Prices as of: October 1, 1998

Gold: $296 Silver: $5.82 Oil: $16.13 DJIA: 7842

30-yr Bond: 4.95% Nikkei: 13406 Yen: US$0.0073 136.66/$ Canadian $: US$0.65 1.53/$

This Month

We're just a matter of weeks past the moment of maximum pessimism in the junior resource markets. And we're only a couple of months past the moment of maximum optimism in the broader markets. Speculating is all a matter of mass psychology. Now that the trend has decisively turned in both arenas, it's time to get into the one, and out of the other, if you haven't already done so. Make the trend your friend.

One tip-off I had to the top of the resource market was when I'd just idly mention a stock here, it would be overwhelmed with a flood of buying. Now I can do a feature article on a great company and nobody cares. Another tip-off to the top, back in 96, was that a lot of advisors, who know absolutely nothing about mining except that the stocks had gone up 10 to 1 in the previous cycle, were now recommending them; it's always that way, too. Where are those guys now? On the other hand, a masseuse in Aspen was telling me in August about how she'd put the proceeds from the sale of her house into mutual funds. It's always that way; people are fearless at the top of a mania, and scared silly at the bottom, when it should be just the opposite.

This issue is devoted to junior mining stocks. I was going to append the articles on Western Pinnacle and Pan American to the one on Russia in the July issue, but there were space constraints. I also had reservations about drawing your attention to any specific stocks when the situation in Russia was just starting to unravel. It's obvious to me that the place is going to come unglued, but that eventuality is now adequately (I hope) reflected in the price of the stocks in question.

Junior Gold Quarterly Review

This feature on these volatile junior stocks appears quarterly (Sep, Dec, Mar, Jun).

I consider all these companies "buys" based on their fundamentals. And not just in relative terms, as has been the case since my sell advice in May 1996, but now in absolute terms. Last December I stated that gold and the mining stocks had bottomed. And I put it in bold caps, so that there'd be no mistake about the call. Gold has been stable, and that was a correct call. It was also correct on the stocks-but only for a while. They went up about 50%, but it's been all down hill for the shares since July. It's odd, but the mood of the market isn't as black now as it was then, even though the mining stocks are off another 50%. Most experienced players (correctly) attribute the state of the market to a combination of tax-loss selling, and funds cleaning out losers for cosmetic purposes. That will end by January.

There's no question that tax-loss selling has been the biggest factor in taking the resource stocks down to these levels. There have been nothing but losses in the resource sector over the last year, while many people still have profits in stocks, bonds, or property; losers, therefore, are dumped mercilessly. And there may be even more tax-loss selling in the last quarter. But when stocks are going for less than cash, and the management, databases, and properties are free, there's going to be a lot of bargain hunting to offset it. The market is off about 95% from its previous peak. THIS IS THE TIME TO BACK UP THE TRUCK. If I could call your broker for you, I would. I started buying too early (i.e., last December), but I'm going to "double down" by year-end. What we're looking at is an exceedingly rare opportunity to make a real killing.

These stocks are washed out, and at a historic bottom. But with gold at less than $300, relatively few of the world's mines even show positive cash flow. After amortizing exploration, acquisition, and capital expenses, almost none are profitable. If you believe the way to make money is to buy when prices are low and panic rules, then this is your chance to put theory into practice. The catalyst that will take them up is a higher gold price.

NEXT