Gold Stock Bull

I remember Linux Gold for the spectacular run it had at the end of 2005. After bouncing around in the teens for over a year, the stock suddenly tripled, skyrocketed to over $0.50 in under two months. Linux quickly retreated to $0.35 before making one more stride all the way to $0.54. It has since been in a relatively steady 18-month downtrend that brought the stock price all the way down to $0.14, which has acted as solid support. But in the last two weeks Linux got its legs back and ran from $0.16 to $0.27, where it sits today. That is a 69% two-week gain that is reminiscent of the start of the last explosion that took Linux over $0.50. However, it is worth noting that while recent volume has been above average, it hasn’t spiked nearly as high as it did during the last run.

Just under half of the recent gains came in the few days leading up to their announcement of having acquired an option to purchase a 100% interest in 26 mining claims close to the historic Ester Dome mining camp near Fairbanks, Alaska. The other half of the gains came in the week following the announcement. The owner of the 26 claims says the land was and is the primary source for the majority of Placer Gold that has been mined from Ester Creek and its drainage over many years. Expectations are high for this property, as it is in the middle of the Fairbanks Gold District, one of the more prolific gold areas in North America. Over 10 million ounces of gold have been recovered from placer mining alone.

It was announced on September 9, 2007, a major gold/silver discovery was located on the claims, with a potential strike length of 6,500′, width of 100′ and minimum depth of 100′ of high grade gold and silver values based on the sampling and trenching program completed this year. The area has been re-sampled and results are pending. Drilling is planned on the mineralized zone this year, to confirm gold and silver values on the property.

Linux has other properties in the Granite Mountain region of Alaska, where Teck Cominco, NovaGold and Northern Dynasty have all developed significant gold, copper and zinc projects. NovaGold has identified about 25 million ounces of gold on properties to both sides of Granite Mountain. The world class Pebble (Northern Dynasty) gold-copper-molybdenum porphyry deposit to the south has a 28 million ounce gold and 16.4 billion pound copper inferred mineral resource.

Kinross Gold’s Fort Knox mill, which produces some 400,000 ounces of gold annually, is located within six miles of another one of Linux’s properties - Fish Creek Prospect. Kinross recently shared results of a geophysical survey that identified six gold targets on Linux’s Fish Creek Prospect.

Linux also owns claims in the Bralorne/Lillooet mining division in British Columbia and another 161 square kilometer property in China.

But for all of the excitement over the potential of Linux’s properties, it is thus far just that - potential. Expectations are high, but solid drill results are lacking. And being in close proximity to successful properties does not mean that Linux will necessarily strike gold with their properties. Nor does it prove that the $10.3 million they recently paid for the option to mine near Ester Dome was a good investment. However, expectation alone may drive their stock back towards $0.50 in the coming weeks and if they come out with any significant news or discoveries, we would not be surprised to see the stock hit the $1.00 mark. Investing in Linux is not for the faint of heart, but could provide some incredible returns if the lofty expectations come to fruition. And as gold passes $800, we expect quality junior mining companies to come to life and outperform as they usually do.

Linux is a high risk/high reward speculative play and you should perform you own due diligence before making any investment decisions. The author does not currently own any Linux stock.

Gold had been ripe for the latest $100 advance for quite some time. But this near vertical price increase has many analysts calling gold overbought and predicting a correction in the short-term. So the question on the minds of many gold investors is this: Is gold really overbought and needing a correction or does this upleg have room to run and a likely target of $1,000 by year’s end?

The commercial short position is at an extreme level and this historically precludes a drop in the price of gold. Many analysts also believe the dollar to be oversold and are anticipating a rally in the coming weeks. Conventional wisdom supports the theory that nothing goes up (gold) or down (dollar) indefinitely, but are current conditions for gold really overbought and in need of correcting? Let’s take a look at the history of this gold bull and see what the chart tells us.

As you can see from the chart above, gold’s last major upleg came after a 9-month consolidation period and consisted of two huge (28%) spurts with a mini-consolidation in between. In total, the last upleg increased $280 or 62% over the course of about 8 months. The current upleg has similar characteristics including the fact that is was preceded by a 9-month consolidation and new lows for the dollar. However, the current run has only brought an increase of $100 or 15%. If the last gold upleg is an indication, the current upleg has plenty of room to run. In fact, gold would need to surpass $1,000 before any significant correction could be expected. The percentage price oscillator (PPO) also supports the view that gold has plenty of room to run before reaching historical overbought levels.

Even if we are due for a mini-consolidation as occurred last time, it would not be expected to last more than 2 months and fluctuate 5% in either direction throughout the consolidation period. But before this would occur, gold can be expected to climb towards the $825-$850 range. The consolidation would then be followed by a quick resumption of the bull’s charge to the $1,000 mark. Some have speculated that we are already in the midst of this mini-consolidation, as gold has been bouncing between $750 and $770 for the past two weeks, but we think it is too soon to call.

While the massive spec long position/commercial short position is worthy of concern, it is also worthwhile to point out that these exact conditions were the precursor to the last major upleg in the gold market. Commercial shorts have the deep pockets that typically allow them to get their way, but they were forced to cover back in September of 2005 and we expect they will need to start covering in this scenario as well. The weight of the sinking dollar and magnitude of investment dollars flowing into commodities may be too much for them to overcome. The covering of these short positions could very well be the fuel that helps propel gold to new highs in the coming months. We will be keeping a close eye on the unwinding and take it as a sign to increase our positions.

In summary, as quick and steep as the latest run in gold has been, there is no indication that a correction is coming. A short consolidation might ensue, but if history is any indication, this upleg will take gold to $850 and then towards $1,000 in the coming months. The upside potential significantly outweighs the downside risk at this moment. Those trying to time the market might want to wait for gold to dip back to the $730’s, but they risk missing out on a run towards $850. Our strategy will be to maintain our core positions and look to add on a breakout above $790 or dip to $730. Either way, we feel strongly that gold is on its way to new highs in the coming months and those with positions in quality miners will be rewarded with some serious upside leverage. We will also be looking for silver to catch up with gold and in all likelihood outperform gold in the next upleg. Accordingly, we hold positions in both silver miners and the actual metal.

On Monday, Yamana and Meridian announced that 79,873,250 common shares of Meridian Gold had been validly deposited to Yamana, equating to approximately 78 percent of Meridian’s common shares on a fully diluted basis.

Consequently, all of the conditions to Yamana’s agreement with Northern Orion were met and Yamana’s acquisition of Northern Orion was completed and became effective on October 13, 2007. Northern Orion shareholders will receive 0.543 of a Yamana common share and C$0.001 in cash for each Northern Orion share.

We have long been a fan of Northern Orion (NTO), including it in our list of Top 8 Gold Stocks, although technically they are more of a copper play than gold. We first highlighted Northern Orion back in February of this year, stating:

“NTO has been on a steady decline since May of 2006, forming a descending triangle pattern. This pattern often forecasts a breakout and should be seen as bullish with clear support around $3.75. This support line has been tested three times over the past year and has held every time. Although it is still early to confirm, technical indicators are turning North for both the RSI and MACD, confirming the bullish sentiment.”

Bullish indeed! NTO bounced off support at $3.75 and rocketed all the way to $7.50, doubling in value. Yamana’s offer of .543 shares equates to roughly that amount, as Yamana recently closed at C$13.43 on the TSE.

Congratulations to our readers who went along for part or all of the ride! There are several other takeover targets waiting to be snatched up by the resource-hungry majors. A few that we place high on that list can be found in our October 11th article titled “Newmont Grabs Miramar - Who Is Next Gold Takeover Target?”

As always, good luck and happy investing!