VB Update Notes for May - June 2012 - What Reversal?
HOUSTON – What an ugly looking chart we all witnessed near the end of April as the effects of a protracted buyer’s strike wormed their way into the indexes and ETFs which track the smaller, less liquid and more speculative issuers we follow and game – the companies we call The Little Guys. It is no less than the direct effects of a super-negative liquidity “towel storm” as the weary and disgusted threw in towels, chunking overly cheap and still falling miners and explorers overboard. Some because they just had enough of a falling market, some because they feared even further erosion in price and some because they literally had to sell or were forced to sell.
(GDXJ/CDNX comparison chart.)
There is little question now that The Little Guys, as a group, have purged most, if not all of the hot money and overly optimistic momentum premium that once defined this sub-sector. With the Market Vectors Junior Gold Miners Index or GDXJ having corrected as much as 41% just since September; with the Global X Gold Explorers ETF or GLDX having corrected as much as 48% over the same period; with the S&P Canadian Venture Exchange Index or CDNX following suit to the tune of -24% since September and close to -50% since March of 2011, prices for shares of the companies exploring for gold, silver, copper, and other important resources have gone on the figurative clearance sale rack in 2012 – again!
The trouble with “sales” as wide spread as this one is that there have been so few profit ops lately that many gamers have little or no resources left to buy them. One of the common threads in our mail lately is from people who would love to take advantage of Ridiculous Cheap pricing, but have been “all in” since late 2011. (Ridiculous Cheap or RC on our charts is a technical term to us Vultures.)
Indeed, we would be in the same boat (having deployed all the capital we might allocate to very high risk issuers like The Little Guys) if not for our own decision to sell a small portion of our accumulated metal holdings in order to take advantage of absurd panic-style prices on some of our Faves.
Clearly, this current correction and buyer’s strike has been one for the record books. Using the CDNX as our measuring stick and gold as the cipher, The Little Guys have reached levels no one (and we really do mean literally no one) a few years ago would have dreamed they would be with plus $1,600 gold and better than $30 silver. Take a look at the chart below.
The chart shows the CDNX (right axis) with the gold price in green (left axis). Here are a few observations.
- The CDNX correction just since February of 2012 is equal to or greater than the rather large 20.6% correction we saw in 2010.
- Before Bear Stearns and Lehman (before the summer of 2008) the CDNX and gold shared a fairly high correlation. Since then they are not very correlated and since about March of 2011 an enormous divergence has opened up with the CDNX very strongly underperforming gold.
- The CDNX first crossed the 1,305 level (the Oct 2011 capitulation nadir) in 2003 when gold was still under USD $400 the ounce.
- This (in April/May of 2012) is the third test from above of the 50%-61.8% Fibonacci retrace zone of the December 2008 – March 2011 bull recovery move for the CDNX.
- CDNX is once again nearing oversold on momentum indicators such as the RSI.
- This current correction, as was the 2011 and 2010 examples, are creatures of low, not high volume – buyer’s strikes as opposed to a wholesale exodus of capital from the sub-sector. This is one of the more compelling reasons for our continued involvement and interest. Reversals from buyer’s strike events tend to be high volume, high percentage affairs, usually measured in many months. (See 2009 and 2010 for near examples).
- This chart illustrates in spades that it is liquidity (literally the amount of wealth entering or leaving a market in a given time frame) which determines prices for things at public auction or in a stock market (which, after all, is nothing more than a continuous, daily auction). In this example, although gold has continued to rise since 2008 that fact failed to translate into direct or even indirect “value” for The Little Guys pari passu. If gold was the primary determining factor for the small resource related companies in the CDNX, it would look completely different. Therefore gold is NOT the determining factor. The determining factor is quite simply a matter of confidence in markets in general, in economic conditions in general, in government’s ability to handle the mess they have created, and, of course, confidence in resource related companies in particular.
One last observation: Once the CDNX does find good support it exhibits a tendency to rise violently as it overcorrects the overcorrection.
