07/05/06 - TraderMike: A Closer Look at Some Gold Stocks
Got this emailtoday:
Dear Mr. Swanson,
As a WSWPro-subscriber I am very pleased and impressed byyour analysis. On Friday you had said that we might see a dip in the goldprice for a day or two before we resume our bull run. Do you still seethat? If so what price might be a good entry point to go long, and wouldthat be after the US markets reopen after the 4th of July?
Sincerely,
RS
We'll certainly get a dip orpause at some point. Nothing goes straight up. That's why Iwarned that a dip for a few days could come at anytime on Friday. Obviously we went higher and saw gold stocks blast off Monday. It'sbeen an incredible turn around and is exciting. Usually we see goldstocks shoot up after bottoming and then pausing for 4-8 weeks beforegoing higher. I'd still expect to see this happen at some point.
Where this might happen isanyone's guess and that's why I wouldn't try to sell thinking you'll beable to get back in and outsmart the market. I'd only try to dothat at the end of an intermediate-term uptrend, because buying back incan be difficult if not impossible. The market can go up withoutyou or not pause for as long as you think. Resistance on goldis in the 635-660 area while the XAU's resistance is in the 146-152area. We're already at 149.41.
It's hard for me to give you anestimate of where gold stocks might pull back down to without seeing themmake some sort of peak first, because I use percentage retracements andmoving averages to determine possible support levels. Right now theXAU has support on its 150-day moving average at 138. I doubt we'llto that from here, because gold looks like it is going to go higherbefore it pulls back down.
There are a couple ofinteresting things going on with gold stocks. First the resistancedowntrend line on the XAU/gold ratio going back to February broke duringthe last two days. I took the break of the April downtrend line asa major signal that the bottom was up and the bullish trend had comeback.
However, the XAU/gold ratiogoing back to February is an even more important indicator as it is anintermediate-term indicator. During the past few summers each timethe gold stocks topped out, bottomed, and went sideways, this longertrendline wasn't broken until the end of the summer. Once it wasthough gold stocks exploded. This time this trendline was brokenmuch quicker. That's another sign that we are in stage two of thegold bull market - and in stage two you can expect bigger gains andquicker more violent corrections like the one we just went through a fewweeks ago.
A lot of people don't thinkwe're going to get to the highs in gold stocks until the end of theyear. They're expecting a long consolidation period after thebottom like we've seen in years past. I've been more bullish thanthis, thinking we'd pause somewhere below the highs in July or August andthen break them in the Fall. But with the break of this XAU/goldtrendline going back to February this may happen quicker than anyoneimagines. It's a clear sign that the trend is up and you don'tfight the trend. You embrace it.
Since the June bottom in the XAUthe following gold stocks have been leading the rally - GRZ(+56%),TGB(+41%), SA(+40%), CLG(+39%), NXG(+37%), TRE(+32%), AUY(+32%),AEM(+31%), GLG(+30%), GOLD(+29.39%), NG(+28%), AU(+26%). A lot ofthe big cap stocks have put on huge bounces. MDG, KGC, and NEM areall up big. Institutional money is coming back into the goldmarket.
Newmont is an important goldstock to watch, because it is the darling of institutional investors andtraders who demand liquidity. The gold market as a whole isn't veryliquid. Someone who wants to be able to quickly trade millions ofdollars in and out of gold stocks only has a few names he can do thiswith. Newmont is the most liquid gold stock so it is the key onefor these people.
You can watch the trend ofNewmont compared with the XAU or gold to get a good feel for wheninstitutional money is coming into the gold market. Just like thexau/gold ratio, changes in the trend of the Newmont/gold relativestrength ratio have marked important turning points in the goldmarket. The reason is, because when the trend of the Newmont/goldratio turns up it is a sign of institutional money coming into the goldmarket.
The Newmont/gold ratio wastrending down until the gold stock bottom in June. The ratio brokeout of its downtrend and has been rising ever since. Notcoincidently, shares of Newmont have put on a powerful rally. Otherbig cap stocks gold stocks have also been going up - and attracting bigvolume too.
The futures market is alsoshowing new signs of institutional interest. Commercial tradershave been paring down their short positions in recent weeks, and even didso last week despite the powerful rally in gold. Usually they shortas gold goes up, but so far they've been standing aside and actuallygoing long more than they have been going short. This is the typeof thing they do at the start of major uptrends in gold and goldstocks.
