Many on this occasion will be taking technical analysis into "battle", courtesy of the Nasdaq boom which created a new breed of chartist and day-trader who lately is reacting to every slice of negativity and good news centred around "Iraqi freedom". Major gold producers in Australia are starting to nicely track the intra-day gold movements, and on Friday a new gold security was launched on the Australian market where investors can speculate on movements on the Australian dollar gold price. It is amazing how the gold index was removed around the same time a more positive attitude was emerging towards the yellow metal. A number of indices have been established to track gold producers and juniors, however these tend to be lacking in mainstream coverage and are mainly confined to mining related publications.

Whether you're into " The Simpsons or Seinfeld", "Coke or Pepsi", "Coffee or tea" investors loyal to the fundamental cause now have to accept the fact that technical issues are going to have an interim impact on their commodities and/or equities. Personally I do not see any humour in Seinfeld, buy whatever drink is on special, and found ten cups of coffee a day gave me headaches so I made the switch to tea.

I looked at charting in 1994 and threw the concept along with the graph paper in the bin, (how times have changed) and elected to play the market the hard way, and whilst rewarding it is often easy to get terribly bogged down in fundamental research. The resource seminars, underground mine visits, cream biscuits and percolated coffee at AGM's and not having to go through a line of human shields to get to management makes the entire exercise rewarding.

Like those neat young men dressed as bank tellers of old who knock at the door at ungodly hours, I am under constant pressure to convert to becoming a technical analyst as I am often asked, "Where is this stock heading short-term? When do you think the selling will stop? Do you think it has bottomed here? To be perfectly honest the simply adage of "buy low, sell high" works and I couldn't give a rats proverbial of some of the day-to-day movements of certain gold stocks. If I want to gamble I have a casino a few kilometres down the road, and having a few beers over the blackjack table can be an enjoyable past time.

Being an absolute fundamentalist I am likely to be guilty of using another language to basically portray what a chartist is trying to say. Examples such as "This stock has run out of momentum", "The selling pressure is relentless", "Buyers really like it here", and hopefully down the track, "This thing has smashed through the brick wall, and look at it go now" are fairly common after watching a number of soapies almost every day for seven hours.

So what does all this have to do with surviving the precious metals bull? The bottom line is that as much as I hate to say it, the success or failure for many is pre-determined before a shot is literally fired. You either have the character traits to survive and prosper or for some the premise of losing ones home and shirt. Rarely will you see large groups of people claiming success at the end of a bubble as there is no halls fall of people discussing their multi-million dollar windfall from a Nigerian email or how they all invented a wonder hair removal cream. Speculative bubbles are where a microscopic minority prosper, and pieces of paper would be better suited to the bathroom if they were soft enough to prevent chaffing. Basically the great mountain of wealth created turns into a tumultuous disappearing act and there is no schmaltzy "Hollywood" ending.

Where are we in the PM bull?

The PM bull and in particular gold has been a gradual affair after the temporary rush in September/October 1999 as a result of the Washington Agreement and some frantic short covering. After the rises were wiped out as quickly as they eventuated gold endured a painful slide into the $250's. At this level the gloom and doom merchants were writing gold off completely, the buying depths of even the majors resembled ghost towns, as the media was about to develop a "fatal attraction" for the tech sector. Gold enthusiasts although frustrated were able to survive as some of their beloved companies decided to sell out to join the tech bandwagon. Absolute dogs turned into ten-baggers, geologists became website hosts, whilst a small number of companies kept chipping away and were actually bucking the trend. Some of the upside may have been attributed to chartists noting the increasing volume and assuming the company was about to launch a tech venture. Exploration expenditure continued to fall, there were only a handful of significant discoveries, and however gold was about to find itself trapped in its own version of "Groundhog Day". Many that watched the moves in the low-mid $270 range will know what I am talking about. It was like being sandpapered to death, or being subjected to a repeats of a reality gardening show. When gold finally broke the $300 barrier and post S11, the price was monitored like a newborn baby. Any slides below that level you would think nurtured suicide tendencies amongst those watching every movement. The press heralded gold's break through $300 with reasonable coverage and an excuse to finally cover it, much like a break through $400 in my opinion will provide investors with an excuse to start buying the bloody thing. As soon as hint of daylight was evident, the party poopers started a mini ruckus again calling for the metals demise.

