e Losses Raise Investor Anxiety
Junior resource stocks have had their worst beating in many years. Most are down 50% or more. It is a very difficult time for investors in these stocks. There are many explanations, but whatever the reasons, there are few buyers and many sellers. When good news is released by a company, it becomes a liquidity event and everyone lines up to sell the stock because there are buyers available. Bucking this trend is proving very difficult.
Investors are frightened, resulting in stock lows and fears last seen in the aftermath of the credit crunch of 2008 when many juniors crumbled and collapsed. Many companies are most apprehensive about their future as junior exploration companies rely on repeated visits to the market to raise funding for the next round of explorations, and there is little appetite in the markets these days to invest in any junior company. Company that are short of cash are worried about their future capability to stay in business. Those companies with little cash on hand, are being forced to turn over their properties to larger companies with the alternative being to lose the property entirely.
Out of this Doom and Gloom, There are Opportunities
First consider the illogical behavior of the stock market. Stocks rise or fall with little relationship to value. We have discussed this lack of relationship of stock price to vale many times, and the conclusion is always the same. Those that buy when stocks are low, do well in the market. Those that buy after the market has risen to dizzying heights, and buy because everyone else is buying, lose their shirts.
It is funny how quickly the psyche of investors can change. The same stock, with the same assets, with the same potential, can be worth $10.00 one month and the next month, no-one wants it at $0.10.
Emotions Drive Stock Market Values
Consider in 2008 when stocks fell so violently and so dramatically, that there were almost no buyers for them. Those few who had the intestinal fortitude to buy these beaten down stocks did very well indeed in the years 2009 through 2011.
It was similar to going into your local department store, and seeing all of the merchandise on the shelves marked down to 10% of what it was selling the day before. A major shopping spree took place for those that understood that these cycles always occur. These cycles of emotional desire to buy what is hot, and to sell what is not, are related to the business cycles that we refer to so often.
If you want a bargain, and if you want to buy low, and later sell high, the bargains are now waiting to be plucked. How jealous everyone will be that you had the good luck to buy when prices were so cheap.
Consider Some Facts
Commodity prices remain high and within a normal range of the high that they reached in the last cycle, yet the shares of the junior companies that own the un-mined deposits of these metals in the ground, are severely depressed. There is not a correlation.
There has been no dramatic slowdown anywhere in the world. The US continues to drag itself out of the mire with ever reducing unemployment and ever increasing car sales. Japan teeters near the fiscal cliff in the same manner that it has done for many years now, but the country has survived earthquakes and tsunami’s and still is the 2d or 3rd largest (depends how you calculate) economy in the world. China, in spite of predictions of a great bust, has proven itself to be resilient and if there is a slowdown, demand from the millions of new middle class consumers remains strong.
The US fiscal cliff is a gamesmanship political fight, with the ideologies of the two parties at odds with each other. This is not a fiscal cliff and it will produce no depression. What most people fail to understand is that this type of political infighting has gone on since the birth of the Republic, and this is nothing new. In her biography, “Team Of Rivals: The Political Genius of Abraham Lincoln,” Doris Kearns Goodwin recounts similar bitter politic fighting going to Abraham Lincoln.
The Fiscal Cliff will be remembered with laughter in the same vein that Y2000 is remembered as a humorous anecdote.
Producing Minerals From the Ground
The miners and producers of metals are making near record margins. Costs have moderated a bit, profit margins are high. Miners should be enjoying this success, but instead are mired in this emotion of pessimism.
The very fact that every mine can see at current world prices, all of their output, shows how robust the demand is, and how valuable these junior minors are.
But fear has taken over the TSX Venture and the last time that happened, it was the greatest buying opportunity of our lifetime. So it is now. In 2003, gold traded at $230 per ounze. Today it trades at $1,650 /oz, roughly an 8x increase in price. Yet the stock price of companies that own gold in the ground is dropping.
In 2003, oil traded at $30/bl. Today it trades close to $100/bvl – a 3x increase. Copper traded at less than $1.00 whereas today it trades around $3.00.
The value is there for the picking. This is an opportunity to buy these stocks.
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