THE LAST SELLER

Will this terrible, dark season ever end? That is what we all continue to depressingly wonder.

It has been so long since our juniors and exploration companies have risen for any real extended time. I was trying to think of some kind of relative comparison. All that I could come up with is to compare it to a chronic bodily pain such as arthritis. The horrible pain is always with you, but then one day it mysteriously disappears, and amazingly you are free of the pain.

I continue to believe that such a day for the small gold companies is very, very close, and many of us will soon be shocked and in wonder. As we watch the juniors sink like in a Chinese water torture, downtick by downtick, regardless of any positive news, I believe that we are witnessing the conclusion of a frustrating, extended correction.

Contrary to accepted wisdom, stocks bottom out not with a bang but with the proverbial whimper. They come when the last depressed seller cleans out his stock holdings, no longer able to wait it out because it has become too painful to endure.

This behavior is explainable when you understand how tops are completed. Tops are usually made in a burst of euphoria and greed, accompanied by enormous volume and universal acceptance. Even the stubbornly anti-gold bashers threw in the towel and proclaim that they see “it” and were now gold believers. They are the reverse of the last seller. They become the last converted bulls. There are no more buyers to be found, and then the decline begins.

But bottoms in a great bull market, such as what we have now been in, behave differently. Usually, the volume dries up, and because the juniors are illiquid, a small amount of selling has a disproportionate effect. A 60 cent stock can move down 25% on a 100,000 share day. Or a 25 cent stock might drop on 5,000 shares. I would estimate that the average trading volume today has shrunk to about 20-30% percent of what they were a year or two ago. And what is worse because there is so much irrational pessimism, stocks can decline almost daily with an up day nary in view.

It might hard to recall but a few years ago, ECU Silver sold for about a quarter with an average daily volume of under 100,000. But by the time it crossed $3, ECU commonly was trading over 1 million shares. But as it has receded, the volume has again dried up as the last seller licks his wounds and exits.

Unless a junior has a compelling story or discovery, you will find ECUs littered everywhere. Companies with proven reserves that might justify a price 2 or 4 times higher are languishing as the last seller continues to liquidate his dwindling holdings. There are dozens if not hundreds of exploration companies selling as though the next announcement will be bankruptcy. But that is how the gold companies looked back at the beginning in 2001 before many of them began to shoot up. Go look up the charts of Goldcorp and Agnico Eagle back at that time. In November 2000 you could have bought GG at $2.50 and AEM at $5. I think that most of us would take a 1,400 gain even with the sharp corrections.

The fundamentals for an historic bull market are not only still in place but they are much more powerful than they were back in 2001-2002 when the gold stocks began their lift off. Gold is up almost 400%; reserves continue to plunge; production is down dramatically; the rate of central bank sales has dropped sharply. And most importantly our assumptions of the world's financial situation has been proven correct. The hypothesis that the dike must eventually leak is happening before our eyes. Today, there is no way out now of the structural problems but to print more and more paper. We face a indefinite future of constant depreciating currencies against the stability of the world’s historic money, gold. It is illogical to believe that we have reached the top of the move, and yet that is how the exploration companies have behaved. And it is just as logical to conclude that we can never have an elongated bull market without it ending in public participation and massive speculation. I wholly believe that before it is over, the junior gold sector will be the most speculative market the world has ever seen.

Stock bottoms are not announced by a trumpet blast or by a bell. They come unannounced and quietly while all potential buyers are still waiting for lower prices and a noticeable reversal before they will buy. The current environment is quiet, depressed with shares selling at the same ratio to the HUI as they did back in 2001 and at a historic low ratio to the metal. You will find that these correlations come only at major bottoms; but only after the last seller has done his thing. Start to look for some of your leaders in your portfolio to begin to break this long trend, and soon almost all of the gold shares will be joining them. The fun has not yet begun! Chuck ikiecohen@msn.com