Under normal conditions these tiny companies are driven by the price of gold. After the yellow metal and its producers enter uptrends, the explorers eventually follow them with larger percentage gains. Similarly, gold declines, or even periods of a stagnating gold price, usher in a time for these small companies where at best their prices erode. Or, at worst, they experience waterfall collapses. It is as though no sooner than the soaring gold impetus is removed, that they quickly lose steam and fall back to earth.

I have increasingly pondered the thought during the past month, that could this time possibly be different? Whenever I contemplated this topic my thoughts went to the possible reasons why these emerging companies have remained so resistant to decline. This, in the face of obvious weakness in both gold and the major gold producer stocks.

I purchased my first gold stock in1972, and began speculating in exploration shares in the mid-1970's. Since that era I cannot recall a precedence when six weeks after the eternal metal entered a correction, that these small companies continued to attracted so great a number of active buyers.

Upward momentum always evaporated within a few weeks of gold entering a correction! By this stage in a down-turn they usually experienced ongoing across the board mark-downs after the buyers went on strike.

During periods of weakness since gold’s1999 Bull Market inception, even spectacular drill results or major acquisitions have but briefly attracted investors to the reporting company’s stock. Then, no sooner than its initial price spike abated, the fortunate stock would be inundated with selling. This would arise from those who needed money and were offered a bid to hit. They would then join the other juniors that were trending ever downward in price. In fact, they often greatly suffered as the short sellers continued to pound their stock until the last bidders were routed. This is indeed a first for their Bull Market.

Numerous thoughts have consumed me during the past month regarding the reasons behind the exploration sector’s unparalleled strength. I discussed in my recent article, The Resource Market’s Transformation, that more investors have begun to focus on these stocks. I stated that an increasing number of individuals now harbor the expectation that some of them will develop market capitalizations comparable with those of the major or secondary producers.

Is it an overflow of this enthusiasm that has continued to attract capital to this market? In this case has greed overtaken their better judgment and driven investors to continue to throw capital at these shares? But, when the climactic vestige of profit lust subsides in the final investor’s bosom, will the last bids be withdrawn, thereby removing the floor that has to date supported them? Will they then suffer an onslaught of selling that finally produces broad price reductions as I have always witnessed in the past?

On a positive note, could the juniors be signaling that the gold correction is destined to be shallow and short? Or, could we have truly entered a new era for this stock sector? Will they now act in a stand alone fashion with a new following of determined investors influencing their shares with little or no regard for the movement of gold? If either of these latter conditions is true it would indeed be unprecedented!

The real answers will become obvious at a later date. However, what I do know is that they are presently exuding outstanding relative strength that has kept a number of companies within striking distance of their cyclical high points. In fact, as a group the companies that I follow have not fared far worse than their producing counterparts. Impressively, those companies that report either important acquisitions or exploration results continue to be rewarded with far higher share prices.

I made some comments a few weeks ago in the March issue of Financial Insights, when gold was trading at $558 and the HUI was at 320, that I would like to share. I stated, “...be prepared for gold to test lower levels before it again moves substantially higher in price. While I doubt that the $500 area will be tested, $525 is not out of the question”.

In the same Letter one of my statements has already been proven wrong when I noted that, “The 295-300 zone (of the HUI) should offer strong resistance to any decline”. The HUI broke below 295 in a heartbeat. However I also wrote, and remain of the belief that, “there is an outside possibility that the 240-260 zone may be attacked, but I deem this quite remote. Even if this area is struck it will not jeopardize their Bull Market”.

If gold and the HUI are destined to extend their present corrections in time and/or depth, I believe that the likely reason for continued exploration sector strength can only be caused by a change in the psychology of those who invest in this tiny stock segment. Further, if I am correct, this indicates that resource stock investors have lost much of their fear of lower gold prices, and are now confident that the $500 range has become a long-term support for the eternal metal. Now they await the substantial profits that they believe will be bestowed upon them when the next company “pulls a hole”, and investors drive its stock towards the moon.

There is anecdotal evidence that the above theory is correct. The large majority of companies that I follow in Financial Insights continue to attract bidders whenever stock is offered on the market. This indicates that there are numerous buyers who are waiting in the wings vying for the limited supply of stock that is sold. Further, large sell orders are rarely encountered. This suggests that the resource funds are maintaining their positions if not adding to them. Additionally, a number of generalist funds are beginning to take their early positions in the junior stocks. This market smacks of accumulation! I believe that it is this new mind-set that keeps investors buying and supporting these nascent companies, during a time-frame when heretofore they would have gone begging for buyers.

Again, and of utmost importance is the fact that investors are continuing to purchase these highly speculative shares long after gold and the major companies entered a down-phase. This indicates to me that going forward in their Bull Market, companies that either report important acquisitions or better yet exceptional drill hole results will be richly rewarded.

This will be by the new breed of investors. They will now count their future profits using limited information, and will project enormous stock valuations for any fortunate exploration company that gives them nothing more than a fleeting “sniff” of success. All that they will need is a good reason to become avid and aggressive buyers, and I am confident that they will be given ample opportunity to do so.

This is what I believe the surprising strength in the junior mineral exploration companies is telling those who will listen. If this condition persists, the next gold up-wave should make earlier profits in these companies pale by comparison.

CAVEAT

I expect to have positions in many of the stocks that I discuss in these letters, and I will always disclose them to you. In essence, I will be putting my money where my mouth is! If this troubles you please avoid those companies that I own! I will attempt wherever possible, to offer stocks that I believe will allow my subscribers to participate without unduly affecting the stock price. It is my desire for my subscribers to purchase their stock as cheaply as possible. I would also suggest to beginning purchasers of these stocks, the following: always place limit orders when making purchases. If you don't, you run the risk of paying too much because you may inadvertently and unnecessarily raise the price. It may take a little patience, but in the long run you will save yourself a significant sum of money. In order to have a chance for success in this market, you must spread your risk among several companies. To that end, you should divide your available risk money into equal increments. These are all speculations! Never invest any money in these stocks that you could not afford to lose all of.