first majestic silver

Gold & Silver Penny

September 4, 2004

Thank you all for the great response to the first issue. Many questions have been asked by readers and numerous stocks have been proposed for analysis. During the past two weeks my research staff have worked long hours to analyze the charts of over 1700 mineral, mining, exploration, development and royalty penny stocks on the US, Canadian, UK, South African and Australian markets. I have reduced this to 95 stocks that I believe can be of value to investors. The selection process demanded that the shares had to meet several criteria and I believe it is worth discussing these.

Firstly there had to be good volume of trade. It is no good buying a huge quantity of a penny stock only to find that it is impossible to sell it when necessary. This factor also dictated that the daily volume must have a level of consistency. A stock that trades a million shares a month sounds good but if all the trading occurs in three days and then nothing for the other 20 days it is of no use to us. I require that any position of 100 000 shares must be able to be sold within two days trading. When I wish to sell I do not want to sit around and wait for buyers to appear.

Most penny stocks are the subject of continual sales hype by interested parties and often unsubstantiated rumors. Press releases by penny stocks are more prevalent than larger companies. For instance, on the site there are three Canadian penny stocks (AKV, ETG, GSM) advertising. Only the data on ETG fits our strict volume profile, and then only just. Technical analysis is an essential tool to be able to sort out the meaningful data from the hype.

Many buyers of penny stocks forget about the brokerage. If you buy 10 000 shares in a 5c penny stock it will cost $500 and the brokerage will be prohibitive. This is another reason why we have ditched all stocks under 10c unless they have outstanding volume characteristics.

One of the interesting volume aspects of penny stocks is that in a ranging or bearish market the volume dries up. When the bull trend really starts to charge there is a sudden burst of activity as market hype causes investors to smell quick profits and start chasing the shares. This results in some extraordinary volume spikes involving several million shares. We want to avoid this chase and be accumulating stock before the herd comes rushing in.

Gold and silver stocks are commonly regarded as trading and not investment vehicles. I do not totally agree but let's stay with it. Penny stocks are certainly for trading. When we couple the volatility of gold and silver with penny stocks there is no argument that this is a trading arena. This is why I require the stock to have substantial and relatively consistent volume. Many investors become upset if they sell at a profit and the stock continues to rise. Wrong attitude! The object of investment, irrespective of whether this is in large cap or penny stocks, is to make a profit and not to pick market tops and bottoms.

The main reason for buying penny stocks is the huge potential leverage. Once a real bull market in the precious metals gets under way the penny stocks significantly out perform the mainliners. This was classically illustrated by DROOY, the world's tenth largest gold producer. On the JSE it rose 1200% from early 2000 to April 2002, more than double the performance of the JSE Gold index. But when we come to the exploration, royalty, development and resource stocks the leverage can be even more spectacular.

Gold ore locked in undeveloped ground has at best a nominal value. An increasing gold price has an accelerating effect on the value of the subterranean gold. Should the gold price approach the level required for potential development to production then the value of the real estate and mineral rights soars. In a nutshell, penny stocks need a strong bull market in metal prices.

It is interesting to note that all the big South African mining houses have been expanding outside the country for some time in order to cushion the increasing costs of underground mining at low gold prices. They continue to look for good prospects in all parts of the globe. A rising gold price will obviously make some of the lesser areas that are currently in penny stock holdings, become more attractive to these big mining houses. Thus joint ventures, such as Iamgold and Goldfields or Angloplatinum and Anooraq Resources, and total takeovers are likely to increase as the gold and silver prices rise.

Technically it is a reasonably simple matter to analyze potential breakouts from patterns and trends to determine when the penny stocks are likely to start moving. But in over 35 years of analyzing the gold market I have found one regular factor. A rising gold price causes the stocks of the big miners to rise first as their profits start to increase and dividends become more attractive. The smaller higher cost operations remain quiet until further rises in the bullion price push them into more profitable positions. They then start to accelerate away from the big miners as the leverage on income over costs rises exponentially, as clearly illustrated by DROOY in the last bull charge. Finally the exploration and development stocks start to move as the rising gold price increases the value of their mining rights. Eventually they overhaul the high cost producers as mining rights rise in value with even greater exponential leverage. Astute gold stock investors are aware of this staggered action in the bull phase and switch groups accordingly. Ultimately the market peaks when the public and press are in a euphoric furor over the unbelievable prospects for mining penny stocks that are going to turn investors into multi millionaires overnight. Remember NASDAQ?

The stock prices of the leading gold miners have already started to rise over the past three months. The second line producers are still relatively quiet and it is time to be accumulating these stocks. Many of the penny exploration stocks have no signs of moving but there are plenty of the minnows that are on the cusp of turning. At this point of time nobody is interested in precious metal penny stocks. Now is the time to accumulate.

