This is Greg McCoach with a Mining Speculator Hotline for Thursday May 5, 2011.
Inside this Hotline:
- Market Update
- Spotlight on Ethos Capital
- Administrative Note
Market Update
Silver prices have plummeted this week, which in turn have led to a commodities selloff across the board. This activity has puzzled investors who understand the tight supply demand fundamentals of the silver market and why this would affect other commodities as it has.
Here’s my take on what the market is telling us.
First, silver was ripe for profit taking after a very rapid and steep climb to much higher levels. As I say, no market goes up in a straight line and we were due for some consolidation, but I thought we would hold the $40.00 level. To see silver slice through that psychological support was disappointing.
The word however I would use to help subscribers is “RELAX”. Everything is going to be just fine. These are the dip moments I have been talking about where you want to BUY. Silver and gold after a short time will bounce back in big measure. Remember we are going to see volatility and that volatility goes in both directions as the secular bull market in precious metals moves forward. I would expect silver to find a bottom in the next few days and tread water for a bit before ascending on it next volatile leg to even higher highs.
Dan Norcini of JS Mineset had some great comments that I think reflect the true nature of why our market is reacting the way it is. Dan said, “I want to address the silver backwardation issue. Many investors and traders feel that silver should not be dropping in price because of the backwardation structure. They point to this fact as proof that silver is in short supply and demand is phenomenal.
That may be entirely true, I don’t know, but the fact is that when we are dealing with the Comex silver market we are dealing with a paper market. Keep in mind that hedge funds that trade the paper markets do not care about fundamentals. They are pure technicians who rely solely on their computer trading algorithms to make trading decisions. These algorithms are utterly indifferent to the realities in the physical market.
The bottom line is once these algorithms move into a sell mode, the hedge funds will unload until they’ve exhausted their selling, regardless of the physical market structure. Meaning the paper market does not care about the physical market.”
Another factor that has affected our silver market was Wednesday’s CME announcement that they were raising silver margins. Jim Sinclair, who has been through all of this before back in the 70’s and 80’s weighed in on this and said the following:
Margins will continue to rise on the COMEX until it reaches the cash price of silver. This works for the shorts as their hammer on the silver market reduced the equity of low cost positions. The efficacy is short term and made no difference whatsoever in 1980 as the silver market made its highs. What broke silver in 1980 was a unilateral change (novation) of the silver contract which went to "sellers only." Under contract law that is simply not permitted. They got away with a violation in 1980, but the corporate changes in structure at the COMEX that have occurred since 1980 makes the COMEX less able to pull that trick off successfully in 2011.
Silver is simply being silver. Silver did help gold therefore the 25% drop in value has to pressure the gold price.
The USDX is simply having a weak rally off a totally oversold on every internal indicator short side trade. The dollar has no future. The supply wishing to diversify is simply too big to allow any rally to have legs.
I have told you silver is a game. That being said, it is a great game. Certainly as the silver price approached the 1980 high, you might have considered selling 1/3.
The high trade on silver was $54 in 1980. Silver’s round numbers are at $50 and $100. Both will function as such in trading.
After this short play, which had to follow the spike intermediary top, silver will rise as fast as it did again.
In addition, Mr. Sinclair went on to point out what I have been saying is coming with our junior mining shares. This is a major turning point that will begin to heavily favor junior mining shares.
Jim explains in italics below:
The Hedgies are having their way with the gold shares, but logically this is coming to an end. When you can buy companies whose resources are three times the company’s present capitalization, the share is getting unreasonably cheap.
The ratio of GDX versus GDXJ is starting to favor the juniors, which is a major heads up event.
What you have witnessed is not at all shocking. If you traded 1968 to 1980 you would know this is just silver being silver.
Relax. Put a french curve on silver and you will see the bottom change in trend event.
To make truly big money in a volatile market you need to understand what you are doing. Volatility is our friend, it is not our enemy! We are being given a gift to buy silver at discount prices for a brief period of time. For those of you who wanted to buy silver but just didn’t get around to it, here is your chance to buy an oversold dip. Watch for the bottom to come rather soon and pull the trigger.
It is the same with our mining shares. This downside volatility is creating great buying opportunities. How long this will last, particularly now that the summer doldrum months are approaching is hard to guess, but I would say between now and mid-July would offer the best window.
