Ricks Picks header image

What to Look for as Gold ‘Juniors’ Take Off

11 comments

(We’ve heard from our friend Chuck Cohen again, and he’s as bullish as ever on the junior and exploration gold shares.  Two stocks he likes look too overextended now to jump on, but there are many others that have yet to leave the launching pad.  RA)

A seismic change is rapidly approaching in the junior and exploration gold shares. Many companies that appeared primed for liquidation just last November will be soon be ratcheting up in an unimaginable way. There remains an unusual amount of doubt and anxiety, as we saw in Friday’s air pocket in gold and silver. So why do I still feel so strongly about an explosive rise in the metal and shares? It’s a chart thing, specifically the recent price movements in two junior gold stocks, Romarco Minerals and Terrane Metals. Here’s what their charts look like:

Romarco

Terrane-a-buy

The swagger of many gold investors just a couple of years ago has almost evaporated, as the gold shares sold mercilessly down last year. And from my correspondence and the gold blogs I follow, even with record prices, caution and disbelief, not confidence, still permeate this market. But the cavalry is on its way. We are starting to see the first fruits of a massive bull market in the shares. I don’t wish to get into the fundamentals for this trend  reversal except to say that I believe the financial world is about to be awash in an incredible flood of liquidity that will soon drive up all market – stocks and commodities, but especially silver and gold shares.

What to Look For…

First, the prices of the desolate junior shares will lift above the top of last November’s selloff. Remember how, at their bottoms, it seemed as though most of the exploration companies might have to shut their doors? To think that a massive bull market was just ahead seemed crazy. But for most juniors and exploration stocks, almost without any recognition, this first step has already begun.

Second, following this initial rise, shares will begin to show short sharp bursts, accompanied by unusually heavy volume. In the past, this pattern usually proved to be a negative as selling drove back the advance. But more recently it has been a sign that strong hands are entering the market.

Parabolic Stage

Third, shares will start to pick up strength and extend their moves. At this point most will have risen 100% or 200% off their bottoms. And finally, when it looks as though the ultimate top was reached and a scary reversal was at hand, instead of breaking down as in the past, the stocks will break out again, this  time parabolically.

I have included the charts of two stocks–Romarco Minerals and Terrane Metals — to show this pattern as it has unfolded. (Since this was written last week, I want to add that Terrane has pulled back as I had originally thought, but I wanted to still include it, warts and all.) I have held both and done well in them. But also, I sold them prematurely because I thought that the old pattern might still apply. But as Dylan has written “Things have changed.” And this change portends big things ahead in the junior share market. Please note that although these two companies still have terrific prospects, I am not recommending them at current levels because their huge rise has made them less attractive for the moment. There are many junior and exploration companies that haven’t yet left the launching pad that will soon follow these patterns.

Below are the two year charts of Romarco and Terrane along with some observations about each.

Romarco Minerals

Romarco has had a prospective property in South Carolina since 2007. At first, its drilling results were good — not spectacular, but very encouraging. Plus, it has two very high-profile holders, Frank Holmes and Sprott Resources. But even with all of that going for it, the stock lagged, dropping from $.35 down to under $.10 late last year. If you held this stock, what would your expectations have been back in November of 2008: Just another junior loser, or would you still expect it to move as it has?

The obvious answer would be that Romarco might be just another candidate for a 2008 tax loss. But look at this chart!  As of Friday November 20, Romarco was still ascending parabolically, up almost 20 times from that low. Do you see what I mean?

Terrane Metals

Terrane is a different situation, since it is heading towards production in British Columbia. But its fundamentals were almost as compelling two or three months ago as they are now and yet you could have bought it at $0.25 just two months ago. Looking at the chart, would you have anticipated that it would go up over five times in just a couple of months? It’s as though someone lit a fuse under the stock. Two weeks  ago, thinking Terrane had exhausted its run, I exited the stock. But when it started to dig in last Thursday, I began to doubt my decision. On Friday it moved up to a new high, and I have no idea where it is going. Unfortunately, it will be without me. It was this mistake that prompted me to write this piece.

If you want to look at two other potentially parabolic charts in the exploration sector, look at Pelangio (PGXPF) and Moneta Porcupine (MPUCF).  I suspect that the next breakout from their current consolidation could morph into a parabolic curve.

Learning from Mistakes

It is strange to consider in an investment-crazed culture, where every advisory service  promises certain success, that your best teacher is the mistakes you make. There is nothing like them — that is, if you can figure out what went wrong, and if you are honest with yourself. Richard Russell always brings up his investment in Berkshire way back, and then happily scalping a 100% profit, but eventually missing out on its legendary run over the years. It’s instructive that he strongly reminds his readers not to sell gold in this move. This advice probably traces back to that Berkshire lesson. A wise man!

Here is my conclusion: We have been constantly disappointed in our gold shares because of past fake-outs. Many thought: I won’t be fooled next time. But things have changed — in a big way — and many of the underachieving juniors are about to replicate what Romarco and Terrane have done this year. I urge you to do your own homework. Go to excellent chart sites such as Bigcharts.com and check out a large sample of the smaller gold shares to see what is now unfolding. I haven’t included Pelangio, which I recommended a couple of months ago, but look at its current pattern.

Mine Accident

Finally, for those who have bought Metanor Resources and have been concerned about the mine accident, Jay Taylor has an interview with the company this week at his site.

I believe that blow-outs and, ultimately, blow-offs will be commonplace in the junior gold share market in the years to come. If you wish to receive my help on a professional basis which includes some new recommendations of these smaller gold stocks that could soon be joining Terrane and Romarco in these moves, please get in touch with me at [email protected] Also, if you wish me to send you a six-part series on gold, please request it. Thank you. CHUCK.