It is usually institutionalmoney that first flows into gold stocks after they bottom and this isindeed what we are seeing right now. Most of the time after abottom the stocks that first lead the rally are big cap gold stocks andjunior producers with solid earnings. The more speculativeexploration stocks as a whole, and small juniors, usually lag right offof a bottom. We're seeing this pattern repeat right now.
The reason why this happens isthat after a bottom money tends to flow first into the most liquid stocksand the stocks with the best earnings and fundamentals. Then asthose stocks go up money starts to flow back into the more speculativenames.
That should start to happennow. Most of the big cap gold stocks have gone up so fast that theyno longer can provide safe entry points for new investors. Until weget a pullback or a couple of weeks of consolidation I wouldn't put anymoney into the Newmonts, Goldcorps, or Barricks if I were you. I'dwait to put that money to use later. Until we get a correction orpause new money is best deployed in the more speculative stocks thathaven't rallied as hard yet.
BMGX is at least 40%undervalued. Battle Mountain hasexploration properties valued at $17 million. At 25 times cash flow and agold price of $500 an ounce, the acquired royalty assets are worth $60.5million, giving Battle Mountain a market cap of $77.5 million with goldat $500 an ounce. With 63 million shares outstanding that gives a $1.23stock price for Battle Mountain. Of course gold is trading higherthan that, but I like to make conservative estimates when I invest. (BMGXcanceled 7.8 million shares on June 21 on the sale of its interest inPediment Gold).
Sido Manji of Golden Capital Securities filed with the SEC to sell425,300 shares of BMGX on May the third then filed to sell another234,000 in June. It is likely that the liquidation of those shareshas been what has held down BMGX. He filed to sell 425,200 back inDecember too and the stock did nothing for a few months. That's nottoo unusual. A lot of times when hedge funds buy private placementsin small companies they immediately flip their stock as quickly aspossible for a short-term gain. I know of one stock that I ownedlast year in which a hedge fund did a large financing and then shortedthe stock to lock in their gain. The stock went higher and they gotcaught in a short-squeeze. They didn't care about the company theywere just trying to make a quick buck and ended up being too smart fortheir own good.
Whatever the reasons for Manji'sselling, he filed to sell in December and the stock ended up going uphuge after it digested his shares. The stock is lining up to dosomething similar once again. Its been consolidating for weeks,causing its Bollinger bands to become extremely narrow. This isalmost always the prelude to a big move. The stock is gearing upfor a big breakout. A close above 80 cents should send itimmediately to a dollar. And I think itwill go to one or two dollars by the end of the year with a strong goldmarket. Anyone short now is playing with fire.
Last week the President of Eaglecrest released a letter to shareholdersto update them on the company's progress. You can read the fullletter here:June2006 Shareholders' Report.
Some highlights and thoughts:
- They have encountered vein thickness (this is where gold lives) inexcess of 15.9 meters [52 feet] and have engaged Major Drilling to builda special rig to drill faster and deeper. This will speed up SRK’sresource calculations due to come out thisfall.
The next few months should be afun one for Eaglecrest shareholders.
Top10 Blue Chip Stocks With Market Caps Above $500 Million
Yamana Gold(AMEX: AUY, Toronto: YRI) 5/05/06 $11.25
Glamis Gold(NYSE: GLG) 5/22/06 $33.55
Bema Gold(AMEX: BGO) 5/22/06 $4.75
Agnico Eagle(NYSE: AEM) 5/22/06 $32.45
NovaGold(AMEX: NG, Tortonto: NG) 5/30/06 $14.00
Southern Copper(NYSE: PCU) yields 12.90% at entry point 602/06$87.60
Meridian Gold(NYSE: MDG) 6/02/06 $32.25
Eldorado(AMEX: EGO) 6/13/06 $4.21
Tanzanian Royalty Exploration(AMEX: TRE) 6/13/06 $6.40
Top10 Emerging Growth Stocks With Market Caps Below $500 Million
Paramount Gold Mining(OTC: PGDP) 4/24/06 $3.40
Eaglecrest Explorations(Vancouver: EEL) 4/26/06 $0.60
Battle Mountain Gold(OTCBB: BMGX) 4/27/06 $0.58
Blue Pearl Minig(Toronto: BLE) 5/09/06 $3.20
Alhambra Resources(Vancouver: ALH) 5/10/06 $2.78
Gold Reserve(AMEX: GRZ, Toronto: GRZ) 5/30/06 $7.27
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