The gold rally into June 2002, created a new breed of POGI. (Pissed Off Gold Investor). Basically they charged into stocks as it became mildly fashionable, and whether or not there were more breakouts than a detention centre, the fact remains they were to become somewhat of a burden in the race to $388. Amazingly gold stocks in a $329 environment were around the same level, if not higher than many prices at $380. Many were asking the question, what could have caused such obvious price discrepancies and why were they doing their hard earned when they the POG went as expected?

In my opinion it all boiled down to confidence in equities, and at this immature stage of the bull market investors are finding it difficult to differentiate between various equity classes. For many the only paper profits were in their PM stocks, and when everyone else is selling the only "in" thing to do is join them. Stocks that were popular in May-June 2002 were the ones punished severely in the recent correction and in the near-term it is likely these stocks will be the centre of attention as some confidence is restored.

Whilst some will say gold could go either way at these levels, I am of the view that it is simply an opportunity to stock up. If a store were to announce to 45% off everything sale why wouldn't you load up? When the major gold stocks on average slide around 40-45% only a brave few are willing to go near them. Makes you wonder why around 97% of speculators lose money?

The major problem here is that the fundamentalists would be essentially "fully invested" and awaiting the cavalry (chartists and daytraders) to set things off to provide the backdrop for some stock rotation which is essential in the next stage of the bull market. In order for this to occur we need one heck of an intersection to come from somewhere (any commodity will do) in order to divert the trading attention away from the fallen blue chips. To the quick buck artists out there we have a few walls for you to smash down and my previous sledging was only harmless banter.

There are some real gold bow wows out there

As with any industry you have your bad apples, and unfortunately there are a number of companies out there who have been terrible ambassadors for the gold sector. Whether it is through poor hedging policies, squandering shareholder funds or mismanagement the fact remains you cannot simply buy a gold stock and expect to become instantly rich when the POG puts on $50. In previous articles I presented tables of our major producers performance and whilst some of them I would rate as "Buys" others I wouldn't touch with your money. In a speculative bubble you throw out every principle of research and join the stampede, however we are far from that right now, so unfortunately for some there is still considerable research to be undertaken. It would be great to buy a grab bag of promoters rubbish stocks under or around 1c and go reside on a tropical island with a mobile tower and come back to large pay cheque, but this is impossible due to a severe lack of patience and the overwhelming need to watch every moment and try to analyse why someone would sell your favourite stock (normally nothing more than needing money). If things appear simple people become suspicious and try to turn it into a unique science. My response to this is why bother as markets will always rise and fall, and the majority are often and will continue to be wrong in the end.

Are fundamentals doing your head in?

At times I am as guilty as everyone else for ramming gold's fundamentals down peoples throats. From my research all the positives that existed prior to "Iraqi Freedom" have not miraculously disappeared, and to an extent it would appear that the socio-economic backdrop is not going to change for sometime to come yet. In plain English the outlook for gold is still pretty good with the potential to surprise to the upside. Until it becomes blatantly obvious that other investment classes are far more attractive or gold stocks heaven forbid become overheated I will stick with the program. My search for ten-baggers was not only the result of reading, "One Up On Wall Street" but also the desire to go against the herd mentality. Whilst the majority sweat on a one-price step movement, I thought bugger it I will go for the larger returns over a few years, and leave the trading until we see even a mild return to the conditions that existed in the first three months of 2000. Horses for courses I guess, but rarely do speculative "bubbles" sneak up on you. If you watch closely enough even the slightest hint of a stock misbehaving is detected, and if you follow the market depths of a number of stocks you can normally sense when things are on the improve. From following a number of stocks, it is apparent that we may be slowly turning the corner in the junior PM sector and are on the verge of some fireworks in a handful of stocks. During a conversation on Friday with a fellow gold bug, he made comments on how the Australian juniors were developing multi-year basing patterns and how the sector had largely been left to its own devices whilst the producers were creating/near old highs.

Market caps still low

There are still numerous juniors out there with tight structures and market caps under $5m. During the tech madness even the loudest barking dogs were attracting $40m market caps, so in the event of some of bubble forming you would expect the juniors to at least triple in the absolute worst-case scenario. The juniors do not appear to be going any lower, so who knows maybe this is the buying opportunity of the decade and not the waterfront property many are dreaming about.

