After a fierce first quarter rally from December 2013 lows in gold and gold miners, we’ve been experiencing a fairly severe pull back since mid-March. GDXJ is our benchmark for junior gold stocks and after almost doubling from $28 to $46 between Dec-early March, recently it has pulled back to the mid-high $30’s. This is actually a reasonable pull back after such a big run in such a short period of time. However, my sense is that the bottom in the cyclical bear market that is now 3 years long is a process not an event. Meaning, it’s possible that we see a re test of the December lows this summer or perhaps a higher low that cements the bottom. July is a very regular month where gold and gold shares hit a low for the year before moving into its most seasonal bullish period of September-January. Let’s keep that in mind but look at some longer term data:
In Thirty Years, the XAU never experienced a losing Streak for more than 3 Years (1984 – 2014):
I think it is important to take a step back from time to time and look at a bigger picture. After all, any huge move in securities I’ve been lucky enough to own have taken time to kick into gear and then to develop in stages. I have also been lucky in buying stocks that take off right away but that is not an expectation I want to have regularly. In fact, I have goals and ideas about stocks when I buy them but I generally don’t “expect” anything. I take the same philosophy with people and life circumstances……I do what I can with my part then turn the actual results over to Providence and try and enjoy the ride along the way. In investing, sometimes things take longer than we would like to materialize. We’re in the very late stages of what has been a 3 year brutal bear market for gold equities. Many have given up and many others are frustrated and angry after 3 years of declines in precious metals stocks, all the while the world keeps printing trillions in paper.
Now, investors have been chasing returns in technology and biotech stocks. Even little sector bubbles like Marijuana stocks have seen huge money flow into them at a fever pitch. I do not know if there’s another run to new highs in Mary Jane or Biotech/Tech stocks going forward but this is the exact type of chatter/action I’ve seen before that ultimately ends smoking late comers. In fact, we had this experience in 2011 in gold/silver stocks when they were flying high. It takes discipline to shift our focus to hated and ignored sectors and put money to work when other sectors are flying high. But, I am absolutely convinced the huge money is made by doing exactly that and gold/silver shares represent a contrarian opportunity of a lifetime.
Global Gold Mining Index relative to the Price of Gold, Annual Rate of Change, 1980 – 2013:
Gold miners are very much trading at historically depressed prices relative to the price of gold as per the chart above. The fact is that gold miners with the exception of coal (Cardero) is one of the most hated sectors in the market. It is not a question of if we’ll see a rise it is when, how high, and for how long. What is the message? Stick with gold/gold shares and be an accumulator while the sector carves out its bottom. The longer the weakness lasts the closer we are to a new bull beginning. We’re all tempted to trade and chase the action but in my experience the most success I’ve had is to pick an idea/sector I have conviction in and wait. If you are playing in biotechs and marijuana stocks right now, I would encourage you to at least have trailing stops in place as to limit your downside I will be zeroing in on more specific gold mining plays as we roll into the summer doldrums because I think that may be our last chance to buy certain assets at pennies on the dollar valuations. For now, let’s look at some of our “out of the gold box” stocks that we follow.
I think Zenyatta Ventures (ZEN.V/ZENYF) looks very good on a technical basis. As you can see from the chart above, the stock is trading just above the 200 day moving average, which is a strong support level. The overbought condition from very early April has been worked off nicely so there is now plenty of room for a new rally to materialize. Here are my comments from last week’s premium issue on ZEN:
“Zenyatta Ventures is still quite an exciting story even though it has moved up so much over the past 18 months. I sold a little bit of my trading shares that I recently bought at $2 in the mid $3’s. I will likely buy those shares back this week if I can throw them back on under/at $3(*April 22nd -I have bought back ½ of my shares). $2.90-$2.95 is now strong support and I expect the stock to reverse higher from that level. ZEN is clearly a very volatile stock but I think we will have some serious enthusiasm into/around the release of the PEA (Preliminary Economic Assessment) due out sometime in May.
The economics on this future mine are world class and the PEA will prove that once and for all. I sense ZEN will raise some money in the $4-6 per share range. At those prices, raising $10-15MM will be very nominal dilution and actually a way for ZEN to grease some brokers and institutions that will initiate research and buy more in the open market. I’m still very bullish on Zenyatta and feel it is quite possible the company is bought out this year. A $10 price tag to be acquired is realistic to me. But, remember to “scale out” into strength in the stock and do NOT save your whole position trying to ‘top tick’ out of it! This stock is volatile and maybe they won’t get bought out for whatever reason. I believe they will but no one knows exactly when. So, this is the perfect stock to “be greedy when others are fearful and fearful when others are greedy).
Where do you want to sell some? Decide that now because if you don’t, you won’t sell it when it looks great/strong at a long term or intermediate top. One really simple tool I use to decide when to sell some shares or buy some shares is called the RSI (Relative Strength). If you look at the ZEN chart above, you can see the green small areas at the top right of the chart. It goes green when the RSI goes above 70. I believe it goes red or grey on stockcharts.com when it goes below 30 on the downside. In very simple terms, if RSI gets to 80 or higher, the stock is overbought and due for a breather. If it gets to 20 or lower it is oversold and due for a bounce. It isn’t that cut/dry because stocks/sectors can stay overbought/oversold for quite a while.
However, it is a great simple tool to watch for to exit/enter partial positions. You can notice above in the chart that right after ZEN went green with RSI above 70, shortly after in recent cases it pulled back.”
