We will finish this article viewing several Canadian mining companies that our analysis suggests as severely undervalued with exceptional long term capital gains potential. Let’s discuss several technical and fundamental measures that are solid indications that we are exceptionally undervalued in mining  and particularly in the Junior mining sector.

Time and again, the majority of investors in gold mining stocks lose money. Why? THE PRIMARY REASON IS that they consistently invest AFTER mining stocks have already had substantial price moves up; they rarely ever invest when the mining stocks are languishing at their long term bottoms. Such has been the case for years whether or not we are in a bull market in gold bullion. Yes, that is exactly what I mean, most investors lose consistently! The second reason for lack of investment success is the fact that most investors harbor a strong reluctance to take profits. Most often, they don’t take profits and someone else does. Later it is too late as the top has been made and the correction has commenced.

Like many others, I have been positive on gold stocks for over twelve years. But the sad saga continues. Even if we see my later bullion target of $2100 an ounce, I expect that most investors in mining stocks will lose money. That has been the history of investing in mining stocks over the last thirty years. But if an investor addresses the overall situation and does his or her analysis and can exhibit patience, the potential for enormous profits is there again as the market has now put so many of the mining stocks “on sale”! And so many seem to be truly on sale using such gauges as historical valuations, cycles and technical analysis.

Let’s consider some of the facts that indicate that we are so close to a bottom in many gold stocks and above all the juniors. To begin with, the price of stocks compared to the price of bullion itself is at a level that has been in the past an area of a bottom.

1-Effectively, the stocks are selling at prices analogous to bullion not only selling at between $500 to $900 an ounce but between $350 to $500 an ounce and in many stocks, even less. The stock market is not efficient, one must accept that. And positive market reactions take more time than in the past.

2-Historically, analysts have given companies’ gold in the ground a value reflecting between $30 to $100 an ounce for gold. Today, one can find many companies given values of only around $10 to $15 an ounce for gold in the ground. In our humble opinion, many mining majors and numerous juniors are exceptionally undervalued on this basis. Historically speaking, few-very few investors will take advantage of the incredible undervaluation. It has always been that way.

3-If one looks at the charts of many mining stocks and various gold stock indices, the prices of most of the individual stocks and the indices are now at price levels that are analogous to the previous bottoms going back for decades. Yet, in many cases, if not most cases, the companies have much more in reserves and resources. But the market doesn’t seem to care-for now!

4-Technicals? Look at the gold stock indices and the vast majority of mining stocks and note that the distances below their long term moving averages today are consistent with their bottoms of the past.

5-I believe that James Turk recently pointed out a very revealing point: If we take the XAU Gold Mining Index, we can see that it would take 3 grams of gold to purchase one share of the XAU index today. That is the cheapest level it has ever sold at since its start in 1988. On average, for almost 25 years, it would take approximately 7 grams of gold to purchase one XAU gold share and often more, up to 11 grams. Today, the mining stocks are incredibly cheap.

6-There are fewer market makers at the brokerage houses and banks that accumulate stocks on corrections thus giving stocks solid price support. This is a result of the fact that there is far less research coverage for most mining stocks. There is a great deal of “word of mouth” type information but far too little comprehensive research analysis. This is a severe loss to the markets as volatility has increased dramatically. Watch the volume on declines and you may note that far less selling volume brings a stock down than brought it up on the buy side. Again, the disappearance of market makers truly hurts the markets and the stocks themselves.

7-Just as on the New York Stocks Exchange, the mining stocks volume is dominated by pro traders. At recent glance, over 90% of the volume in junior mining stocks apparently is done by the professional traders. This is not good and tends to destabilize the markets. A market should be 70% and perhaps 30% at most should be traders (pro’s). Successful mining companies want investors as shareholders, not traders!

8-Insider Buying and ownership by officers and directors of the mining companies that we follow for our clients and on the www.montrealanalyst.com and this site is exceptionally positive with heavy buying occurring as these stocks are in their bottoming areas. This can be one of the most positive technical signals for a company. Monitor it closely.

PART TWO OF THIS ARTICLE TO FOLLOW!