Contrary to the staggered action between the leading prime producers and the lagging exploration stocks at the start of a bull market, there is no time lag at the top of the market. They all top out together and the massive leverage of the minor players is accentuated on the downside leading to some catastrophic price collapses, again I use DROOY as an example. There is time to accumulate penny stocks at the start of a bull run but there is no extended time to sell. When the general market signals indicate a downside movement then all penny stocks should be ditched, en masse.

A sudden massive increase in volume over a period in a penny stock bull market is also a major signal for the analyst to review the technical data as such volume surges usually occur towards the end of a bull phase. But the volume characteristics of penny stocks also play a huge role in signaling breakouts from patterns. All the classic patterns such as the triangles and rectangles occur frequently on penny stock charts. An upside break out of a triangle on increased volume is usually a very positive sign that the fundamentals of the penny stock have changed and that those in the know are buying. Patterns do not occur in isolation. If one penny stock is exhibiting a classic pattern then you can be sure that numerous others are doing the same leading in what I call the 'group effect'. I will be analyzing over 300 penny stocks for such pictures.

During our research it was pointed out to me that there were quite a few stocks in the base metal industries that also had potential. I was also reminded that if my analysis of an ultimate target of $70 a barrel oil price was likely then oil and gas penny stocks should also be of interest, especially as the volume of trade in those stocks is far higher than in most mining stocks. Thus I have included several base metal and oil developers in our analytical database.

Portfolio management is an important aspect of all stock investment, and even more so for penny stock portfolios. Unfortunately penny stocks have a great appeal to investors with only a small amount of cash. They tend to pick a stock and put everything into it hoping that it will yield a fortune in the years to come. Most people of this ilk are still holding. Be careful of names as some supposed resource stocks have changed their principle objectives to internet, Golden Spirit Resources (CA:GSPM) is an example.

Management of a spread portfolio is an absolute pre-requisite for penny stock investing. It is no good attempting to put all your eggs in one basket. I believe that a minimum of five penny stocks should be held, even in the smallest portfolio. But the added costs of brokerage must be considered. In my analysis penny stock investing should be done with a minimum of $10 000. Lesser amounts cannot achieve the required spread and brokerage costs can be too high. The very small value pennies under 10c also attract much higher levels of brokerage.

Many of the stocks to be analyzed will be in Canada, Australia and London. For US investors this is simply a matter of instructing ones broker to go into those markets and buy stocks. It is often far cheaper and more advantageous for investors to open an account directly in those markets as this dramatically cuts costs. This is more fully discussed in this week's 'Gold Action'.

I am going to split the newsletter into several sections. First I will look at the higher cost marginal producers that are ready to move. Then I will detail interesting stocks in the higher volume exploration groups in all the main markets. Finally I will indicate several stocks in the base metal and energy sectors that are of interest. But before embarking on this extensive program it is necessary to keep an eye on the gold, silver and oil prices as these are the key to all our analysis.

Let's start with the $gold price. The key to this data is the long term resistance at $430. This level has held the price in check for 15 years. But it is also acting as the flat top to a huge broadening pattern. The upside target from this format is $610.

The red RSI oscillator is holding onto a very powerful level at the 60 mark. This indicates a strong bull market that is likely to continue. A gold price above the current $410 resistance will lead to an attack on the $430 level and once above these sellers the $610 target becomes a reality. What will that do to the penny stocks??

Gold in Sterling also has a flat top resistance level. But the key to this long term chart is the red RSI in the bottom frame. It has a solid base at the 50 level and has mapped out a triangular pattern over the past three years. This is ready to break out on the upside and produce a very strong upside surge in the gold price.

If gold is in a true bull market it should outperform all the leading currencies. This is discussed in more detail in this weeks 'Gold Action'.

Volume Characteristics

Before commencing the penny stock analysis it is essential for readers to understand the logic of my volume requirements and I detail the following three charts to illustrate the problems.

Acrex Ventures (CA:AKV) advertises on the site. But it has a typical volume problem for our work. There are a huge number of volume spikes and then periods of very low trade. There is no consistent level of minimum volume. In addition the average daily volume is around 25 000 and that is far too low for our data. This is why AKV is not included in our database of stocks to watch.

Desert Sun Mining (DEZ) is a classic example of the sudden massive increases in volume during penny stock bull phases that reach a crescendo towards the top of the bull market. From an average day trade of 50 000 shares the DEZ volume shoots to a million in hot periods. During the churning or bear phases the volume drops to nothing. It is also interesting to note that there is the occasional capitulation volume spike at the bottom of a fall.

Penny stocks have a propensity for trading in well defined trends, mapping out precise patterns and having clear support and resistance levels. Linux Gold Corp (LNXGF) is a typical example. Also note the vertical catapult price surges once the patterns have completed. This is usually accompanied by a large increase in daily trading volume.



'Gold & Silver Penny Stocks' is the sister publication to 'Gold Action' and is produced by Dr. Clive Roffey.

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Dr. Clive Roffey
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The melting point of gold is 1337.33 K (1064.18 °C, 1947.52 °F).
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