Weekly Commentary – September 29, 2007 – Time to Start Dipping Our Toes in the Water

by JDH on September 29, 2007

As Q3 comes to a close, what do I know?

I know it’s time to re-visit my Investment Philosophy. My basic approach is to buy when a stock is ending a consolidation, and perhaps even making a new high, and then to sell even higher. I don’t try to pick the bottom, because I’m not that smart.

This has of course been a difficult strategy over the last few months, as most uranium stocks have been in a downtrend. August 16 was an obvious bottom, and we have had an obvious bounce since then, but does that mean August 16 was a perfect buy point? Perhaps, but perhaps not. For example, check out FRG.TO – Fronteer Development Group Inc.:


Despite the uptick since August 16, Fronteer is still in an obvious downtrend. Until the trend is broken, it’s still going down. However, I like the fact that Fronteer is now above it’s 50 Day Moving Average (50 DMA), and the RSI is not a very high levels, so I think now is the time to put in buy orders at $10 for 50% of my eventual position.

So, to save you the trouble of reading my boring ramblings, here’s what I think:

October will be the month to do a lot of buying, but that does not mean that October 1 will be the exact day to do a lot of buying. The markets have performed well the last few weeks. Uptrends don’t continue every day, day after day, for 100 days in a row with no down ticks. We will have a day or two, probably more, in the next two or three weeks where stocks pause. That’s the time to add to positions.

The best way to add to positions is to decide now what you are willing to pay, and then put in bids today at that price. Some refer to these as “stink bids”, because you are bidding below the current market price. The advantage of a stink bid is that if we have a sudden down day, your bid gets filled, and you own the stock at an attractive price. This strategy works well if you have a real job, and can’t sit and watch your computer screen all day long. You decide what to do, and then let the computer do the rest. (For the record, I have a real job, and can’t sit at the computer screen watching stocks all day).

So why buy only 50% of my eventual position? Because I don’t know if those eventual down-ticks will be severe or mild. If they are severe, I step in and buy more.

So back to the rules:

Rule #1: After a consolidation, place stink bids below market to grab what you want. Gradually accumulate to a fully invested position.

Rule #2: Stick with quality stocks.

I believe that in the initial phase of the bull market, such as we saw in 2005 and 2006, the dart-board approach worked great. Any stock with the word “uranium” in it went up. Now, however, the price of uranium has dropped (see chart on the right hand side of this page) from the $135 level to the $85 level, so a mine that was profitable at $100 may not be profitable now. More importantly, an early stage exploration company with no proven reserves is a lot less valuable.

I have no problem with speculative stocks, but they should be companies where people are, at the very least, actually drilling, not simply staking claims. Being a producer is even better (less upside, but less risk).

The mania phase is not yet upon us, and when it comes, then, and only then, we can return to the dart board approach. For now, let’s stick with the more solid companies.

Rule #3: Diversify.

(Brilliant rule, eh? Diversification is something everyone has recommended for 100 years).

It’s not 2006. I’m not putting most of my portfolio in uranium stocks. I think they will increase in value, but I think gold stocks will increase even more in the next six months. Therefore, I plan to have at least twice as much invested in gold and silver as I have invested in uranium shares, probably more.

Rule #4: Buy gold shares.

The reasoning here is simple. The U.S. economy is in big trouble. Foreclosures are rising. The Canadian dollar is now worth more than the U.S. dollar, which is a bad sign of the health of the U.S. economy. The Fed stopped the bleeding by lowering short term interest rates, but long term rates, which the Fed doesn’t control, are still increasing. The Fed said, in effect

“We want to protect the idiots in the financial industry that made stupid mortgages to people who had no hope of paying them back. They were stupid, so all Americans will bail them out. Americans will pay for it through higher prices on imported goods, but so what. We don’t care about all of those prudent people who manage their finances wisely. We don’t care that long term mortgage rates will increase. We are here to protect the stupid. We don’t care if the dollar crashes. Long live the stupid!”

Foreign investors, unfortunately, aren’t stupid. They can see that the Fed has sacrificed the dollar. They therefore no longer want to hold U.S. assets. That will drive the U.S. dollar down even further. So where do they invest their money?

One place may well be Canadian resource stocks, which is good for my portfolio. The more obvious answer is gold, the ultimate store of value, because governments can’t print gold. Is it time to buy gold now?

gold three month chart

The time to buy gold was August 16, when everyone was selling everything they owned to cover their margin calls. I personally think gold is somewhat over bought at the moment. The RSI is around 76, which is historically high. As I said Last Week:

“The Relative Strength Index is just under 80, a level not seen since the previous top in May, 2006, and we all know what happened from there. I continue to operate under the assumption that the gold market is being manipulated. It was driven up in anticipation of the Fed rate cut,and now that everyone is watching gold again, the cartel, or central bankers, or whomever, will drive it back down to around the $700 level so they can all say “see, gold is irrelevant in today’s modern world.” That’s when we buy, and watch gold run quickly to over $800.”


