EGSNEWS Excerpts - September 2, 2004
EGSNEWS Excerpts - September 2, 2004
YTD At their lows
Gold -4% -10%
HUI -20% -30%
TSX-V -16% -16%
NASD -10% -12%
DJIA -4% -10%
For starters, keep in mind that apart from oil prices, other markets are also losing ground this year. Sure, gold stocks as represented by the HUI have been hit especially hard. This is a result of the terrific 3-year run they've had.
A second consolation is that $400 represents formidable technical resistance going back 2 decades now. We shouldn't be at all surprised for it to take numerous attempts to decisively break over it. Just look at how many times the price has flirted with $400 since around 1985 on the long-term chart.
More than consolations though, upon examining the gold price seasonal chart I'd say there's reason to be optimistic here.
Seasonal strength begins here
Most striking is how September appears to be the strongest month of the seasonal calendar. The line moves from the lowest point on the chart right to the top within a one-month period. Why is that? Because fabrication buyers (mainly for jewellery) who have been on vacation all summer return after Labour Day. Now if you notice in this example, gold has more or less found equilibrium around the $400 mark, albeit with a mild upward bias since the lows in early-May. Now take any commodity that's more or less at equilibrium, add new buying and all else equal, prices have to move up. In my estimation, barring a major US Dollar rally, I'd guess this should be enough to push gold back up to at least challenge the recent highs around $430.
September also marks the first of a six-month period of strength for gold prices. Not exactly a time to be selling, but if anything accumulating. Possibly just the opposite that our emotions might be telling us to do right now.
If you were contemplating selling now, I'd hazard to guess this decision would be based on emotions such as; disgust, fear of further losses, etc., rather than on pragmatic facts. Experience shows that buy-sell decisions based on emotions are more often than not, the wrong ones. One of the most important lessons from studying market psychology - don't allow the emotional demons of greed and fear guide you.
HUI anticipating seasonal strength
In the week ending August 21, the HUI started anticipating strength in gold prices ahead. On August 19, eager beavers started moving aggressively into the senior producers, pushing the HUI Index decisively through the top of its 4-month trading range, ending the week right at the 200-dma. Even if this is "given back" in the final dog days of summer, this is a positive sign.
It's also insightful to compare the HUI with other related indexes or the POG itself. Notice in the Gold vs. HUI chart a couple of interesting items. Notice how the HUI fell almost exactly three times as much as gold did (30% vs. 10%) at the lows in May, which is exactly what we should expect. I've always said expect 3 to 5 times the price move in the stocks compared to the metal price - and this works on the way down as well as up. Also notice how in just the past month, after underperforming the gold price, now it's beginning to outperform? The senior stocks always anticipate and move ahead of the metal price.
Now compare the TSX-V Index where most of the penny stocks trade and you'll notice while the HUI topped out in early-December and January, the small cap Index really hung in there until early-April. The pennies always lag the big caps as usual. Now notice more recently how the seniors have performed relatively well yet the TSX-Venture is now lagging again out of the gate. Which explains why speculators who mainly hold the junior mining stocks are feeling especially glum.
But was any of this really that unexpected? Or even cause to sell?
Hardly, if anything, I'd say just the opposite. The negative prevailing sentiment out there is setting the stage for a rally. US Dollar Index mixed to negative
No outlook for the POG is complete without taking the pulse of the US Dollar so we'll conclude with that. And here the signals are mixed to negative (or positive for gold).
The US Dollar has done precisely what we were expecting it to do so far this year, namely experience a bear market rally to the 92 area. It touched 92.5 the week of May 14 and has been pulling back from the top of a sharply sloping long-term trend line ever since.
Technically, I must concede the jury is still out at this juncture. There have been no new lows since the major low around 85 the week of February 20, therefore no confirmation the bear market is ongoing. The longer it can go without making new lows, the greater the probability that we are wrong and that it has begun a longer term bullish move. On the other hand, after reaching our target, it has begun encountering major resistance; it can't make new highs either. A mixed picture. The fundamentals however, are not at all mixed.
Fundamentally, the US Dollar's still a basket case.
Part of the reason I believed the gold sector would have a significant correction this year (beyond the fact that chart channelling had showed it had become way overbought) was that I was actually expecting the U.S. Trade and Fiscal deficits to start showing some improvement by midyear. Once a currency plunges like the Dollar has, one would expect imports to decline and exports to expand.
