What Makes Us Different

Our passion is uncovering well-pedigreed, early-stage, small-cap growth opportunities with limited downside. Our objective is to position ourselves in a timely manner through a combination of strong fundamental skills and proven technical analysis. Investing is not a game of logic. It is a well-known legend that scientists, doctors and lawyers, logical people with education and occasional intelligence, often do worse in the stock market than dart throwers and coin flippers.

That’s because the stock market is a challenge in understanding market (mass) psychology, and to anticipate it for profit. This requires a high degree of contrarian thinking, and a lot less linear logic. While this equally applies to short term trading, we use our understanding of this for positioning early into the bigger (secular) cycle, and to take advantage of the intermediate and primary waves.

Back in 2001 we wrote that we were finally turning up out of a 20+ year bear market, that the U.S. dollar was entering a bear market, and it was time to set up for the biggest commodity boom the world has ever seen… copper… gold… silver… nickel… oil… uranium… across the board. We saw it as a safe bet given the evidence at hand.

Fast forward to today, and we still have some ways to go, thanks to the world-wide central banks’ efforts to avoid the “Kondratieff winter” of debt deleveraging and the pain associated with the return to fiscal discipline. Well-chosen resources will prosper, and gold will remain the only accessible and liquid alternative to paper currencies for most of the world. The artificially low interest rate environment will compound and prolong the process, but also the opportunities.

Commodity and precious metals markets have recently declined. This is normal and healthy behavior, but admittedly uncomfortable for most market participants. Readers my age remember the ’70s gold bull market, where gold advanced from $35 to $850 per ounce – but declined by 50% right in the middle of that run. A 50% decline is a painful event, particularly for those on margin, but at the bottom of that retrenchment gold was still up threefold from its $35 low, and went on to increase eightfold once the bull market resumed. Cyclical retrenchments are a normal and healthy feature of a secular bull market.

All the reasons for the gold market’s rise remain intact. Can sovereign debts be serviced or unfunded obligations be met any better than last year? Are insolvent banks any healthier? Does adding trillions of unbacked dollars, euros, yen and renminbi to the pile have no consequences? Serious investors need to get comfortable with volatility, and make it their friend, because these are generational events that need to run their course.

When irrationally exuberant expectations give way to irrationally negative expectations, opportunity is born. A correction started back in April 2011. Markets are now a lot less expensive than they were, and this is good news for buyers. Markets do work! Expensive markets collapse of their own weight; cheap markets rise as greed overwhelms fear. Many resource equities have gone down, even trading below cash value, but nothing adds to share value like discovery. Just take a look at some of our previous larger winners at the bottom of this page. 50 and 100-baggers do happen, and not just to other people!

Large intermediate and major mining companies constantly need new economic projects in order to continue. Every day they produce resources, their inventory gets smaller. The twenty-year bear market in gold equities that ended in 2001 severely constrained these companies’ ability to explore, so now they must acquire. Thanks to higher prices and improved corporate cash-generating capabilities, they can afford to both acquire other companies as well as develop the projects they acquire. They can afford to acquire each other, too, eliminating duplicate expenditures and enhancing shareholders’ returns.

Be a contrarian. Markets work. To buy low and sell high you have to position when everyone else is afraid, or at least disinterested. Well-selected, fundamentally compelling issues with strong leadership and access to capital can make you fabulously wealthy. Buying them ahead of the crowd takes courage, but takes a lot of the risk away!

And make sure you stay out of debt to avoid becoming the “weak hands” that ultimately sell out to the strong, at the wrong time!

“Deficit spending is simply a scheme for the ‘hidden’ confiscation of wealth.
Gold stands in the way of this insidious process. It stands as a protector of property rights.”

        – Alan Greenspan, Gold and Economic Freedom (1968)

This Week’s Featured Chart

Editor’s comments (sent Sat. Apr 28, 2012 6:05 am pst): PMI became our largest single portfolio holding since we added 1.65 million shares last October through late December during tax-loss selling season, mostly at around a dime. After a stellar move to $0.385 in early Feb we’ve endured a long 12-week correction. We may have finally hammered out a bottom April 16-23 with a series of identical lows at $0.215 as per the daily chart sent out with our April 24 comments.

Today we’re presenting a unique perspective to help refresh everyone’s anticipation level with PMI while awaiting some fundamental news – maybe that one of the two drills has arrived on site and are turning. With $64 million in the bank, Shell paying for some of their deepest wells (at a cost of at least $54 million), this has the potential to become our next Bankers Petroleum or Urasia Energy (both ultimately 15 to 20-baggers).

We often look to Point and figure (P&F) charts for our longer term holdings. It is an amazingly useful charting technique used to predict target prices.

First, a quick primer in what we’re talking about here. P&F charting is unique in that it does not plot price against time as all other techniques do. Instead it plots price against changes in direction by plotting a column of X’s as the price rises and a column of O’s as the price falls. Each box is assigned with a value (eg: 2 cents, 10 cents, 20 cents) … called ‘box size’. The vertical y-axis is for price whereas the horizontal x-axis is for the number of reversals. The number of boxes required to change column is known as reversal size (it is usually 3 boxes although any other numbers are possible). Reversal refers to the process of changing from a column of X’s to O’s or O’s to X’s. That means, P&F charts will not change direction (ie: from a column of X’s to a column of O’s or vice versa) unless the price moves more than 3 boxes (or unit of price) in the opposite direction. Therefore, there can be no fewer than three boxes in a column.

P&F charts do not take time and volume into consideration. It is a pure price charting method that reflects uncontaminated supply and demand. Passage of time and volume has no impact on the chart.

The technique is over 100 years old. “Hoyle” was the first to write about it in his 1898 book, “The Game in Wall Street”. Richard Wyckoff  described the technique with charts in his 1910 classic, “Studies in Tape Reading”. The first manual dedicated to P&F was written by Victor Devilliers in 1933. A detailed history and explanation of the technique can be found in Jeremy du Plessis’ ‘The Definitive Guide to Point and Figure’ which we have personally read several times. P&F charting is designed for long-term investors and has little value for the short-term trader.

The technique evolved from a price recording system used on the trading floors, to become a charting method. Traders kept track of prices by writing them down in columns. They noticed patterns in their price record and started referring to them first as ‘fluctuation charts’ and then as ‘figure charts’. They started using X’s instead of numbers and these charts became known as ‘point charts’. Traders used both point charts and figure charts together and referred to them as their point and figure charts, which is where the name point and figure likely came from.

By using point and figure charting to identify overall price trends, technical investors can take positions that have a strong probability of profiting. What is particularly appealing to us is that they are often so amazingly accurate at predicting price targets through a technique called horizontal and vertical “counting” – which we’re not going to explain here.

What we do want to share with you is the last 4 targets this technique gave us for PMI, and a 5^th target that is being projected right now. While price projections are relatively easy to make once you know the rules, what is not given to us is their timing. So here is our P&F chart on PMI, using a 1-cent box and 3-cent reversal size (due to its low price). We portray the historical  and most current vertical count projections from all the obvious key reversals of trend using the number of boxes x the box size x the reversal size, and add or subtract from the previous column’s extreme low or high for the projected target high or low, respectively. Obviously the technique has been amazingly accurate – almost exact! We can only hope that the current price projection comes close, as it would surely make our year!

Winners Gallery

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