“To be clear, I believe gold will be the investment story of the next six months, but I still believe that the time to buy will be October or November, not today. I just don’t believe a flagpole formation from these levels will continue.”

Well, we saw a pullback in gold this week, and starting Monday it’s October, so I believe that gold’s time is almost here. I will not be surprised to see a $720 gold price before we see a $750 price, but we are arguing over nickels and dimes, so I will begin to accumulate, using stink bids, starting this week.

What to buy? Here are some thoughts (yes, I’m actually going to give specific recommendations, instead of my usual vague generalities):

First up, IAMGold Corp.:


The stock is still in a down trend, but it is now trading over it’s 50DMA, so the uptrend has begun. The RSI is at a good, if not great level. I like it because it has high leverage, or sensitivity, to the price of gold. It’s Net Asset Value is projected to increase by 18% for every $50 per ounce increase in the long term price of gold, which is the highest of all major gold stocks. Since I think the price of gold is going up, that’s a good thing.

I plan to pick up 25% of my eventual position this week, and buy more on any future weakness.

Note: As far as I know, this is not a Dines or Casey stock, so you’re on your own on this one (which is also a good thing).

IAMGold will not be one of my core holdings. A better choice for that will be Kinross Gold Corp.:


The MFI is still at historically high levels, and obviously the short term down trend is still in place, but I like Kinross because:

  • The RSI has pulled back to a more favorable level of 60 (50 would be better);
  • It’s trading above both it’s 50 and 200 DMA (not a lot of our stocks can say that); and
  • It’s a good, solid, blue chip gold company.

Since I think the price of gold may still ease a bit, I plan to put in a stink bid at $14 for 25% of my eventual holdings.

For higher risk, I like Dynasty Metals & Mining Inc.:

dynasty Metals

This is the only chart I will publish today that is actually in an uptrend. In fact, we will probably see a new multi-year high in the next month or two, which is also great.

This is a riskier stock than Kinross, since they are at the advanced exploration stage, but not yet in production. However, they started trading on the TSX on August 2, which has helped support the price, they have cash, and they are going up. I plan to accumulate 100% of my eventual position this week. I see no point in waiting on this one.

There are lots of other gold stocks I’m keeping my eye on; more to follow in future weeks; I’ll let each of you post your gold stock suggestions in the new Gold and Silver Board on the Buy High Sell Higher Forum.

Rule #5: Buy silver shares.

Silver and gold tend to move together, so if you own gold, you probably want to own silver as well. (See also rule #3, diversify). For many years I have owned SSO.To – Silver Standard Resources, Inc.

silver standard

I still own it, and I still like it. It’s trading in the middle of it’s 50 DMA and it’s 200 DMA, so the uptrend has started. I plan to buy more with stink bids at the $35.50, and see what happens from there, probably for about 50% to 75% of my eventual position (since I already own it).

Rule #6: Uranium is still good.

I have not forgotten uranium. We still need, more nuclear plants will be built, and with the speculators temporarily out of the market (since they had to sell to cover their margin problems back in August), uranium will still show growth for years to come.

MGA.TO – Mega Uranium Ltd. had a big up-tick this week:

mega uranium

It appears the down trend has been broken, and it’s above it’s 50 DMA, but below the 200 DMA. The RSI is getting high, so I’m going to put in a stink bid at $4.30 and see if I get filled, for 25% of my eventual position.

PNP.TO – Pinetree Capital Corp.‘s chart doesn’t look as good, so I’m not buying it, yet:


FRG.TO – Fronteer Development Group Inc.’s chart looks a bit better, so let’s look at it again:

Fronteer Development Group

It’s closer to seeing the downtrend broken, so perhaps a stink bid around $9 is in order, for 25% of the eventual position.

On the Fronteer chart I drew light green vertical lines at the start of October. In 2004 and 2005 Fronteer declined in early October, but in 2006 Fronteer increased by 79% from October 2, 2006 to January 3, 2007, so the normal lower early October seasonality did not apply last year.

DML.TO – Dension Mines Corp. shows a similar pattern:

denison Mines

The down trend appears to be ending, so a stink bid at $10 for 25% of my future holdings makes sense to me.

JNN.TO – JNR Resources Inc. also appears to have turned the corner, so I’ll be accumulating this week, starting with a bid at $2.75

jnr resources

I could show you more charts, but I think you get the point.

Again, to beat a dead horse, I still believe a normal market pattern would be to re-test the August 16 lows. I don’t believe we will get down to those levels, but nothing goes up in a straight line, so I plan to gradually deploy cash over the month of October, with the expectation that November and December will be excellent months (as they traditionally are; just look at the charts).

There were some interesting discussions this week on the Buy High Sell Higher Forum about psychology; we need to look wrong to be right. It appears that everyone believes that August 16 was the low for the year, and they are probably right, but that doesn’t mean it’s clear sailing from here. A gradual redeployment of cash makes sense to me.

As always, thanks for reading. Next week I’ll publish my suggested portfolio, once I figure out what it is. Have a good week.

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