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Sell Gold Shares in May and Walk Away?

Commodities / Gold & Silver Stocks May 12, 2008 - 04:57 PM GMT

By: John_Lee

Commodities

Best Financial Markets Analysis ArticleHere we are in May, and everyone asks the question, is it time to sell and walk way? Well that depends what you are holding. This article focuses on timing in regard to the junior resource mining equities, for which we use the S&P/TSX Ventures Composite Index as a proxy.

Resource Junior Sector Roller Coaster


Over half of our fund's portfolio of 50+ junior issues are trading 50% below their peaks, and I suspect many other junior resource investors are in the same boat. Indeed, despite oil and gold trading at all time record highs, the TSX Ventures Composite Index (“Ventures Index”) is trading near its 2 year low. Investing in juniors in the past 2 years has not been for the faint-of-heart and the Ventures Index has made several round-trips between 3,300 and 2,500, highlighted by a stunning and record 33% drop last August.

Good fundamentals of underlying commodities

I have been hearing oil bears talking of a big correction since oil was $40. While I can't tell you where oil is going, the chance of it ever going below $100 is diminishing rapidly by the day, as the chart indicates strong support at 200 DMA (day moving average), which is $95 and rising.

Gold has been a lagger relative to oil. Gold price is currently sitting at $880/oz and the chart indicates good support at $850, its 1980 high and support at its 200 DMA of $830, which continues to rise. We project the next leg up for gold later this year will be to take out $1,000/oz with ease.

 

Junior Shares: Buy or Sell?

Below we show the chart of the Ventures Index divided by gold.

This ratio indicates the relative value of junior mining shares compared to the price of gold.

As the chart indicated, resource equity investors did well by selling in April of 2002, 2004, 2005, 2006 and 2007 (red circles).  Is selling resource equities the right move again in Spring 2008?

One might think so; however, this chart is sitting at 7 year low since the bull began in 2001 and it is a hard case to argue against investing in the Ventures Index if you don't see gold and oil staging a spectacular 30%+ crash.  Another way to put it: I see the risk of getting in the Ventures index as very low unless oil and gold crash 30% in the next 2 months.

Technically, as we saw before, The Ventures Index is currently trading at 2,500, lurking right beneath its 50 DMA. I track dozens on dozens of junior issues and many are staging similar breakout patterns by Knight Resources (KNP.V) and Independent Nickel Corp (INI.TO) below.


On April 8, I published an article titled “The start of the run for gold (shares)” http://www.goldmau.com/content/contributors/lee_john/08-04-09.php
From that article:
“It makes no sense that the American mortgage crisis is impacting Canadian gold and resource juniors. One can now margin at 5% to buy oil trusts paying 15% dividend and gold juniors for less than $10/oz in the ground. I am confident the situation will reverse, offset not by higher interest rates but by higher junior stock prices.

Within two months and as soon as we hit the bottom of interest rates, I expect all the hoarded money to spill out looking for a new home as it simply does not pay to park money earning 2% with real inflation running at double digits.­-John Lee, April 9 2008

Now a month and another interest cut later, we are indeed seeing revival of the Ventures Index and I expect it to break out of 2,500 level to test 200 DMA of 2,750 shortly.

 

We manage a gold fund and have written much about gold and currencies at www.goldmau.com I invite you to read up.

John Lee, CFA
johnlee@maucapital.com

http://www.goldmau.com

John Lee is a portfolio manager at Mau Capital Management. He is a CFA charter holder and has degrees in Economics and Engineering from Rice University. He previously studied under Mr. James Turk, a renowned authority on the gold market, and is specialized in investing in junior gold and resource companies. Mr. Lee's articles are frequently cited at major resource websites and a esteemed speaker at several major resource conferences.

John Lee Archive

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