Canadian Junior Mining Shares Ripe For The Picking
Below is an excerpt from a commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, July 9th, 2007.
The opportunities in Canadian junior mining shares has never been better. And now is the time to get in before prices skyrocket higher in my opinion. As mentioned the other day in pointing out the precious metals sector is turning higher, when the Canadian $ heads over parity against the Greenback, American investors will be looking for a home for excess cash they wish to hold in Loonies. And as they work their way down the food chain, eventually they will arrive at junior mining shares, a group that has been all but forgotten by the institutional types because either company or trading characteristics don't meet desired models at this time. That is to say the shares are in the pennies, generally illiquid, and have been heading in the wrong direction (down) for some time now, a characteristic set definitely outside of the desired formula most momentum chasing behemoths (hedge funds) are chasing these days.
And what of the little guy? With the exception of a few market savvy types, in the aftermaths of both the tech and housing bubbles, most are both skeptical and / or discouraged about getting involved in anything these days. What money they do have in the market is primarily invested through some variety of funds - those being hedge funds, mutual funds, and / or pension funds. So, a traditional source of capital for junior mining shares lies dormant, with the big question being, 'will they come back once they see prices beginning to move again.' I think they will. And what's more, I also think junior mining shares will find a new audience in the funds eventually as well once prices begin moving higher. In fact if our own experience is any indication, where we are beginning to receive requests from forward looking fund managers for help with portfolio planning and security selection ideas, such interest is already showing up. We also hear through the grapevine mainstream mutual fund groups in the States are spinning off new funds focused on small cap resource opportunities that will undoubtedly be very interested, if not entirely focused, on Canadian junior mining (and energy related) opportunities.
But why would anybody want to invest in these companies now anyway - right? After all, generally stock markets of the world are already nothing but a bunch of bubbles floating around, all just waiting their turn to get popped. And if this is the case, then one must be very careful because the deflation such a scenario could create would surely crush junior mining and energy shares no? This is certainly what history has taught us. If you sat though the secular (long-term) bear market in these types of issues experienced in various stages during the 80's and 90's one could not be blamed for being hesitant now given this picture. Of course we are not in those times anymore. But most people still do not understand this concept, or that because we are in the midst of an accelerating inflation cycle, any price corrections in such issues should be considered of the cyclical (shorter term) variety, where in turn each asset class will feel the effects of inflation. Currently the art world is the focus of public attention, along with mega-LBO's.
As mentioned above however, we remain confident both interest and liquidity will work down the food chain given time, and based on the way precious metal share indexes performed last week, that time may not be far off now. And while we are not 'bull confirmed' as of yet, where as you will see below, more correcting is still not out of the question, if classic technical analysis married to our more fundamental beliefs on the subject are germane, then any weakness seen over the next few days should simply be a test(s) of various sector friendly breakouts witnessed last week. Not the least of these was marked in the breaking of vertical / triangle related resistance associated with the Amex Gold Bugs Index (HUI) / Gold Ratio, where shares put in the first strong performance against the metals seen in quite some time. (See Figure 1)
In terms of confirming the bull then, what we need to see in this respect is the HUI / Gold Ratio up through indicated Fibonacci resonance related resistance, where ultimate (sector wide) confirmation will not be signaled until gold itself is through the large round number at $700 in triggering an intermediate degree 'buy signal'. As mentioned last week, gold itself will not officially trigger a short-term buy signal until it can close above $660 spot. The way shares are moving impulsively to the upside however means we need to find other means to confirm participation here as the indexes could be considerably higher before lagging commodity confirms a more profound buy signal. In this respect, a close above indicated Fibonacci resonance related resistance will provide this signal, where if I had to guess in terms of how the sequence is about to unfold, HUI should run up to rectangular resistance at 370, react lower in association with a test of what would become Fibonacci resonance related support in the above, followed by an accelerated move higher in both measures not long afterward.
Further to this, it should be noted that in a perfect world, a test associated with the HUI / Gold Ratio discussed above should correspond to a final seasonal rally in interest rates as we approach equity options expiry in July, where as we get closer to the 20th, stocks will be able to handle the pressure associated with rising rates because of the floor pricing sponsored by outsized bearish bets. This scenario was discussed a few weeks back and is playing out just as expected, where price managers are using the support of squeezing price action in shares to work through a seasonal correction in bonds, which should maintain generally healthy liquidity conditions through consumer oriented / economic weakness seen this fall. Correspondingly then, the Gold / 10-Year US Treasury Bond (TNX) Ratio should reach the indicated Fibonacci resonance related target quite soon then followed by a reversal higher as typical / seasonal weakness in the economy brings a bid back into bonds married to gold discounting a 'need for speed' in monetary growth rates. Shares are rising now in anticipation of this seasonal shift. (See Figure 2)
Of course because of potentially stubborn 'inflation' (referring to what bankers would have you believe this means - that being rising prices) a reversal higher in the above should be characterized by gold rising faster than bonds, which as you can see should involve the metal of kings reaching $1,000 within the next intermediate-term sequence if history is a good guide. And although it's not shown in Figure 1, such a move should correspond to the HUI / Gold Ratio (see the weekly attached here) attaining a Fibonacci resonance related target of approximately .95 on an intermediate term basis, which in doing the math means HUI would be vexing the 1000 plus area correspondingly in tracing out a second Primary Degree advance in precious metals shares over the next 13 to 21 months, both being Fibonacci related sequential possibilities in time. Naturally, if gold were to move past the large round number at $1,000 precious metals shares would move higher as well, but at a ratio of .95, taking the risk of owning shares as opposed to the metal would no longer compute. For this reason, we recommend investors switch share positions for the metals once the HUI / Gold Ratio pushes into the .95 area, if not before.
