The last two junior gold and silver explorer bulls capitulated last week. But at that very moment we saw the best rally in the spot gold price in decades, and the US banned shorting of financial stocks while deciding on a massively inflationary bail-out of its financial sector which also leaves the dollar open to a sharp devaluation this week.
I hope the excellent analysts from Zeal Research and Gold Drivers will take my comments in good part. But both research houses chose to publish gloomy articles on the juniors at the very moment that the market actually turned positive for these beleaguered stocks because the gold price suddenly caught up with economic reality.
Jim Sinclair, the doyenne of gold analysts, was first to spot how the change in sentiment against shorting stocks also might be the turning point for juniors, quite apart from the sensational change in direction for gold itself. As it now emerges the summer fall in gold was a perfect 38.3 per cent Fibonacci retracement from the March high, and prices have now bounced off this level.
This week the US Treasury and Federal Reserve will unveil their $800 billion rescue plan, arguably the most inflationary development in US economic history and certainly comparable to Nixon abandoning the gold peg in the early 70s.
The currency markets are going to see a storm, just like the equity markets did last week. But the direction of the dollar will be downwards. More currency in circulation means devaluation, pure and simple, and markets love a simple one way bet.
Gold has a negative correlation to the US dollar and should bounce decisively back over $1,000 this week, and may never cross that line again. In this context any share linked to gold and silver – and silver may well show its usual precocious volatility and outperform gold on the upside as it has recently done on the downside – will do very well.
That brings us back to the bombed out junior gold explorers, driven to these depths by shorting by hedge funds, much of it illegal naked shorting as Mr. Sinclair has pointed out and campaigned against. Now the shorts are going to start to run for cover.
Hedge funds probably will not wait around for shorting to be made illegal, and if they are sensible the time to exit is indeed now before the losses become too catastrophic. Nothing is going to undermine the hedge fund industry more quickly than an attack on shorting, as if current markets are not challenging enough.
In this environment you will see juniors that are bombed out at 10 cents double, triple or quadruple in a few weeks. That will be a great relief to the many who bought at the higher prices but for anybody seeking an instant profit then the thing to do is obvious.
Peter J. Cooper