The condition of negative liquidity and a buyer’s strike tends to feed on itself in a relentless trend as prices for the juniors keep falling. In part because of the continued assault on small resource company gamer confidence, but more importantly because falling prices rob the tiny market of its lifeblood – the profits to those very same gamers a rising market bestows. To state the obvious, funding for the juniors is enhanced by rising, not falling prices. Rising prices produce profits – falling prices the opposite. Investors are more willing to risk their resources on juniors if they have just taken big profits on one or more juniors. They are loathe to take a chance when the juniors have done nothing but clobber their portfolio or after they have taken sizable losses.
Puny Profits Panic Paradox
It is a paradox without a good name (that we know of). The paradox of feast or famine on steroids. The one constant we know of is that the best time to buy these companies is during the famine part - when almost no one wants to buy them, when fund and portfolio managers are getting redemptions and are literally forced to sell them at way-too-low prices and few have any resources left to catch their involuntary hurtling towels – like now, for instance. And, nothing says that the condition of this sick market patient won’t get worse before it gets better. It very well might, this being May. But, and this is the anchor that we hold onto with both hands, it would be arrogant and very highly likely incorrect to suggest that the current condition will continue as-is for the rest of this year. That we doubt.
Needless to say, the developing inverted head and shoulders pattern we thought might come into play in the last full VB update utterly and completely failed to materialize for the CDNX. Instead the CDNX has come down to test critical support – again. And, as we said we would if the weakness continued, since the last full report we have added shares in a number of our Faves, including Northern Tiger (NTR.V or NTGSF) – a high risk, high reward explorer in the Yukon that has already made a high grade discovery; Timberline Resources (TLR), a soon-to-be low-cost gold producer working in Montana and Nevada; Riverstone Resources (RVS.V or RVREF), an advanced gold exploration company working in Burkina Faso that has already proved up 2.7 million ounces of the “good stuff” and is very likely on its way well above 3 million ounces; Millrock Resources (MRO.V or MLRKF), a promising, self sustaining project generator working in “elephant country” in Alaska and Arizona, and Guyana Goldfields (GUY or GUYFF), an advanced gold explorer with a high grade, 6-million ounce plus deposit in Guyana, South America.
We even added to issues we deem as “pure lotto tickets,” such as Argus Metals (AML.V or ARGXF) as one example, because, as we have said before, we Vultures aim to buy when the market for these promising issues is at its worst and most unloved. We added to these and several other Vulture Bargain Candidates of Interest (VBCIs) as noted on the individual thirty-something VB and VBCI charts available to Got Gold Report Subscribers.
We have, however, also lightened up on a very few of our positions, including exiting one Vulture Bargain (VB) company at a modest profit, also as disclosed in the charts and below in the VB Roundup.
Our attitude has not changed; we are operating under the assumption that no condition in the stock markets lasts forever and we very strongly believe that to include nasty, tide lowering buyer’s strikes for junior miners and exploration companies like the one that has been underway.
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We will continue to try to be extra diligent about putting notations in the various VB and VBCI charts as we make additional changes just ahead. We continue to believe that there has already been too much liquidity “Hoovered” out of the juniors, and so we are looking for the negative liquidity event to end soon, if it isn’t already in the process of doing so.
If not “soon” then, as we are wont to say, our positioning is for “as long as it takes.” We say that not just as a slogan – it is a Vulture way of life. We do so in the context of a market where our accumulated gold has never had more purchasing power relative to the miners in general and the smaller resource companies in particular.
By definition, then, we look for the opposite condition, positive liquidity, to return, with the market opening a can of “positive liquidity vengeance” soon thereafter. We are convinced that change is coming, although the catalyst which will ignite that event has yet to surface.
We are in good company when doing so, but the number of players with the tenacity and determination necessary to maintain their confidence until a sure-enough market reversal arrives – the number of True Vultures – almost certainly is being winnowed down to its core.
In short, we believe the sure-enough reversal is coming. The only unanswered question is: When?
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As always, the first place to look for new commentary is directly in the charts themselves (available to Subscribers). As we move forward the charts will become more and more the focus and these too-long written reports less and less the focus.
On to this May-June edition of our Vulture Bargain (VB) notes, then… for our tenacious, bargain loving and Ridiculous Cheap seeking Vulture members.
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