JUNIOR FESTIVAL 2006 - Part I

by Eric Hommelberg
December 29, 2005

When I wrote my piece ‘2003 – Year of the Juniors’ back in December 2002  I started off with:

Dreaming of astronomical profits the year ahead ? Dreaming of the investment of the century? Well, here's your chance ! Profits of 100% to more than 1000% are in the pipeline next year if invested in high quality junior exploration companies! END.

Well, I had a lucky shot I guess since the entire junior sector exploded to the upside and appreciated by a multiple of 100%  towards the end of the year. The HUI was making all time highs at that time topping the 250 mark for the first time. 

Sure enough it was hallelujah time for the gold shares back then and people bought hand over fist every gold shares they could get their hands on. Well, as we know by now that party ended up with a terrible  hang-over which lasted for almost two years.  So here we are, two years later, December 2005 and again I would make the same statement as I did in December 2002:

Profits of 100% to more than 1000% are in the pipeline next year if invested in high quality junior exploration companies! END.

The only difference this time is that this time the setup today is even more phenomenal as in December 2002, especially for those juniors in discovery stage (or at the verge of discovery).

To put it bluntly: This setup you may never ever be witnessing in your entire life again.

Exaggerated? Don’t think so! It’s my strong believe that we find ourselves in a generational bull market in gold and I don’t think we will witness another two year correction in gold shares again within this bull market.  Why not? Well, the answer is simple. How could there be a two year correction in gold shares in the first place? What does it say about sentiment? Sure enough, sentiment should be short-term bearish and denial regarding the gold bull strength should be high.. Well, that’s exactly what we’ve got for the last two years, every new high was being characterized as a potential top by many, statements like “my grandchildren will never see $500 gold”, gold has lost its role as safe haven etc… were being heard all over the place  But ever since gold took out $500 people realize that gold can go up indeed and suddenly $1000 gold seems to be the tune of the day.  Suddenly investment money starts flowing towards gold (investment demand for gold up +56% during Q3 2005) and it seems that by crossing the $500 mark we’ve just entered phase II of this generational bull market in gold.  This phase II will be characterized by a increased slope of appreciation (gold) therefore reducing the odds for another two year correction in gold shares dramatically.  Since the gold shares were beaten up to such depressing levels over the last two years they became extremely undervalued against gold.

The extreme undervaluation of the gold shares vs gold reached its high in May 2005 and ever since then the gold shares are showing signs of life.. Believe it or not but the year of 2005 ended up altogether on a very positive note for the junior gold shares. Looking at the Junior Year to Date performing list no other conclusion can be made: (Norsemont + 892%, US Gold + 721%, Crested Corp +562%, Tan Range +555%, etc… see Year to Date list HERE)… Furthermore all companies which came out with good drill results (discovery stage) did extremely well as well. I can’t stress enough that companies in discovery stage are doing well anyhow no matter what the gold price does and yes even during the correction of 2004/2005 they did very well…

So is the gold share train leaving? Or did it leave already and did we miss the perfect entry point?

Well, it’s our strong believe that this is just the beginning and that you ain’t seen nothing yet.  Those companies in discovery stage are doing extremely well already and will amaze everyone in 2006.

So were do we find ourselves exactly? Is it time to buy and why? And what about the smaller explorers, why didn’t they move at all? Will they recover as well and if so when?

In order to paint a complete picture I’ve split up this article into two parts:

-          Junior Technicals

-          Junior Fundamentals  

Junior Technicals:

This section outlines the technical set-up for the smaller exploration companies based on: 

• Gold vs HUI performance 2002 – 2005
• HUI performance 2003
• HUI performance 2005
• Relative HUI 2002 - 2005

Gold’s bull market started in 2001 and so did the HUI’s. It’s simple, when gold rises gold shares rise as well. The benefit of owning gold shares vs gold concerns  the ’multiplier’ effect. In other words, gold shares do rise faster than gold itself. Everyone can see the proof out there:

2001 – 2005: gold rises  100% , HUI rises 650+%  

Conclusion: Gold shares do rise faster than gold over time.

Still some people aren’t convinced that there’s a correlation between gold and gold shares indeed and some analysts even argue that there could be a bear market in gold shares while witnessing a bull market in gold at the same time.  This kind of thinking surely gained momentum during spring this year when the HUI got extremely undervalued against gold. Sure enough it turned out to be another ‘buy’ opportunity (described in detail in my piece ‘Gold/HUI Divorce part I and  part II) as extreme under-valuations never persist for a long period of time. Now let’s take a peek at the Gold vs HUI chart since 2002 so you can judge yourself if there’s a correlation indeed or not.
 

Chart#1: Gold vs HUI performance 2002 - 2005

 

rising gold prices mean rising gold shares

 

This chart  proves beyond any doubt that there’s a strong correlation between gold and gold-shares indeed. That’s the big picture. When examining the chart details you’ll notice that the gold shares sometimes run too far ahead of gold and sometimes they’re lagging the price of gold. This was clearly the case in December 2003 which led to a huge anomaly in the Gold/HUI ratio. It’s fair to say the gold shares back then were overvalued indeed. But as we all know extreme over/under-valuations don’t persist for a long period of time and overvaluation usually morphs itself into undervaluation over time and vice-versa. This time was no different since the December 2003 over-valuation morphed into an under-valuation in May 2005.  Ever since then (May 2005) the HUI has been catching up on gold and therefore outperforming gold..