These comments one week later are all still accurate in my mind. In the premium issue I dug deeper into trading and investor psychology, not to mention new stock ideas. I encourage those of you that enjoy GIL to sign up to the Premium membership which costs peanuts but offers more content and most importantly, new stock picks first (there’s a link to subscribe at the bottom of this letter). I also always send my thoughts on when to start taking profits on our core positions to Elite/Premium members first. Their “skin in the game” is nominal but I truly appreciate that commitment and try to add value uniquely to paying members.
My last comment per above as it pertains to taking profits is that the most important message I can try to pound home over and over is that we have to be disciplined to buy on weakness and sell into strength. Not all at once! Even if you don’t play with a lot of money I think the practice of accumulating in tranches and selling in tranches is wise. Plus, buying when stocks are down, dead, or downright scary are when we get the best prices that we look back on and feel good about. Being fearful when others are greedy and greedy when others are fearful is a great slogan but most people simply can’t or don’t put it into action.
Sadly, I cannot tell you how many emails I get from subscribers that always and only buy stocks when they are running hard. Then, they write me about how they are down 40% but the stock is basically back to where I first recommended it. I think this is such a common problem for individual investors and is the main reason why people lose money. Small resource stocks are speculative and very volatile. We can either cause that to work in our favor or against us. But, that means not getting swept up in emotions. Zenyatta is a good example right now. If you missed the buying opportunity around $2 and are kicking yourself, now would be a good time to reconsider adding. Because the stock has cooled off almost 20% from recent highs NOW is a good time to look at buying, not after it heats up again and looks terrific and everyone is buzzing with excitement about it.
I do believe we’ll see ZEN trade to about $4.50 at least within a few weeks before/after the PEA is published. That should be out in May (my guess) but even if it’s June then there is a good shot ZEN can appreciate nearly 50% into an important piece of news that we know is imminent. Speculators/traders likely want to loosen up and take some profits sometime around the PEA when the stock is trading hot, don’t wait to get excited then and buy at the highs!! Anyways, hopefully you get the message…..I just know that the buying is actually the easy part! It’s knowing when to sell that is the hardest part of investing/trading to me. So, focus on getting the buys correct if you have a habit of chasing stocks then we’ll work on the taking profits part.
Poly Shield Technologies (SHPR)
For new subscribers, our top pick for 2014 is SHPR. In case anyone missed it, last week SHPR signed a contract with Disney Cruise Lines: http://biz.yahoo.com/e/140417/shpr8-k.html
Disney was just a warning shot across the bow so hopefully readers are either nicely positioned or use this as a wakeup call to add shares before it is too late. Below are comments I put out late Friday to Elite members. I haven’t updated the charts to reflect Monday/Tuesday but all said is still relevant and within the channel/triangle referenced.
Onto Poly Shield (SHPR). I am not an advanced technician but I do pay attention to charts. A ‘triangle pattern’ is very common and very easily understood:
SHPR clearly has a symmetrical triangle pattern on the daily chart below and an ascending triangle on the weekly chart below that(longer term view measured in weekly price movements versus daily). The bottom line technically is that there is a pressure build up as the channels you see below become a tighter and tighter trading range. The price will absolutely break out up or down by the time the line intersects in “time”. Usually, the stock decides which way it’s going to go before the apex where the lines meet.
Clearly, we are right at the top of the channel on both charts. Either we’re going to bust out(it won’t take much! A move to $1.08 to $1.10 breaks the trend line) on the upside next week or we hit a short term top today and we will pull back one more time. If we get one more pull back, this time it will very likely be a higher low in the high .80’s-lower .90’s. The longer this triangle forms and gets tighter/tighter, the more powerful the move when it breaks the trend line…..like pulling back a bow and arrow.
The VERY bullish data in our favor is the ascending triangle on the weekly chart. 8 times out of 10 the break out of the triangle is to the same direction as the trend, which on our weekly chart is clearly UP. I will tell you that once SHPR decisively breaks above, say $1.10, and closes above $1.08 or so…..there will be a number of traders that will get a buy signal and buy the stock. I only see a bit of resistance at the previous high at $1.20 to $1.22 but after that we are going $1.50 to $2 pretty fast.
So, whether it’s next week or it goes to the apex in about 30 days, this stock is going to move. We didn’t pop Friday on Disney but the stock held a nice 14-15% pop from Thursday. And, I really think as I’ve gotten many messages today, this deal legitimizes SHPR in many investor’s minds and confidence is building. I keep harping on buying around $1 or lower because I believe once we bust out, the days of buying all day at these prices are probably gone for good. There’s always the possibility that I’m wrong and the triangle breaks lower…..we shall see soon!
The bottom line fundamentally is that there is a storm coming to the maritime industry and we have the best product available to solve a huge problem. This story is just starting to unfold but the upside is truly enormous……
Lastly, I think this summer will truly be an extraordinary time to be scooping up the gold mining stocks that we like. In the meantime, we could see some nice action in ZEN/SHPR and I hope everyone is nicely positioned in both after validation from Disney last week on SHPR and the impending PEA coming soon from Zenyatta. A chart on the next page shows us what gold seasonal action has looked like over the past 30 years.
Lastly pertaining to Premium membership, I just released a new small cap energy stock that has exceptional upside potential. Anyone who signs up to premium status this week will receive information on this new pick immediately. This new idea alone could pay for years if not decades of subscription costs!
All the Best,
Disclaimer: Eric owns shares in Zenyatta and Poly Shield
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