive unloading of shares on the market within a one or two day period. For stocks that normally only see trading volume in the thousands of shares suddenly see two-hundred thousand or more shares come on the market in a single trading session when prices are moving lower is not a healthy sign. Subsequent trading days have seen less pronounced activity, but distribution nonetheless. We recommend exiting positions in these stocks at this time.

Glamis Gold [GLG:NDQ] is an American gold stock that looks good at the present time. Unlike the stocks mentioned above, the tape for Glamis shows a healthy accumulation trend underway with heavy volume flowing to the upside. The chart shows a bottoming accumulation pattern that confirms this incipient buying trend. A buy above $2.

A gold stock that has witnessed a lot of speculative activity of late has been Britannia Gold [BGP:VNCVR]. While a speculative issue, a high amount of liquidity has flowed into this stock in recent weeks, making for ideal trading conditions. In fact, Britannia has recently seen two million share days—highly unusual for this stock. Currently trading at $0.7, this is the type of stock that affords the investor with the magic of leverage, turning a relatively small initial investment into a nice profit. Be sure to use protective stops and watch the tape carefully. But Britannia looks like a winner in the weeks ahead.

A stock with an exceedingly bullish chart is Highridge Exploration [HRE.TO]. Take a look at the bullish flag pattern that has developed in this stock in the past few days. Its forecasting implications are for considerably higher levels. Currently trading under $4, we consider it to be a worthwhile endeavor.

Latin Gold [LTI:TO] is one of the more risky of gold stocks. While at first glance its chart pattern would appear to be extremely bullish—it is presently in the midst of an ascending triangle formation preceded by a massive runup—the volatility and somewhat confusing nature of the tape should serve as a caution to traders who enter long positions in this stock. We would recommend this stock only for the more risk-averse traders and even then only when placing tight stop-loss orders to protect against sudden drops. A resolution appears imminent and the direction of the breakout should tell us where Latin Gold is headed in the weeks ahead. Watch carefully.

Pangea Goldfields [PGD:TO] is having a tough time moving decisively above $2. But its tape is undeniably bullish as it reflects a decisive accumulation of shares by investors. Once available supply has been assimilated we would expect to see a nice rise in this stock. Worth a look.

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including most recently “2014: America’s Date With Destiny.” For more information visit www.clifdroke.com.

Throughout history the ruling class has always sought to own gold and silver because they represent purity and longevity.