The cup has turned half full, with almost any news is taken as being positive and potentially negative news brushed aside. A "sea change" in perception is under way as a steady stream of new investors finally realize a powerful secular bull market has begun. As a result gold and silver stocks have continue rallying with the HUI now up an amazing 70% since the April lows. Beginning in mid-July, the HUI exploded, out-performing the metal by a factor of over 5 to 1.

Even the juniors are finally coming to life. The quality ones have already caught up to their more senior brethren by typically tripling and quadrupling in price since their bottoms a couple years or so ago, the lesser known juniors trailing, but now well off their lows. Brokers are telling me that they're easily closing one equity financing after another for junior exploration companies that couldn't have been completed just a year or two ago.

I'm encountering an annoying ongoing problem ever since last issue where every time I go to take a closer look at a junior mining stock, the price suddenly runs up. This action tends to make me nervous. Be advised that our best technical tool to date, our price channel, has "flashed" overbought by moving to the top line, a possible indication a reversal is at hand.

The gold market is now reaching the point where investor sentiment and perception are now taking over from fundamentals as the main driving force in price action. That means that prices are now starting to include a significant degree of future price speculation, making them vulnerable to short sharp, scary corrections without warning. When resistance levels are taken out like they have been since last issue, sometimes prices just keep moving forward. Other times they need to consolidate before moving again.

The same concern goes for the overall market which has moved so far since their spring lows. The U.S. is growing its money supply at a alarming rate just like prior to Y2K, which boosts stocks initially, but leads to a retracement later when the taps are turned off. On the other hand, personally I'm not inclined to take profits en masse at this point in the seasonal calendar, as we can almost always usually anticipate higher prices in the first quarter, a mere few months away.

There's also the danger of being left behind. We've yet to see the buying power that going to be unleashed once some exploration company makes a major multi-Billion dollar mineral discovery. That's the "area play" part of the overall bull cycle. As I write, dozens of junior exploration companies are drilling or mobilizing drilling programs. Sooner or later, likely just as metal prices are really soaring, somebody will make that first mega-discovery (who knows, maybe, just maybe, it could be XXX). And when that happens, dozens of juniors in the area will soar and dozens more will flock in and the entire tide will rise from the tremendous liquidity that will be created. We haven't seen any major discoveries yet.

I guess what I'm saying in a nutshell is the picture is very mixed right now. On the positive side for gold stock investors, this month we've entered the strong seasonal period and the U.S. Dollar is beginning to "roll over" and die again. However shorter term I am concerned about the extreme high commitment of traders in the futures markets heading into a "pause" in seasonal strength commencing around the second week of October ending the middle of November (see seasonal chart above). So I'm doing what I normally do when conditions are mixed - not too much. I'm certainly expecting a "pause" but not enough of one to begin cashing in core gold positions. Meantime I'm keeping some cash aside in the event of market weakness and tax loss selling just around the corner. The open question for swing traders will be whether profits should be taken if gold prices suddenly run up very quickly to $400 - $420 well before year-end possibly getting ahead of itself.

Long term - no worries, public remains in the dark

Long termers have the luxury of "looking the other way" during the corrections (if anything buying the dips) waiting for the entire bull cycle to run its course. Bull markets end when everyone is in. While the commitment of traders is soaring - outside of the futures pits and among the greater financial community and the general public, that appears to be a long, long way off yet. Not only is the general public not in - they're not even aware of secular bull market in precious metals yet!

Case in point was a cover story on the September 5th issue of Investor's Digest by John Embry, legendary Canadian precious metals mutual fund manager, entitled; "Some gold commentary just plain drivel" in which he proceeds to dismantle a most ill-informed posting regarding gold he found at theStreet.com.

Yet another remarkable article appeared just a week later at www.MiningNews.net. The World Bank released a report titled: Global Economics Prospects citing weaker jewellery demand, new "lowcost" production, the resumption of producer hedging and continued Central Bank sales as reasons for the gold price to fall Below $300! I found this line most amazing:

"Even when prices fall below $300 per oz, mine production is expected to continue to increase moderately as new low-cost operations come onstream." (page 190, Global Economic Prospects 2003) http://www.worldbank.org/prospects/gep2003/appendix2.pdf

Does the World Bank mean to tell us then that gold producers really haven't been high-grading their reserves the past half dozen years to survive? Production to increase? Serious gold industry think tanks are projecting a gradual (2%) annual drop in production. The world's largest producers are depleting their reserves, just as the investment world is taking a serious interest in gold. More CB sales? Canada just sold almost all of its gold, down to its last 100,000 ounces or so from 2 Million twenty years ago. New "low-cost" production? From where? I wish the author of this report would disclose where this new low cost production is coming from, so we could all invest in it now!

Same goes for a recent "round panel" of "financial experts" in the National Post. At least the one day I read it - these experts were commenting on where the market's been, where it's headed, what's been good, what's likely to be good - and can you believe it - the gold sector was not once mentioned. It didn't even come up. The HUI has risen an amazing FIVE TIMES in price since the bottom in late-2000 - from 40 to 200 today - and none of these experts even noticed it, or saw fit to comment on it, or to speculate on whether it might continue? I find that truly amazing.

Forgive me for being facetious - but it's no wonder the public doesn't get it, given the "drivel" they're being fed, just as Mr. Emory says. And while sad for those yet to be enlightened, it's all good for long term gold stock investors who can rest assured the bull has years yet to run. Not until the masses are "enlightened" and in, will the bull market be over. Just stay on the alert for stock tips from waitresses and taxi drivers. Want a more quantitative warning signal? Watch the Dow/Gold ratio. Peaking at 45 in early 2000, currently around 25, my long term target is 5 or less. When it reaches five we should begin averaging out. This translates into potential rough targets of $1152 (+207%) for gold and 5760 (-40%) for the Dow if they were to both move in unison.

To date, a 50% move in gold prices has sent gold stocks up an average of 300% or more. Just imagine what a further 200% rise in the metal price could do? This is but one of many methods of coming up with an eventual price target for the gold. We'll examine others in subsequent issues.

Swing Trader's Corner

In keeping with my cautious stance on the overall market and gold sector at this time and our newsletter's motto of "Finding Extreme Value in Small Caps" - this issue I've picked two gold stocks trading under a dollar that could also qualify as "value" stocks; one which trades at a significant discount to its liquid assets in the treasury, another trading at less than five times earnings per share.

These articles (the complete issue) are available to non-subscribers for US$10 via PayPal through our website by "subscribing" and then cancelling your subscription after the issue is received. Just go to www.emerginggrowthstocks.ca, subscribe, and the issue will be emailed within 24 hours. The issue also includes updates on what we believe are the two most prospective exploration programs underway today, one currently drilling for diamonds, the other due to commence a drill program for silver.

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