TORONTO () -- The last two months of trading action, particularly in the junior resource market, differ entirely from the norm for this time of year for as long as this particular bull has been around. Indeed, the month of December has been a bright spot in this cycle, with resource stocks always making new highs on strong volume this time of year.
A quick glance at the chart of the TSX Venture Exchange below indicates that we are now nearing the August lows, which, as most readers will recall, felt like the end the world, and which shook out numerous weak hands and fast money momentum players.
The addition of tax loss selling and global economic panic has certainly not helped the situation this time around either. That being said, the picture for commodities still looks great, with gold and oil making new highs and the base metals continuing to boast strong forward curves.
The lack of liquidity and bids in the junior space are a reflection of the institutional mentality that 2007 is over, but the majority is convinced that big money will be stepping back into the sector early next year to take advantage of the same sellers that were lining up desperately towards the end of the summer.
At least Canadian investors can take some comfort in the increase of their global net worth courtesy of the loonie's spectacular performance in this year.
We believe that the U.S. economic treadmill will continue to hang in with the help of strong rate cuts in the 2008 election year. While no one can deny the obvious systemic flaws in the American economy, with many bullets still in the fed's gun, the likelihood is that the inevitable reckoning can continue to be staved off with an aggressive approach to monetary policy.
With that in mind, and despite the likelihood of a broad-based recovery in the resource space, there is no question that this will remain a stock pickers market, as we are still far from a parabolic blow-off in which even pigs will fly amidst a frenzy of exuberance.
Senior gold stocks, as measured by the HUI did fairly well this year, although probably not in that well in relation to the yellow metal itself. The juniors, on the other hand, unless one gets very specific, had a very hard time.
Even popular, well-managed precious metals funds failed to outperform the underlying commodities and several could not even generate a return at all! This is hardly what one would expect given the environment and the number of major new discoveries this year which should have been the tide to lift all boats.
Nevertheless, a bird's eye view of the sector as a whole would lead one to favour the precious metals going into next year, not only on the strength of the commodities and the inflation risk in the economy, but also on account of the innumerable bargains and out of whack valuations.
Moving into the last few trading days of tax loss selling we believe that investors fortunate enough to be sitting on cash would be well advised to deploy into quality precious metal names that have taken a beating and can't find a bid. This course of action should be well rewarded in the short, medium and long run.