Successful speculators do exist

So who are the people that will clean up during the current PM bull market at the expense of the majority? They are those that normally,

• Do not treat the stock market as their primary source of income or the be all and end all.
• Have some degree of success in other fields, and are not afraid to use others expertise rather than delude themselves they can be successful at everything. Amazing how those with extremely high IQ's have difficulty trading/investing in the stock market.
• Investigate a rumour rather than buy on a whim. Looking at a chart of past performance may indicate the smart money is already in, and the stock is likely to collapse on the earth shattering news.
• Can place food in the microwave and see out the entire two minutes.
• Avoid becoming depressed when gold drops $10 in a session or over excited when the reverse occurs.
• Treat conspiracy theories with some degree of caution, however accept the fact one may indeed come to fruition.
• Avoid bringing up, "I could have, I should have, Why didn't I? next time I will, and why the hell not? when dealing with the market. In hindsight we all made money, got the girl, hit the winning run and sailed off into the sunset. The successful speculators buy low, sell higher and do not dwell on the fact they failed to extract maximum value.
• Successful speculators do not ring their broker every half hour or day for that matter unless they have other things to talk about.
• They do not borrow copious amounts of money to buy depreciating assets.
• Refrain from boasting on Internet forums when they make a profit. Most of them treat them as humour material at best.
• Have fewer stocks with larger holdings as opposed to becoming an "alphabet speculator".
• Understand that mines take time to develop, and managing directors have more important things to do than address a frustrated trader who cannot get out of the stock. Most complaints from shareholders to company Directors are from those seeking exits, not to find out when a project maybe developed.
• Are able to separate luck from trading ability.
• Accept that gold may not be the only show in town. Silver stock accumulation and tenement holding applications have continued on unabated despite the refusal by many to treat it as a viable alternative.
• Have exit strategies in place already for their gold stocks, and are already looking at other sectors of the market to research and build positions.
• Account for the fact that the PM bull is likely to be far more prolonged and powerful than they originally anticipated.
• Laugh stupidly at "The Simpsons" and not degrade those that are on the floor during Seinfeld or vice-versa.
• Accept past mistakes and clean out their kennel. Owning small amounts of companies in liquidation or flirting with extinction is a cheap education.
• Can spot a bull-shitter a mile off and realise that one day he/she will be worth knowing. (Normally during the middle stages of a spec bubble).
• Whilst grateful that there is "One born every minute" they realise that at times things will temporarily go against them, and they are able to resist the temptation to switch camps in fear of missing the rush.
• Have the ability to foresee a likely transformation of a company that gets minimal attention into a potential market darling.
• Refuse to get caught up in the hype. When a stock they paid 3c for is suddenly 30c and being touted to go to 50c they are able to separate themselves from such discussion.
• Have a life outside the market and whilst keeping up with current affairs they also realise the need to escape. They are often out chasing the opposite sex or spending time with the family rather than watching every play on Wall St on a Friday night.
• They are able to find reasons to like a stock rather than dwelling on the negative aspects when the share price is dormant or lower than what they paid for it. I find it amusing how a client can hate a stock at 6c but love it at 9c when they paid 8c for it. More often than not the company's fundamentals have not changed one iota.
• Remain focussed whilst realising that at times their spreadsheets will be soaked in red ink. Often the pain on the way down is more than made up for on the way back up (normally stocks sold off on low volume).
• Refuse to die wondering. If the fundamentals supports ones gut feeling, they have the ability to override technical analysis regardless of how terrible they look on the chart. Everything is attractive and guaranteed to make money at the top.
• Importantly they do not become caught up in their own success. Whilst we all like to be complemented from time to time there was one line from Wall St that puts it all into perspective, "We are all just one trade away from humility"

In the context of world events the current performance of gold stocks is not surprising, nor does it indicate that the PM bull is over. We are at the stage now where investors are awaiting good news, and any discovery of note are likely to result in significant re-ratings from the direct participants and those within reasonable proximity to the find. There is sufficient activity currently being undertaken by juniors to assist in this process as drill rigs are starting to become somewhat of a scarce commodity.

There was a sell recommendation on gold in the "Editor" section of "The Australian" newspaper today. With any luck we will see more of these emerge in the near-term to kick-start the sector.

The game is far from over.

Tony Locantro
locantro@iinet.net.au

1 April 2003