We will start this Market Update with a quick reminder of our previous reports. We have received numerous e-mails from Readers enquiring about our view on the current situation in the market, most of them asking whether we consider the correction in the precious metals over or not. We thank you for your kind words and for the questions, however we regret that we are not able to answer every e-mail personally.
Just as we expected, we have just seen the general stock market (measured by the DJIA) testing the 12500 level. We have also indicated that the whole gold stock sector MAY get lower, perhaps as low as 370 on the HUI Index, BUT that it was just a speculation on our part, and we think it was prudent to make at least long-term purchases right away (that Market Update was sent on May 4-th, with HUI just under the 400 level). Currently we doubt that it will get lower than that, but we will get back to this topic later.
We pointed out that we have bought put options on the SSO (proxy for the general stock market), strike 75, expiry dates May and June this year. We have just sold the June options, and combined profit of this transaction is about 50% of the total invested capital (which was only a couple percent of the total porftolio). Those of you who also bought puts on SSO or any other proxy for the general stock market might consider closing his/her position.
Currenly DJIA is right at the 12500 and we think that this is either the local low or that we may get lower to about 12250 but rebound very sharply. Either way, we think that the general stock market will begin to rally shortly. This is one of the reasons we prefer junior mining companies to the big, senior producers at this time. We have written an essay about the reasoning behind this methodology. You may read it in the Research section Juniors Performance and Timing. As far as the US Dollar is concerned - we have just written a commentary on that topic, which was posted on Kitco. You may find it here.
Taking into account our view on the buck, we expect gold and silver to fall to or below their recent lows. In case of gold the former option seems more probable, and in case of silver the latter.
The way we see it right now, the precious metals stocks may not go as low as we said was possible (370 level). The HUI:Gold ratio held up very strongly along with the recent declines in both gold and the stock market. This gives us a clue that the PM stocks are ready to rise again soon. If gold goes down to $850 and silver drops to or below $16 (which we expect), gold/silver stocks may not go back to their recent lows - 385 on the HUI Index. Should precious metals drop temporarily below their previous lows, then we expect the old HUI low to stop it's current decline. The main point is that in the long term, the risk is to be out of the market, not in it - especially when we are talking about the long term capital. We are probably going to have another buying opportunity within a few days or weeks.
The junior sector is very strong at the moment. Most of the companies we featured in the last report are up significantly. The most important fact is that the company that we sometimes use as the proxy for the whole sector (EDV.TO) is doing great! Not only did the company brake out of it's down trendline, but it did so on a very high volume and now is holding up in spite of declining precious metals prices. If you take a look at the chart of the EDV.TO to the HUI ratio it is clear that now the juniors begin to outperform big gold and silver companies. The breakout occured in late April and it was confirmed in the middle May. We are happy to have featured it to you when it was below 7 CAD. If you do not own this company or have not invested in the junior sector at all, then you might consider making purchases right away or waiting for the precious metals to reach levels mentioned in the earlier part of this Market Update.
As indicated before, we have already taken our positions in the junior sector. If you are consideri ng buying these stocks now, here's a list of juniors that we like at the moment (the one's which we would purchase ourselves if we did not have any yet):
edv.to caa.v egd.v svl.v fur.v msv.to ok.v gpr.to sst.v fr.to fvi.v mag.to mai.to sqi.v
There are very few changes from our last selection. If you already are in the sector, like we do, you should be fine with the stocks we featured in our previous Market Update, but one can also sell the laggards (in our opinion those would be: spm.to, bcm.v, nmb.v) to purchase other stocks from the list. This is exactly what we plan to do - we are going to sell these stocks and buy stocks that will be among the strongest during the fall in the precious metals.
Below is a quote from our previous Market Update on how this list can be used:
Here is the list of junior stocks that we like specifically. The first one is EDV.TO, which serves as a proxy for the whole junior sector, so we think that one can put a couple times more money in this stock than in other individudal stocks from the list, as EDV.TO is 'diversified' itself, by the nature of its business. The rest of the stocks, in our view, can be purchased with equal weights, or with diminishing weights (like we have), since the stocks are written in the order of much we 'like' the particular stock.
Please note that probably the most important aspect of participating in the junior sector is the diversification. You should be fine with other junior companies (for example if you have subscribed to a newsletter with fundamental approach and you believe that stocks selected in that particular newsletter are superior to other juniors) as long as your portfolio is diversified. Sure, you can make a killing if you have one junior that is very successful but in the long term the odds are against you. This is not how big money are made AND preserved in the long term. Please see our essay 'The Universal Investor' for details on this approach.
As far as the speculative capital goes, we have a few ideas for profit in the near term. Before we tell you what they are, please note that this part of the Update is for risk-tolerant and disciplined speculators. If you decide to follow us in these trades, please remember to use only a small part of your porftolio. How small? Definitely not more than our Positions Size Calculator (please see the Tools section for more details) suggests. Even that may be too much for some people. Always ask yourself whether the position is small enough, not to interfere wit h your perception of the situation on the market, should you lose that money. It's better to use too little money, than too much. Consult your financial advisor, if you haven't done so already. Having said that, we will proceed with presenting our ideas for quick transactions.
As (and if) the USDX approaches it's resistance around 74 level we plan to purchase call June and especially July options on stocks from the following list (we also provide you with our preferred strike prices). We expect them to move up rapidly, once USDX stops it's rise (in fact we expect MOS and POT to rise regardless of the move in the USDX):
Gold / Copper:
The stocks from the steel sector: X and MT are pretty specific, as they have advanced very quickly lately, which may indicate that the upswing that we expect to profit on will be quick and that these stocks will retreat just as quick as they reach substantial resistance. We see such resistance on the following levels for these stocks: $200 for X and $110 for MT.
All of the above is just our view on the current market situation and may prove wrong, as nobody can be right each and every time. By registering at our Website, you confirmed that you are interested in our thoughts on the current market situation, so we're sending it to you. Please do your own due diligence before making any investment decisions.
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