Tuesday, November 29, 2011

Got Gold Report – Season of Blue

We ‘enjoy’ multiple ‘hits’ on our lower-than-low super negative liquidity blue panic targets to take meaningful positions on some of our resource company ‘Faves.’ 

HOUSTON (Got Gold Report) – Monday’s snap rally notwithstanding, gold and silver have come under pressure from yet another rush to liquidity and we note with no small measure of concern that this past thin-liquidity, holiday-influenced week saw almost all commodities under material selling pressure.  When just about everything is selling off and only the U.S. dollar index is sharply higher, it is a sure signal that the world has gone into a heightened fear mode again. For reference, the charts below were as of Friday’s close. 

Fear may not be very good for commodities, but it is ‘good’ for Vulture Bargain Hunting.   

20111128-Gold-Graph1

20111128-Silver-Graph2

20111128-US Dollar-Graph3

As imperfect and unsatisfactory as it may be, the U.S. dollar is still the place people flee to in a time of crisis. We may sound like a broken record, but we wonder how much longer the dollar holds the lead in that role over gold metal. 

Vultures (Got Gold Report Subscribers) will find much more about the gold and silver markets on our technical charts located on the password-protected subscriber pages.  For this particular GGR we wish to focus on the small miners and explorers we love to ‘game’ once more.  Why?  Because quite a few of them are nearing or already at the ‘panic targets’ we have chosen and we are heading into the peak of the retail tax loss selling season right now. 

So, what are those panic targets all about, anyway?  

Season of Blue

It doesn’t take very much study of the capital markets to reach a foundational conclusion all speculators should understand.  The notion has been expressed in many ways over the years in relation to all kinds of markets.  The concept is as elegantly simple as it is extremely powerful.  Simply stated:  Market extremes are nearly always temporary and nearly always reversed in time. 

Look at the trading history of any market or most any stock on long term charts and the price record reflects periods of positive and negative liquidity. Bull market or bear, there are peaks and valleys in all of them.  Invariably when periods of extreme exuberance or panic show they are corrected by the market.  That is the raw essence of positive and negative liquidity in a visual record.   

When we look down the list of small junior mining and exploration companies we have taken an interest in, in November of 2011, we get a full lesson in how volatility can increase to extreme levels in periods of high anxiety and uncertainty.  With capital flight from Europe, fear of Eurozone contagion, Big Market and commodity weakness, tax loss selling in the U.S. and Canada and a rush to liquidity underway simultaneously, we all find ourselves in the midst of another heavy negative liquidity event, a bargain hunter’s paradise. 

It was only eight months ago that we lamented in these pages that small resource company bargains were few and far between.  That was while we were still reducing size in our positioning, raising speculation ammunition in what we call our Bargain War Chest. Back then sellers were few and buyers were many.  Today, by contrast, bargain hunting for small miners and explorers is a target-rich environment.  Relative to then there are bargains galore, a testament to how much this current market is dominated by fear.  Today buyers are few and sellers are many.   

20111128-CDNX-Graph4

(CDNX 4-year, weekly. This has already been the second largest correction of the CDNX ever.  As much as 47% as of October 5.) 

James Carville’s voice: “It’s the Liquidity, Stupid”

At times like this we think it is worth the time to review a basic tenant of what we do as speculators.  Asset prices are always a function of liquidity. Indeed we can boil most any market down to that one idea.  No matter the market, the price is dependent on whether liquidity is flowing in or out of that market.  If more wealth is flowing into a market than leaving it, prices rise … and vice versa. 

When investors/speculators are excited and energized they are prone to bid assets higher in price. They buy today on the expectation of higher prices in the future. They buy today because they fear that if they don’t buy today the price will be higher tomorrow.  If investors/speculators become euphoric, they can bid prices up out of proportion to reality.  Sellers are rewarded for waiting. Buyers are punished for waiting because in a positive liquidity event prices tend to rise and keep rising. 

It takes more wealth entering an issue or market to have a positive liquidity event.

The flip side of the resource market coin is when investors/speculators are worried, fearful and uncertain.  When the majority of potential buyers are scared prices tend to fall as liquidity is consistently wrung from the issue/market.  In a negative liquidity event traders sell today because they fear that if they don’t sell today the price will be lower tomorrow.  If enough people become panicky in that process they can sell the issue/market down all out of proportion to reality.  Buyers are rewarded for waiting because by waiting they see consistently lower prices.  Sellers are punished for waiting for the same reason. Such a scenario feeds on itself up to a point.    