So that’s the big picture of last 6 months. Rising gold prices and gold shares out performing gold. It’s a pity indeed that only a very few gold advisors did see this opportunity  since the ‘short-term bearish, long term bullish’  theme was played over and over again during that time.  One of those very few bullish gold experts who did see this opportunity was Jim Sinclair,  he told his readers in June  2005:

It is only six short months until 2006 is upon us. In my opinion, 2006 to 2008 will be our best years ever.

Wait until 1/1/06 and you will find you are much too late. Things always start quietly before it becomes apparent. People trying to time the market perfectly are going to be left behind in the comet's debris trail.

The establishment interest has started. It took form last May in the majors and is beginning now in the juniors - not January 1st, 2006. In my view, 2006 is for all practical purposes - TOMORROW! END.

Well, how right he proved to be. Not only his own company Tan Range appreciated by more than 500% since then but many others did as well. (eg Seabridge 370+%, Bear Creek 400+%, Norsemont 400+%, etc…)

So where are we now? Is the gold share train leavin’ ?

In order to get a better understanding of current situation let’s go back once again to 2003 and see what happened after the HUI broke its long-term resistance at 155.
 

Chart#2: HUI performance 2003:

 

breaking its long-term resistance at 155 marked the ultimate HUI ‘BUY’

 

When examining the chart details you’ll see that just before the HUI managed to slash its 155 long-term resistance it fell back to 140. Many analysts were calling for a HUI top back then since the HUI seemed to fail to break that important 155 level. It’s a typical bull-action to shake off as many investors possible before going forward. That’s why I keep telling people to be careful with selling gold shares these days  since today’s situation is so similar as in 2003.

The 155 and the 255 level, what do they have in common?  See chart below:
 

Chart#3: HUI  performance 2005

 

breaking its long-term resistance at 255,
does it mark the ultimate HUI ‘BUY’?

 

The similarities are striking and since the HUI could hold its key break-out level of 255 despite the recent $50 drop in gold we believe that breaching this important resistance level marks a major ‘BUY’ indeed.

Another chart which shows a lot more upside potential for the HUI is the relative HUI chart. Previous HUI highs were made at 1.5 – 1.8 times its 200 dma. Since the HUI is currently trading at 1.3 its 200 dma the odds are that no major top has been formed at this point at all, see chart below:

 

Chart#5: Relative HUI  2002 - 2005

relative HUI doesn’t mark a major top yet

 

OK you’ll say, so the majors are making new highs and some juniors (especially the ones in discovery stage) are doing phenomenally well these days but what about those smaller explorers which did so well in December 2003? They’re lagging the HUI tremendously (many are still off by 60% from their December 2003 peek), will they ever recover?

Well, my guess is yes and I think they will be doing so rather sooner than later. 

The smaller explorers are a funny breed, they only participate in rallies when the HUI sails into new high territories. So  during the recent HUI run from 165 till 250 they didn’t participate since the HUI wasn’t trading in new high territories. Same happened in 2003. The smaller explorers didn’t participate in the HUI run from 92 up to 155 since the HUI wasn’t trading in new high territories. But after slashing its long-term resistance of 155 it only took a few weeks for the smaller explorers to wake up and off they went.  The chart below says it all. The window of buying opportunities for the smaller explorers is closing down fast after the HUI slashing its long-term resistance.

 

Chart#6: 2003 -  Window  of buying opportunities smaller explorers 2003

 

(window of buying opportunity for the smaller explorers
closed down fast after HUI moving into new highs territory)

 

So here we are in 2005 and  the HUI just moved into new high territories (255+).

The setup for the smaller explorers is phenomenal since many of them are at the verge of breaking their 25 months down-trend.  The good news is that most of them only need to rise for another penny in order to break out of this grueling long down-trend.

Conclusion: window of buying opportunities for the smaller explorers is closing down fast.
 

Highlights:

• HUI breaking its 155 level in 2003 marked a tremendous ‘BUY’
• HUI breaking its 255 level in 2005 marks a tremendous ‘BUY’
• Many gold-experts are calling for gold prices  exceeding $600 next year.
• $600 gold will launch the HUI towards new all time highs.
• New HUI highs will launch the smaller explorers into new all time highs.
• High quality explorers could easily gain a multiple of 100% next year. 
   

Indeed the high quality explorers could easily gain a multiple of 100% next year.

Again, the setup is phenomenal, the combination of the HUI sailing into new high territories and the smaller explorers at the verge of breaking out of their 25 months down-trend is a setup you may never ever be witnessing again during this bull market in gold.. It’s therefore my strong believe that the year of 2006 will be written down in history books as one of the greatest junior festivals of all time.

So after reading all this you might be interested in buying some junior shares as well.

In our ‘Gold Discovery Premium Service’ we tip you on the junior exploration companies which are discovering gold and silver at this very moment. Juniors in a discovery phase were the real winners in 2005. And they will probably amaze everybody in 2006.

Our Gold Discovery portfolio will be free accessible till the end of 2005.

The Discovery portfolio started at November 01, 2005 and shows an average gain of 25%. 

People interested can sign up HERE

Last but not least:

The Gold Drivers team wishes you and your family a Healthy and Prosperous New Year.

All the Best,

Eric Hommelberg

The Gold Drivers Report/
The Gold Discovery Letter

Next week Junior Festival 2006 part II: Junior Fundamentals (why majors are showing interest in juniors, why smart money is buying into juniors, etc…). We will publish part II in our upcoming free issue of ‘The Gold Discovery Letter’ on January 3, 2006. People interested in receiving our free issue of ‘The Gold Discovery Letter’ can sign up HERE