Below we have a picture of the HUI showing that as expected, and another anticipated outcome discussed a few weeks back, price managers like to break prices down and then hope the market does the rest of the job in taking things further. In this respect precious metals shares were forced below indicated trend line support some weeks back, where again, price managers / short sellers were hoping prices would drop precipitously once this occurred. (See Figure 3)
Unfortunately for them however, because of their own inflation, what is produced are predictable 'false breaks' that sponsor good buying opportunities. This is likely what we just witnessed with the HUI attempting to vex the 300 area once again, meaning intermediate-term lows are now behind us. All we need to see now are the indicator diamonds break to the upside for real and some truly impulsive price gains should be in store for the precious metals indexes in discounting the customary tweaking of liquidity conditions as the Presidential Election approaches in 2008. Here, because the US economy (all Western economies) has largely been hollowed out (loss of regenerative / manufacturing based activity) by bankers endeavoring to extend their power, it has become dependent on constant and increasing fiat based stimulation, meaning this should involve an accelerated money supply debasement agenda that would make anything in the past appear tame in comparison. In turn then, gold (along with all commodities) should feel this inflation relatively quickly if induced through accelerating monetization efforts, which is becoming increasingly necessary these days as the real economy continues to falter, supporting our hypothesis we are now moving into a Primary Degree advance in the precious metals sector led by the shares.
In further bolstering the bullish case, and in returning to gold in wrapping up our discussion of the 'big picture' in this regard today, I would be amiss in not mentioning the Gold / Crude Oil Ratio has now reached our right shoulder target (off the inverse bottoming pattern), which should be very supportive of prices moving forward. This is especially true in knowing the forward crude curve has flattened out recently and is potentially threatening a move into backwardation, meaning oil prices are poised to move considerably higher from here, especially if current Middle-East tensions materialize into some more. And then there are future pricing implications of a big turn here as well, with both intermediate and long-term possible targets denoted below for your convenience. (See Figure 4)
Plugging this information into the larger formula then, one cannot help but conclude the picture finally looks very bright for precious metals moving forward. And it's for this reason(s) we are now stepping up our official outlook for precious metals shares to bullish from neutral for the short-term, where we need to see indicators on the HUI / Gold Ratio weekly plot breakout before we can do the same on an intermediate-term basis. One should notice this could happen any time now with RSI right on diamond resistance, so we shouldn't have to wait long in this regard. Obviously this means value oriented investors should be accumulating aggressively here if additions to one's core portfolio is in the plan. So again, for those not fully invested yet this is a 'heads up' that if you are planning on topping up share positions before this move really gets rolling, now is the time to do it, especially if we are fortunate enough to witness some managed weakness in coming days. Here, don't be surprised if prices back off (as described above) as the TNX takes a run at last month's highs. This would most likely be your last opportunity to accumulate on the cheap.
In finishing things up for today, now that we have this larger understanding out of the way, it appears appropriate commentary on some specific opportunities that have above average potential moving forward is in order. As per the title of this commentary today, we think these opportunities happen to lie in Canadian resource based junior / micro-cap strata of companies, as not only are macro-economic factors (think currencies, credit spreads, etc.) coming together in support this view, the fact they have been ignored for so long is evidence that sentiment conditions are also in proper alignment for some big moves. Here, the idea is a small investment can turn into something substantial, where allocating only 5-percent of your portfolio into such endeavors can make a significant difference to your overall experience.
Unfortunately we cannot carry on past this point, as our stock selections and analysis is reserved for our subscribers. However, if the above is an indication of the type of analysis you are looking for, we invite you to visit our newly improved web site and discover more about how our service can help you in not only this regard, but on higher level aid you in achieving your financial goals. For your information, our newly reconstructed site includes such improvements as automated subscriptions, improvements to trend identifying / professionally annotated charts, to the more detailed quote pages exclusively designed for independent investors who like to stay on top of things. Here, in addition to improving our advisory service, our aim is to also provide a resource center, one where you have access to well presented 'key' information concerning the markets we cover.
On top of this, and in relation to identifying value based opportunities in the energy, base metals, and precious metals sectors, all of which should benefit handsomely as increasing numbers of investors recognize their present investments are not keeping pace with actual inflation, we are currently covering 62 stocks (and growing) within our portfolios. Here, we have unearthed some promising and timely opportunities that could offer above average returns moving forward. And don't let the date of this report confuse you, as they are still ripe for the picking. Again, this is another good reason to drop by and check us out.
And if you have any questions, comments, or criticisms regarding the above, please feel free to drop us a line. We very much enjoy hearing from you on these matters, although we may not be able to respond back directly, so please do not be disappointed if this is the case.
Good investing all.