It only takes the absence of buying for a market to move lower.  In a negative liquidity event more wealth is leaving the market than entering. 

Value Irrelevant

In both cases, extreme fear or euphoria, “value” becomes an abstraction.  There is nothing “real” about the price of something at extremes of positive or negative liquidity events. In extreme events prices merely reflect the imbalance of buyers and sellers, nothing more or less.  Indeed, our experience is that for smaller, less liquid and more speculative miners and explorers “valuation” is fairly difficult to measure, but in the end is not really all that important.  Much more important for speculators is to discover and to exploit increasing or decreasing liquidity or money flow. 

In a panic scenario, for example, a portion of the investors/speculators succumb to irrational fear – even when the issue has already been trounced by 75%, 80% or 90% as if they fear the issue could go “no-bid” (to zero).  Nothing else explains why an issue that the actor thought was a “good buy” at $2.00 per share is summarily thrown overboard during a panic negative liquidity event even though the price has fallen to 10% to 25% of $2.00 ($0.20 to $0.50).  That’s assuming nothing has affected the company in a material fundamental way and the selling pressure is sector or market wide.

Vultures Provide Liquidity in Extreme Negative Liquidity Events 

Enter the bargain hunting specialists.  We call ourselves Vultures. If nothing has changed for the company or its prospects, but it has come under extreme or panic selling pressure, due to non-company specific (outside) influences – so much so as to drive the price down to irrationally low bargain pricing (relative to the history of the issue) we Vultures are energized to take a position or to add to the positions we have already established.  We do so in the secure knowledge of two important driving forces – market extremes are temporary; the market cannot stay in a hyper negative or panic state for very long, and reversals out of extremes tend to be initially violent, then self-reinforcing – in both directions.    

Successful Vulture speculators develop the courage and confidence to do the opposite of the market at extremes.  As much as possible they (we) strive to buy when there is extreme negative liquidity and reduce exposure when there is euphoria or irrational exuberance.   (Easy to say, not always easy to do, especially for new, fledgling Vultures who have not yet experienced a full reversal of sentiment and liquidity.  Most especially difficult for people who aspire to be a Vulture, but have not yet developed the patience required to be one.)

Targets Need Not Be Perfect, but We Need Targets

We operate our own business of position taking in the small junior miners and explorers in areas or zones where we expect strong support to form under a set of market assumptions, using the technical trading history of the stock itself as one guide.  That works especially well in “normal” markets with “normal” ebbing and flowing liquidity.  Our Vulture readers will know intuitively that we are referring to our purple “op boxes” on the individual charts of the Vulture Bargain issues for those expected zones of normal support. 

Somewhere below the purple box we also usually employ a green price range target box, meant to attempt to predict where very strong support might form in an ordinary negative liquidity event, either for the issue itself or for the markets.  We rely on our experience with the small resource company “sector” in the placement of those green “op boxes.”  The green boxes are intended to capture an additional tranche of the issue in the event of an anomalous sell/buy imbalance.  The green box is where, under non-extreme panic conditions we would expect insiders, deep discount bargain specialists and large bargain loving Vultures to soak up all comers on the sell side.  In “normal” negative liquidity events the green box is where we usually become more aggressive on the buy side. 

CDNX Still Discounting $400 Gold 

20111128-CDNX-Histogram-Graph5

(CDNX, 10-year, monthly.)      

Right now is anything but a “normal” market, however.  We are without question in the midst of the second strongest negative liquidity event for the small junior miners in our memory.  We need only look at the graph above to confirm that notion. 

The graph is of the Canadian Venture Exchange Index or CDNX a reasonable proxy for The Little Guys (data as of Friday, November 25).       

Notice, please that the CDNX is currently trading at about the same level as it did in September of 2003, back when the price of gold had not yet taken out $400 and the price of silver was below $5.  Notice also that measured from the previous peak, we are involved in the second largest “correction” for the CDNX since the precious metals bull markets began.  This is not, repeat not, a “normal” market correction, which will come as no surprise to Vultures.  

Instead, this is one of those rare market events where extreme sell/buy imbalances are to be expected – for a time.  Therefore we cannot rely on the “normal” zones of where we expect strong support to form on our Little Guy charts. Rare periods like now, when people lock up in fear; when there is an overabundance of negative liquidity, virtually all of the small resource companies in our universe are affected.