On the fiscal side, I thought for sure Bush and Greenspan would engineer some improvement, not to mention the economy and corporate profits did experience strong growth in the first half of the year. Well, the greenback did rally, gold did experience and intermediate correction. However most recent economic results show just the opposite is happening with the trade deficit actually getting worse, not better. And on the fiscal side, election promises will come home to roost in 2005, so that doesn't look much better either. So the fundamentals remain negative for US Dollar.
In summary, the main message this issue is relax and get ready for a stronger gold sector. The charts are positive given this is the end of typical summer doldrums and just ahead of six months of seasonal strength. So just as back around the top you recall me screaming, "stop buying" now I am suggesting not selling.
The $64,000 question is: how strong will this seasonal cycle be and will the move from $400 to $500 be as easy as the move from $400 to $500 be as easy as the move from $300 to $400 was? I wish I knew. For now we will allow the gold price channel to guide us on the metal price. The stocks are liable to be somewhat hesitant with continued overhang from last year's financings. This can be delved into in future issues.
Core and Spec Gold stock picks
In the meantime, given this is "last call" before the commencement of the seasonally strong period of the year, I thought it was timely to publish our two updated lists of "Core" and "Spec" picks for both new and existing subscribers to review.
Core Picks - Average change to date: +274%
List withheld for paid subscribers to EGS. See bottom for how to obtain this Issue.
Our bias from the very beginning has been for western-based companies with progressive managements and a no-hedging policy. This has worked well given the currency losses from African-based producers and the lacklustre performance of the Barrick Golds and Placer Domes of the world.
Our Core picks provide deceiving amount of diversification given the list has only five names on it. They range from early stage grassroots exploration outfits, to the more advanced-stage development companies, to emerging mid-sized producers, right to the grand daddy of them all, the only NYSE listed gold producer, making it a must own for the institutions and managed by the best in the business (Newmont).
In addition, three of the picks offer further diversification. IMA Exploration shareholders will soon be receiving shares in a new company (splitting off the new fabulous silver discovery, Navidad, Argentina). Wheaton River will hold 80% of another planned silver spin-off (shareholders won't receive separate trading shares in this case though). Finally, Endeavour Mining Capital indirectly provides exposure to dozens of small and mid-sized company gold stocks.
Our core picks are stocks we plan to hold through to the end of the bull market, possibly trading a portion out at seasonal highs when way overbought, with the idea of possibly buying back at seasonal lows. Since they are of the highest quality companies and generally picked earlier on in the bull market, this list has drastically outperformed the Spec pick list. Also notice how in several instances picks bottomed out and bounced off of our support level targets.
Speculative Gold Stock Picks Average change: 35% as of August 23, 2004
While prices of Spec picks are also way down from their highs and have not nearly performed as well as the Core list, they are not on average below water due to my growing reluctance to make new picks in the final quarter of 2003 as the sector was about to begin topping out. Beyond a couple of obscure shell companies to satisfy year-end bargain hunting urges, we avoided the better known names, stocks that had already enjoyed great price gains, but sadly for the latecomers, were about to tumble. The list features one profitable producer, (LOV) is leveraged into silver via IMR and SVL, and even sports a "baby-Endeavour" in AUG. If the bull market in gold plays out the way I believe it will, these should enjoy great exposure and price gains, purely on speculation and transformation in the way mining stocks are perceived. The process changing mass psychology has started, but it has a long way to go. Then, by the time they are perceived the way baby internet stocks were in March of 2000, we should be divest of these and be moving on to something else.
Only available to paid subscribers at this time, non-subscribers can purchase the full single issue and access our two lists of five "Core" and seventeen "Speculative" gold stock picks for a price of US$11 via PayPal by visiting our website www.emerginggrowthstocks.ca and clicking "Single Issue". Includes a 30-day Money back guarantee.
Louis Paquette,
Publisher
www.EmergingGrowthStocks.ca
EGS Copyright 2004
DISCLAIMER -Louis Paquette`s Emerging Growth Stocks is an independent publication committed to providing an objective analysis of the markets, focusing on the TSX-Venture Exchange and individual companies with substantial upside potential over the next six to twelve months. The information contained herein is believed to be accurate but this cannot be guaranteed. The analysis does not purport to be a complete study of securities mentioned herein, and readers are advised to discuss any related purchase or sale decisions with a registered securities broker. Companies featured in EGS are often at very early stages of development and can therefore subject to business failure, and are to be considered speculative and high risk in nature. Reports herein are for information purposes and are not solicitations to buy or sell any of the securities mentioned. The author may or may not hold a position (long or short) in the securities mentioned herein. This publication may not be reproduced without the expressed prior consent of the author. The author is not a registered securities advisor, and opinions expressed should not be considered as investment advice to buy or sell securities, but rather the author's opinion only.