This Week’s Commentary – October 27, 2007 – I Love It When A Plan Comes Together

by JDH on October 27, 2007

hannibalsmith.jpg The cigar chomping leader of the A-Team was forever “on the jazz” (meaning he loved the adrenaline of action). He was named after the Carthaginian general who almost destroyed the Roman Empire 2200 years ago. Like his namesake, Hannibal is a master tactician, but his plans never quite turned out as they were supposed to.  

According to Amy Allen, “Hannibal’s plans never work like they’re supposed to, they just work”. He was man the Team revolved around, and after every successful victory he would utter his infamous catchphrase, “I just love it when a plan comes together!”.

I used to love watching the A-Team, and I too “love it when a plan comes together”, like it did this week.

For weeks, in these electronic pages, I have described my plan:

First, I believe we are moving into the historically very strong November-December period for resource stocks, so by November 1 I want to be close to fully invested in uranium, gold, silver and energy stocks. So, over the last two weeks, I have been deploying cash, so that now I am only 13% in cash, as compared to about 80% cash two months ago.

Second, I want to spread the money around, something like this:

Gold – 33.5%

Silver – 26%

Uranium – 30.5%

Other – 10.5% (of which cash is 1.5%)

In other words, basically a third in each of gold, silver, and uranium shares.

Of the uranium shares, the 30.5% is made up of producers (6%), close to production (2%), advanced exploration (7%), and juniors (15.5%). The heavy weighting in juniors obviously increases the risk, but also increases the potential profit.

How have I done so far? Here’s where I am at now:

Gold – 29.1%

Silver – 19.5%

Uranium – 32.8% (Producers 4.0%, Close to Production 2.0%, Advanced Exploration 5.6%, Juniors 21.2%)

Other – 6.2%

Cash – 13.6%

Obviously I am still sitting on more cash than I had planned, but I am moving in the right direction.

Or am I?

I have over-weighted the uranium juniors on the theory that the biggest possible win comes from a new discovery. On good drilling results a stock can double, or more, which is great.

But ask yourself this question: Where are we in the cycle? Take a look at the chart of the price of uranium on the right hand side of this page. The price of uranium peaked back in the summer, and has since fallen to approximately the levels we were at at the start of the year. Obviously we have gone through a long consolidation. For the first time in many months the price of uranium has actually increased. Why?

I assume it’s because the big hedge funds started buying uranium last year, and drove up the price. The nuclear power plants stopped buying when the price got too high; that lack of demand, combined with the credit crunch in the summer forced the hedge funds to dump their uranium, which depressed the price. Now, the nuclear power plants, who actually need uranium to operate, are starting to buy again, and since the hedge funds have limited quantities to sell, the price is starting to recover. Now for the big question:

Who will benefit from this recovery first?

The answer is obvious: the companies that have uranium to sell: the producers.

The uranium stocks in my portfolio were up about 2% this week. But, the producers were up by more than that. UUU.TO – Uranium One Inc. increased by 6.20%, and DML.TO – Denison Mines Corp. increased by over 8%. (And CCO.TO- Cameco Corp., which is not in my portfolio, was up by 11.5%). My only close to production company, PDN.TO – Paladin Resources Ltd., was up almost 7.5%.

The advanced explorers only increased by 1.33%, and two of them were actually down on the week.

TOURNIGAN GOLD CORP – TVC.V up 9.09%

LARAMIDE RESOURCES LTD down 3.71%

MGA.TO – Mega Uranium Ltd. down 1.38%

FRG.TO – Fronteer Development Group up 1.33%

Total Uranium Advanced Exploration: average increase 1.33% on the week.

Many of the uranium juniors were down on the week, with only two up, for a flat week:

HAT.V – Hathor Exploration Limited down 1.22%; CHX.V – Cash Minerals Ltd. down 1.47%; IEC.V – International Enexco Ltd. down 2.93%; PITCHSTONE EXPL LTD, down 2.16%; TXM.V – Triex Minerals Corp. down 1.79%; URC.V – Uracan Resources Ltd. up 4.29%, and JNR RESOURCES INC up 6.38%

Total Uranium Juniors: up 0.16% on the week.

What does this all mean? It probably means that at as the big investors return to the uranium sector, they will start by returning to the big producers. Once they have made their profits on the big guys, then, and only then, will they start to pick up the juniors. Of course if we start having some merger and acquisition activity, which we have not yet had, the juniors could start jumping sooner rather than later.

Speaking of Cameco, it obviously had a big gain this week, due in part to it’s announcement that a resolution of the problems at Port Hope is near.

cameco

Obviously the time to buy Cameco, as with everything else, was back at the end of August. On the plus side, Cameco has broken through the $47.50 resistance level, which was the September peak, and is now trading above it’s 200 Day Moving Average for the first time since July. Those are good signs. The RSI is looking a bit toppy, however, so the logical move would be to buy on pullbacks, and not chase it. At the moment I have no plans to start buying, but I will watch it, since it will probably be the big gains that have the best moves in early November.

Gold and Silver

An analysis of the gains in our gold and silver stocks reveals a similar result: the big guys were up a lot more than the little guys:

K.TO – Kinross Gold Corp was up 8.20%, and G.TO – Goldcorp Inc. was up 4.28% on the week.

On the silver side, SLW.TO – Silver Wheaton Corp. was up over 7%, and SSO.TO – Silver Standard Resources Inc. was up over 5%.

However, here’s the interesting point: my two biggest gainers in the suggested portfolio this week were XAU.V – AuEx Ventures Inc., up over 22%, and BVG.V – Bravo Venture Group Inc., up almost 11%. (I’m sorry to say I have not yet purchased AuEx Ventures, since it looked toppy to me; I guess I missed the boat on that one, but I don’t plan to chase it). So what does this prove? It proves that the biggest potential gains are from the smaller companies, but at this stage of the cycle, as everyone is moving back into the resource stocks after the August correction, the big players will probably jump before the little ones.

Therefore I plan to ponder whether or not I need to increase the allocation of big companies, and reduce my junior allocation, at least for the next few weeks, to try to ride the wave.

So, like Hannibal Smith, the plan is coming together, although not exactly as planned. I had hoped to pick up a lot of stocks at my stink bid levels. For some, I have. For others, I have paid more than I had hoped. However, I see no point is waiting for the perfect buying opportunity. We are moving in to a strong time of year, and to profit, you must be invested. I will therefore continue to deploy my remaining cash over the next week or so, on the assumption that my plan may not work exactly as expected, but it will work.

I have one final reason why I believe November will be a good month. Traffic on the Buy High Sell Higher Forum peaked in August and September, and has been declining ever since. This means we are all getting bored, and focusing our attention on other matters. That indifference sounds to me like the perfect back drop for a renewed push upwards, since the markets only go up when we least expect it.

As always, thanks for reading, and, if you are not feeling bored and indifferent, feel free to share your thoughts on the Buy High Sell Higher Forum.

P.S. Yes, Mr. Dines issued his newsletter on Friday, which I received on time; good job! He is still positive on uranium. I particularly liked this quote: “during our regular poring over many chart histories, we notice how frequently uranium-mining stocks are now approximately where they were at the beginning of this year….” In other words, you haven’t made any money this year on your uranium stocks!

I don’t blame Mr. Dines for the drop in uranium stocks. None of us anticipated the credit crunch’s impact on the uranium sector. However, it is nice to see him finally admit that no money has been made this year!

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