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Resource Stock Report - V14 #4.1 by Ron Struthers 05/01/2008 Taken with permission from an original article posted at http://www.playstocks.net on May 1, 2008. Gold - Resource Markets Well, April is over and I got through another tax season. It has kept me side tracked the past week, but probably the most painful part was claiming and paying tax on the capital gains I made in early 2007 because they have been very hard to come by in the last several months. I am sure they will come again and I could comment on many of our stocks that are down in price, however I am going to present one chart that pretty much tells the story for most of them and also highlights the fact that this is the time to buy, not sell. The chart below is the Canadian Venture Exchange index and it is a very good representation of the junior resource market. There is a few points that become obvious at first glance. First off, we can see that the market has been in a pretty steep down turn (with a few upside corrections) since the August meltdown in subprime/asset backed securities - the BCBS. Secondly, we have been stuck in a trading range between 2,300 and 3,300 for about two and a half years. That is a long time in a sideways market. Third, we can see that the 2,300 area is a pretty solid bottom where we have bounced off and headed back up four times in the past and will soon do it again for the fifth time.
Now granted, this paints a pretty dismal picture and the good news is - that is the past. What I see as so positive and bullish is several factors. I have already pointed out in early April that $XAU/$GOLD ratio went under 19. Since the bull market began in gold stocks in 2001 whenever it went under .19 a major low in gold stocks has occurred. We can see on this chart of junior resource stocks that we are within 3% or 4% of major support and there is no sense waiting to get a little better bargain because we could just as easy turn higher from here and the upside to the top of the range is 37%. This is a very good risk/reward ratio. The junior resource stocks have been in this consolidation range for over 2 years. If you remember last year I commented about the exact same thing with gold, that we were consolidating within a range but would soon break higher and in September 2007, I predicted gold $900 by the end of the year- we broke out of the range within weeks and I was off by just one week with the $900 price hit in the first week of January 2008. Gold Weekly Chart
These junior resource stocks have seen a huge consolidation, they too are like a compressed coiled spring. You can also see on the above chart of the Venture Exchange that the volume has been at a much higher level in this trading range. That is a very good sign of a strong consolidation and also accumulation. Another fact, the senior golds always lead the juniors and we can see by this next chart of the HUI (gold bugs index) that the senior golds also seen a long period of consolidation in 2006 and 2007 and then broke to the upside. The XAU index has the same pattern. HUI Chart
I want to also point out that the seniors have also come down to an attractive buy level as pointed out with the XAU/Gold ratio and on the chart we are at a major support area around 400 and just below the 200 day moving average. Since the bull market started in gold stocks they have never strayed too far below the 200 day moving average and if so only for a matter of a few weeks. Another factor I want to make you aware of, the gold stocks tend to run up with the price of gold and fall I have no doubt that both the senior and junior gold/resource stocks are headed much higher and soon and we will see the Venture index at 4,000 before year end. As I pointed out in an article I emailed you last week, it is only a matter of time before a lot more buying and money comes into this sector. This recent sell off in a big way was caused by the BCBS mess that has caused a liquidity crisis and many investors had to sell what they could to raise cash, meet margin calls and other obligations. Many Investors also preferred to liquidate junior resource stocks because of their higher risk, anything with more risk caused more fear. This has pretty well run its course and although I still expect to see the credit crisis continue, it will be at a slow painful (more manageable) pace and the shock factor is now over. When this money comes back into the sector there will be few choices. Retail investors will not like paying $1000 for an ounce of gold and many will look at silver, but there is no silver left to buy. I know that sounds shocking but is true and I will soon have a special report out on the situation with silver - it is a powder keg. I also doubt they will buy a lot of the senior precious metals stocks at $50 to $100, so most are going to turn to the mid tier and juniors. This is where the big gains are going to come and is why we are positioned here. Another positive aspect is we are seeing the beginning of mergers with the junior golds and ones we hold, 3 companies with Peak gold and most recent Lero Gold and European Minerals, this will continue. This creates less product to buy and with rising demand we will see a double whammy pushing these stocks higher. The majors and mid tiers will also start buying up the juniors, because they have little choice and even at much higher prices they will still be cheap relative to precious metals prices. To summarize, I see right now - as the best buying opportunity we have seen since we bought in at the start of this bull market in 2001. At that time we seen huge gains of over 100% on the average for our gold stocks and this is about to happen again. (c) Copyright 2008, Struther's Resource Stock Report Struther's Resource Stock Report Editor: Ron Struthers |
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