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Junior Gold Stocks Set to Soar

The Sell-off in Junior Resource Stocks is Over

Written by Brian Hicks
Posted October 7, 2011

The world’s most profitable stocks just got their biggest “buy” signal in nearly three years.

The last time this happened, they more than tripled in value.

Now everything is coming together for this tiny sliver of the stock market which has produced more two-, three- and ten-baggers than any other.

It’s the perfect setup...

Hitting Eight-Year Lows

Investors have gotten spooked in the last few months. They’re all scared — from the smallest retail investor with a few thousand bucks in mutual funds to the largest institutional investors responsible for billions of dollars.

The future is looking even worse...

The majority of Americans think the economy is already in a recession, or worse. Near double-digit unemployment is now the norm. Today’s unemployment report of 9.1% unemployment was hailed positively. Earnings expectations have been declining.

Europe, China, and other places are even worse off.

The global scare has hit everything: gold, stocks, corporate bonds — almost everything has fallen.

But it has hit one of the riskiest and most profitable stock markets especially hard.

The TSX Venture market, home to the highest-risk/highest-reward gold and natural resource exploration and development stocks, has taken a nosedive:

 TSX Venture Index 10 Year - Sep 11

In March your editor warned, “We’re long past the ‘easy money’ period; you have to take less risk and keep more cash on hand for when corrections do come.”

In the six months since, the TSX Venture Index is down 45%. It’s almost as bad as 2008, when it shed more than 60% of its value in three months' time.

The fall has been so fast and hard, the Index has fallen to 2003 levels.

Meanwhile, the fundamentals have improved exponentially. Natural resource prices, which drive the TSX Venture stocks, are up many times over since then.

Gold prices have quadrupled. Copper prices have tripled. The price of a barrel of oil has increased more than three times despite its recent sell-off.

But just because something is down, doesn’t mean it's cheap or a buy...

Take real estate and the big tech stocks; they’re all still below their bubble highs.

When They’re Crying, We’re Buying

There also has to be a significant lack of interest to truly hit a bottom.

There is a significant lack of buyers in the TSX Venture market right now, to say the least. And this small sector allows us to gauge interest in a unique and accurate way.

You see, the TSX Venture Index is composed primarily of junior resource companies. The vast majority of these companies produce no sales or revenue of any kind. They can’t borrow money, either. Yet their primary function is spending money exploring for natural resources...

So the only way they can get cash is to issue more shares in exchange for cash.

During the extreme bullishness earlier this year — when gold was going up $100 a month and junior resource stocks as a whole were going up 10% a month — investors were handing these tiny companies as much money as they could spend.

A lot has changed since then.

The image below shows how high demand was for newly-issued shares of junior resource companies over the past two years:

 TSX Venture Financing Activity September 2011 Corrected

As you can see, the interest in pumping money into junior resource companies has fallen even faster than share prices have.

The total financing activity in September was a mere $343 million. That may sound like a lot, given many of these stocks carry market caps between $10 million and $50 million...

But it’s actually 39% below last September’s levels, 66% below the past year’s monthly average, and 76% below the high in March when the TSX Venture Index was at its highest point in three years.

They’re cheap. They’re out of favor. And there’s one more reason to like them...

Keep It Simple

Although gold and natural resources across the board have corrected heavily, their fundamentals have never been better.

Recent news has been extremely bullish for short- and long-term gold prices.

The Federal Reserve has proven its commitment to keep the printing presses going with Operation Twist. The British central bank has just committed to printing an additional £75 million ($116 million).

Globally, interest rates are going to be held at record lows for far longer than most people expect.

When it comes to energy, oil prices are going up from here. Demand is still rising despite the sluggish economy. Supply has continued to lag.

Any economic lift will send oil and energy prices rising fast.

My colleague Keith Kohl recently wrote an excellent article on why oil prices are going to quadruple again from current levels.

In the end, this one is really simple.

We’re seeing the same extremely profitable situation in junior resource stocks that has presented itself many times before: No one wants junior resource stocks. They’re at multi-year lows. Expectations are low. And the fundamentals are stronger than ever.

The time to buy junior resource stocks is now.

Good investing,

Andrew Mickey
Editor, Wealth Daily

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