(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)

Please do not ask trading questions!

  • ben December 3, 2009, 4:45 am

    I heard that a couple ideas were being floated around the Gulf State sheikhs…

    one was to start demanding a combination of gold and dollars for oil…anywhere between 10% and 50% gold and the rest in dollars.

    the other idea was to create an exchange where a barrel of oil would be priced in milligrams of gold…no dollars, or other sovereign currency.

    I would have to categorize this as an unsubstantiated rumor at this point, even though it makes perfect sense that such scenarios are being discussed. If any of these rumors started seriously making the rounds (like the whole tungsten in the gold bars thing a couple weeks ago) I’m sure it would only be a boon for gold…but what would this do to the price of oil, which has been languishing for months?

  • Chris T. December 3, 2009, 12:01 am

    Rick, to follow up your comments yesterday about the deflation/inflation/gold question, here is the latest article on this topic by Gary North.
    I don’t know your thoughts on Mr. North, but you do follow the Mises Institute, as does he, and I have always taking his comments seriously.

    see:
    http://www.garynorth.com/public/5745.cfm

    Regards.

    &&&&&

    Can hardly wait to read it, Chris. On the inflation vs deflation question, North has been arguing that the Earth is flat for the last five years, but he does wrong-headedness more entertainingly than anyone else. RA

  • Chris T. December 2, 2009, 8:20 pm

    Dennie Herman:

    Seeeing as your stock has just managed to hit about 50% of the parabola high set during the internet mania 10 years ago, and also that it has just gone parabolic again, it does not look like like a bad time to sell.
    Some nice resistance at 0.45 from the last high is also evident.

    Unless you bought in during the rel. short time it was over 0.40-0.45, cutting out now seems more sensible than hoping for another reach to 0.80.

    But what do I know, maybe there is a story here?

    I would bet though, that anyonw who could get back about 50% on JDS Uniphase or others of that ilk would cut and run…

  • Peter Montgomery December 2, 2009, 6:00 pm

    have warned on GDXJ before, Adobe format, link
    http://www.hondoazul.com/GDXJ.pdf

    better prospects here
    http://www.hondoazul.com/ProspectorsPanNov2009.pdf

  • Don Regan December 2, 2009, 5:50 pm

    Great article,

    I totally concur with your statement, as I am involved in a Canadian Junior
    Gold Company. A year ago our daily volume was under a 100K per day.
    In the past 5 months we have traded close to 100 million shares. Due to this
    volume we are rolling back the stock to 15-1, doing a financing and announce
    two production scenarios in Canada and Arizona. Let the good times roll!

    Cheers,

    Don Regan

  • FranSix December 2, 2009, 5:05 pm

    If you take the silver/gold ratio over the long term, overlay the gold price, and your gold junior stock, you can come up with a representation of just where the stock is trading in terms of its price vs. various indeces.

    The so-called ‘gold’ junior must have gold as its primary deposit, though often times the fact it may be a copper deposit escapes most traders. In a deflationary scenario, I presume silver will decline against gold, or follow well behind in its wake, thus the gold miner eventually differentiate from this ratio and index to the gold price.

    http://stockcharts.com/h-sc/ui?s=$SILVER:$GOLD&p=W&st=2000-01-01&id=p44435350763&a=128674643&listNum=2&listNum=2

  • Rich December 2, 2009, 4:36 pm

    Black Swan to Withdraw if Bernanke Reappointed:

    http://www.cnbc.com/id/34234721

  • Mike Banks December 2, 2009, 3:11 pm

    Rick,
    I recieve your daily Ricks Picks and thank you for it. You mentioned today you have a six part series on Gold.
    At your pleasure I would be appreciative if you could send this to me.
    Thank you
    Mike Banks

    &&&&&&

    Mike: You can receive this report from Chuck directly by requesting it at: [email protected]m

    RA

  • Denis Herman December 2, 2009, 2:07 pm

    Do you know anything about a penny stock I have held for many years? It has recently gone from a low of $0.01 to $0.41 do you think I should take my profits and run, or wait a little longer. The stock is Medizone International (mzei) I would like your opinion.

    Thanks Denis Herman

  • any joe December 2, 2009, 2:00 pm

    I’m thinking about getting into GDXJ.
    I like their silver mines and Chinese gold mine which is joint venture. Sino-Canadian

    My only problem is that gold mines are not immune to a general market turn down. Juniors even more vulnerable
    Why buy these mines unless you plan on getting out when you think a market decline is coming? Gold could soar while gold mines go into reverse?

    I suppose this is why some gold enthusiasts won’t touch the mines but will buy physical or futures

  • mario cavolo December 2, 2009, 12:39 pm

    Rick, as Chuck’s article on the parabolic potential in gold juniors reminds us, is it a stretch to say that for millions of screwed-over Americans, a way we can offer them to somehow not get left behind is to speculate in gold penny stocks? Or is such advice only meant for us “intelligent traders” of the world? I’m blown away by the NY Times article I just read on food stamps in America becoming part of the new normal, even with the government doing a PR branding campaign renaming it SNAP! to reduce the shame people feel. Even here in China, everyone in the private sector I ask tells me business is down 10 to 30%, yet the “risk on” bull keeps running. Here’s the article I wrote up for a taste of bitter reality we all need to understand is today’s reality of the haves and have-nots. http://www.mariocavolo.com/?p=615&more=1&c=1&tb=1&pb=1
    In fact yes we’re getting to the point where it looks like having half or more of your holdings in gold-related is the MOST sensible thing to do…scary times indeed.

    Cheers, Mario


Do you want up-to-the-minute technical analysis and forecasts for your favorite stocks, commodities, ETFs? Join our Take Request Session on August 18th!

No, I'm not Interested