Conservatively, I absolutely believe that silver will be well north of $50 an ounce before the end of the year with gold getting ready to take out $2,000 during this same time frame. Our precious metals mining will take wings as these prices are realized in the market bringing in many new investors to our sector. We know this is coming, and the time frame for it to occur is very close in my opinion.
So relax and feel confident in the positions you take now and over the course of the summer. Things are going to be just fine!
Spotlight on Ethos Capital
Given the current selloff situation there are great opportunities across the board in our market, but Ethos Capital trading near or below $1.00 per share is now a STRONG BUY!
Ethos Capital Corp (Symbols: ECC on the TSX-V, and ETHOF on the OTCBB) www.ethoscapitalcorp.com
ECC has quickly developed into a very strong value proposition with multiple top notch jurisdictions, plenty of cash in the bank, and a top management team with a track record of success. They have a high ranking on our TOP 10 LIST for these reasons and much more.
I can easily see this company trading at $3.00 to $6.00 with any kind of exploration success this summer or beyond. Here’s why:
First, the company is positioned well with cash. Once the current financing is completed (the subscribers to the financing are already booked), ECC will have $20,000,000 in the bank and roughly 40 million shares outstanding. On a fully diluted basis it would be $31,500,000 in the bank and around 51 million shares outstanding.
With this much cash, great share structure and a great exploration team in place, the odds for early or long-term success are in favor of current shareholders. We now have the money to do the work that will be necessary to make a big discovery in one or more jurisdictions.
Second, ECC is the third largest land holder in the emerging White Gold camp within the Yukon Territories. This land is not just moose pasture. This is qualified Shawn Ryan ground that was amongst the earliest claims in the much sought after White Gold exploration area. The ground that has been vended into Ethos from Shawn Ryan has what we are looking for; big structural controls with potential high grade soil samples in the most prospective areas within the White Gold camp. Only Kinross and Kaminak have bigger land positions that Ethos.
During the 2011 summer exploration program, Shawn Ryan’s team will be working for Ethos Capital in collecting 33,000 soil samples from our ground work program. To help you understand just how significant this is, Kaminak only completed roughly 4000 soil samples over the past four years to make its major discovery at the Coffee project. We have a big land package and ECC is going to be very aggressive at doing the kind of work that leads to discovery.
This area in the Yukon is very unique in its exploration methods. The soil samples and geochemistry are the keys to making the big discoveries. They show an exploration company like Ethos where to put their drill holes. This exploration signature is very simple compared with other exploration efforts I see around the world, and I am expecting many new discoveries in the White Gold camp and throughout the Yukon in the coming months and years. This is one of the most exciting times we have seen in the exploration business in decades! And Ethos Capital is smack dab in the middle of it all.
The soil sampling work on the Ethos ground will be underway next month in June.
Third, ECC has the ability to make news year round and will not be negatively affected by the seasonality situation in the Yukon. The company’s Mexican assets are extremely well heeled for a potential big discovery as well. These projects are located within one of the most prominent silver belts in the world and are known to host huge tonnage, very economic mines. ECC will keep our news flow coming year round as work also progresses in Mexico where we already have some initial success with exploration. ECC will be updating us very soon on their projected activities in Mexico that will commence as activity in the Yukon begins to subside later this fall.
Fourth, based on our tight share structure and low market cap (58 million, 51 million fully diluted times $1.14), any exploration success in the Yukon or Mexico will have a “greased lightning” effect on our share price. To help you understand this just look at Kaminak Gold who now has a market cap of roughly 250 million (74 plus million shares fully diluted times the current share price today of $3.40.
Just one solid drill hole for Ethos in the Yukon could easily drive our share price north of $2.00 or more. Even at $3.00 a share our market cap would only be 150 million. ECC represent great value with big upside potential.
What investors need to understand is that things are heating up in the Yukon and work will soon be underway. The current market sell-off is giving us a great opportunity to buy the companies with the best chances for exploration success and Ethos is now listed as a STRONG BUY up to $1.30 a share. Please take advantage of this situation.
You can click on the following link to access the company’s most recent power point presentation for the full details.
That is all for now.
Greg