Under these conditions we can expect and position for extreme bargains.  That is why a couple months back we chose to temporarily abandon our “normal” opportunity boxes and chose extremely low, panic event target pricing.  Vultures know we are referring to the target zones on our tracking charts in blue.  The “Temporary Panic Targets” for most of the issues we track on technical charts here at Got Gold Report.   

The blue panic event targets are an attempt to position where we would expect support to form even in a panic event such as the one now.  Our object is not, repeat not, to guess where the lowest trade will occur on an issue, or to “pick a bottom.”  In a panic negative liquidity event no price is “safe.”  It is extraordinarily difficult to gauge in advance how much irrational selling pressure will occur for a particular issue or how low the price might go in extremis.  It will neither surprise us nor disappoint us should the price actually travel beneath our chosen blue targets for some issues.  Just one very large last minute tax loss seller can wreak temporary havoc on any of these thinly traded issues and that just comes with the territory from October to December.   

Instead, the object of the blue target boxes is to acquire a tranche of the issue of meaningful size that we are as reasonably sure as we can be under the circumstances, that will look very low priced 6 months, a year or two years hence – once the conditions that prompted the extreme negative liquidity event have faded to the background.  It really is as simple as that.

Just below is one example (of 35 that we share with Vultures) of the target boxes, including our temporary blue panic event target box.  This one happens to be for Argus Metals (AML.V), a junior explorer operating in the Yukon.  The Yukon area play issues have been particularly hard hit in this panic negative liquidity event.  In part because they were irrationally bid up in late 2010 and early 2011 and there has been general disappointment selling due to backlogs in assays and not enough discovery news to offset the market wide rush to liquidity.  In short, the Yukon issues went too high and are now over-correcting too low in our estimation.  Excellent Vulture fodder in other words.   

20111128-AML-Graph6

(Argus Metals, 2-year, weekly.  Note that Argus enjoyed popular enthusiasm at the beginning of the year but has now been decimated by an extreme negative liquidity event. On our actual charts the purple and green op boxes have been colored light gray, meaning they are no longer in play.  They are shown here to illustrate where we would have looked for support to form under more normal conditions. Note that the extreme negative liquidity event underway now has rendered Argus down to all time lows although there has been no material change to the company we are aware of.)

Two months ago 500,000 shares of AML.V changed hands for $92,500 (at $0.185).  On about October 5, one could have been on the bid and acquired 500,000 shares for less than $25,000 (more than 70% lower).  The chart for Argus is not unique, it is representative of a group of Yukon explorers similarly situated.  We believe it to be an opportunity, but we are getting ahead of our message for this report.     

With that introduction, let’s pause here and move directly into the full Got Gold Report.       

Got Gold Report       

First things first, the Got Gold Report – the full report – is published biweekly at least 24 times per year.  Between reports we communicate more regularly on the GGR web log, which is always free and open to the public, or in our COT Flash reports and Vulture Bargain Hunter reports reserved exclusively for subscribers.  COT Flash reports appear on off weeks for the Got Gold Report when there are what we consider important changes in the commitments of traders reports which cannot wait until the next full report.  Vulture Bargain Hunter offerings appear ad hoc as there are developments we feel merit comment for and in the resource company issues we track closely. 

Our aim is to briefly summarize our positioning for the gold and silver markets, and also to highlight a few of the dozens of indicators, ratios and graphs we keep in constant touch with.  Vultures, after logging in, please see the commentary in our numerous technical charts located in their own section of the password-protected subscriber pages. We update most of the Got Gold Report linked charts each week, sometimes even the weekends when we don’t publish the full report. Changes to the linked charts are almost always completed by 6:00 pm ET on Sunday evening (except when Monday is a holiday) and occasionally during the week as events unfold. 

To continue reading, please log in or click here to subscribe to a Got Gold Report Membership.


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The Original
Vulture Speculator

Trading gold, silver and mining shares since 1980 with a focus on taking advantage of volatility extremes, Gene Arensberg analyses the markets through a basket of technical and fundamental indicators and shares his findings from time to time here at Got Gold Report. Mr. Arensberg has been quoted in the Wall Street Journal, Dow Jones MarketWatch, USA Today and dozens of other news organizations.

"I've been a huge fan of Gene and his amazing work for years..."

Brien Lundin, CEO, Jefferson Financial, Host of the annual New Orleans Investment Conference and Publisher of Gold Newsletter


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