russwinter,
I'm very bullish, but thought I'd play devil's advocate (I am still very long physical, juniors, mid-tiers and majors)
I find gold juniors are like startup companies that IPOd too soon. In many sectors companies with floats this low would still be private, but this is the nature of the gold market-the market cap of the entire gold sector would qualify as a small sub-sector of many other markets, like consumer goods or transportation.
In financing startups, usually some wealthy insiders and angel investors get together and fund the company up to the point where the company can IPO and create the breadth and depth to attract institutions and then the retailers hitch a ride. M&A gives the early stage investors another liquidity option.
The upside of the public gold juniors is participation for retail investors in a publicly traded vehicle at this early stage is a rarity in today's markets. The opportunity for homeruns is a reality. The downside is that these companies are premature in terms of warranting institutional investment and so the retail investor gets subject to follow on financing rounds and warrants that continue to dilute. In a private startup, the early stage investors know that they must continue to participate in follow-on rounds if they believe in the company otherwise they'll be so diluted by the time the liquidity event shows up that it won't have been worth the time they spent on due diligence, and the returns won't be competitive. It can take many follow-on financings before that liquidity event, which is why those investors are almost always accredited, with deep pockets, knowledge of the sector, and patience.
Aside from a handful of early stage gold junior funds, many of the retail investors in these juniors cannot continue to up the ante on a good stock to ensure they do not get overly diluted, and most certainly do not have sector expertise. The problem of timing the liquidity event remains, however. Since these companies are already liquid (publicly traded) the best proxy for an IPO-like attention-grabbing liquidity event is: 1. the beginning of acquisitions by majors of junior golds, 2.enough interest in the sector to ramp up the number and size of the gold junior funds, and 3. institutions and the number of retail investors (who may also increase allocations to gold) increase. POG does not have to actually rise to get any of the above conditions. However, since the TA of POG is lacking (don't ask me to count the number of times I read "When it hits $30 there's nothing to $500" or $430-$434 is major resistance") using 1,2 and 3 to time entry into the market is probably a better measure of the probability that you can create a portfolio of juniors that will enjoy premium-generating liquidity events in the near-term.
So far, acquisitions of juniors has been light to say the least. We do not yet have the activity to attract retail and fund investors to juniors that may be bought by some majors. If majors were acquisitive, one could match a recent track record of acquisitions by those majors to candidate juniors in a portfolio to try to value and time a liquidity event-an acquisition.
Interest in gold seems cursory at best, particularly since gold is sold globally and 1/3 of currencies outperformed gold in 2004 YTD. More importantly, 5/7 G7s outperformed.
Message 20849845
While we may have slight increases in individual interest, institutions do not appear to be piling into gold, so the money flows that sustain the life of these companies aren't there.
Any startup company goes through the J-curve and, if the investors timed it right, they pop up when the market is liquid and investors get their IPO home-runs. Timing is much more important in this market because most retailers won't stay around unless they're true gold bugs, so there is the wait for the liquidity event. They've been tested by the recent dollar-down-gold-up head fake that brought home the cold reality that once a few retailers and junior funds left the party, there was not much depth left in this market. On top of that, perhaps the small size of the market doesn't attract the top I-Bank analysts, but the TA in the gold sector tends to come from a few boutique funds and newsletters, unlike other sectors where you have assigned analysts to put targets on securities that at least puts a floor under one's position. While we may pooh-pooh the I-Bank analysts, it took the I-Bank analysts to come back from summer vacation before targets on oil companies were adjusted in September, and then J6P called his broker to adjust the portfolio. That's what this sector needs.
The gold analysis is very dollar-centric, and when it comes from the anti-trust folks, tends to have an irrational slant to it. There are a number of excellent newsletters and websites but noone has enough of a following to create depth and without depth gold juniors might as well be on the pink sheets. There is also (I'm thinking of GATA) this crusade mentality that there is a mission to accomplish-damn the analysis.
Due to the smallness of the gold sector and the corresponding juniors, timing is very important to this sector, yet the analysis seems to lack a level of predictability. While you might get away with not pricing 2004 oil in the huge energy sector, at this advanced stage in the game, with most TA not being able to strip out the currency effects of the USD in the rise in POG, it gives me the sense that this market will have a hard time gaining traction if it has lost many retail investors who thought that many other countries besides Americans might be increasingly buying gold too (Oops, did we forget to tell you, they're not). "Sayonara gold newbie".
Personally my portfolio is 90% of where it was mid-October but I think I understand what goes throught the mind of many retail investors when they look at the action of last week. Why not wait until a) the institutions wake up or b) majors turn acquisitive or c) institutions and individuals show positive cashflows. The average unaccredited retail investor doesn't have deep enough pockets to pay salaries waiting for the timing to be right for liquidity events when who knows how long it will take.
David |
