Juniors - A change in the weather
Chuck Cohen
This message has been percolating for the past week or so. In light of all of the events and headlines of the past month, its conclusions may be difficult for many of us to accept, but I believe that a shift in the markets has most likely occurred, at least for a season.
Most of us who believe that the sky is falling, gold will be preeminent and we can say to everyone, “I told you so,” have been befuddled, frustrated and angry, at the very least. Our premises seem to have to pass. We have witnessed a skyrocketing oil price, vanishing liquidity, collapsing financial shares, a terrible dollar chart and a renewed run up in gold to nearly $1000. But in spite of all of this, the junior gold mining sector not only seems not to care, but is behaving as though the gold move is kaput, with the smaller companies ready to close their doors. I don’t think I am exaggerating this view. The question is why haven’t the gold shares tripled or quadrupled during over the past three years? I believe there are real reasons.
As this recent drama has been unfolding, I have sensed that the above landscape was about to change. Relief was on its way to us, and the launching of the historic move we have anticipated will finally begin. Here is what I think is happening, and why it is ultimately incredible for gold.
Right now by almost any measure, the stock market is enormously oversold. The sentiment indicators have sunk to the lowest levels since 1998, when the stock market began its final maniacal move. More significantly, the volume in the financial shares yesterday was not just historic; it was beyond comprehension. For instance, the total volume on the 19 different financially related companies that we have been charting recently totaled almost 2 BILLION shares. To put this into perspective, the average over the past 30 days prior to yesterday was about 450 million and on May 30th, it totaled just 327 million. Now this could mean one of two things: there is an imminent shutdown of the financial system, or it is a bottom, at least through the rest of the summer.
Or, we might allow for something even more cosmic. This is what I think is most likely coming. The scenario of a perceived free market supply and demand system (only kidding) is morphing into one in which all financial obligations will now be underwritten by the nimble electronic fingers of the United States government, the Federal Reserve and its various henchmen. I don’t pretend to understand how the mechanism would work, but I believe it is doable and probable at this point. Not only will this relieve the liquidity collapse, but it will cause the dollar to break its significant support level gushing out almost unlimited liquidity. But most importantly for us, it will set free our poor orphans from the poorhouse.
I realize that a lot of us might be thinking that if our shares didn’t fly with everything that is happening, why should an improving financial market help us? But we must recognize that the downdraft of liquidity has been our enemy not our friend. If you look back at the bottom of the stock market sell off in early 2003, gold was still around $300, the HUI around 110 and silver around $4. And then came the war spending, tax cuts and the creative housing financing and refinancing. This stimulation will be far different, since the problems are so much more embedded and ultimately unsolvable. It will require extraordinary creative steps although I believe that the governments and authorities are fully up to the task. After all, they were the Thomas Edisons of subprime mortgages and credit derivatives. They are able to create money where none exists. And if there is something we all have learned by now, the monetary authorities and the banks are clueless as to the consequences of their policies but they can do something very well. When all fails they can come up with more gimmicks.
Finally and hopefully to prove my point about the gold shares, I have included this long-term chart of the Nasdaq. I believe the Nasdaq is most representative of the junior sector since it includes many speculative companies. Don’t forget that way back in the early 1990s, many of the smaller technology companies had nothing but promise. And even during the entire spectacular run, few really showed any kind of profits.
If you can follow my logic, please go back to 1988 on the chart. At that time, the stock market was still reeling from the crash of late 1987, and pessimism held sway over the entire investment community and the American public. Yet amazingly, the peak would still be almost 13 years away. In retrospect, it is hard to believe.
It wasn’t until 4 years later that the stock averages finally bettered their 1987 high. In fact, in 1990, the Nasdaq fell almost 20% back down to 400. And then it took off, first slowly and it began to accelerate. Over the next 8 years, it had spiked up over 1200%. And most of the companies that did the best never earned a cent. Can’t you connect this to the junior gold sector?
But there is a vast difference. Many of the exploration companies that have done so poorly hold very prospective properties that contain real money (gold) strewn all over them. I view them as virtual mints, if you believe we are heading to the days of reckoning. We are now nearly 7 years into the greatest bull market in history, and if history can guide us, another 12-15 years remain. If the last great market cycle brought such an extreme move, my strong belief is that this one will bring a much, much greater one.
The world financial complex is heading for the end game, one in which nothing can be done and where chaos is everywhere. Perhaps immediately, the next move will not be the ultimate one, but it will be a critical one for the world, and especially for gold. Hyperinflation, here we come.
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