I use the CDNX, the benchmark index for the Canadian Venture exchange which is heavily weighted towards mining exploration issues, as a proxy for Canadian juniors. As you can see by the chart, after violent sell-offs it has repeatedly found support just below the 2400 mark – where we are now. Previous price action, and the fact that we are on or just below the 200-week moving average (orange line), would suggest that we are at an entry point now – for those that have the stomach for it. If we break that support, ouch.

The next chart shows the price of Oil (black line – USO) against Gold (blue line – GLD) against the CDNX. It’s apparent that as oil rises, the CDNX tends to decline and vice versa. (The rationale for this would be that as oil rises, mining costs rise and thus profits fall. As oil falls, costs fall and profits rise).

In the long-term, I am very bullish on oil, as you know. But in the intermediate term, it looks like we may have formed a top. The huge volume and extreme volatility we have seen over the last few weeks are one sign, another is that oil stocks have sold off quite brutally since the beginning of the month, as the next chart of the XLE, which is an ETF representing the major oil producers, shows:

Yesterday the sell-off in oil gathered pace. If we have formed an intermediate-term top in oil, and are about to see a few months of decline, I am looking at a potentially bullish scenario for juniors and we should get a decent rally. We can but hope.

AIM market makers kill their own market

In Monday’s Money Morning I had a go at AIM, in particular at AIM’s market makers. I was very surprised the amount of emails I got all saying, “Good for you,” “Somebody has to tell these people” and the like. A lot of people are clearly deeply frustrated by this market.

We have two examples this week of how the practices of AIM’s market makers kill AIM dead.

Last week I tipped Leyshon (AIM:LRL), a late-stage gold development play in China. Some huge buying came into the stock, the likes of which had not been seen since 2006.

What’s AIM all about? It’s the London Stock Exchange’s international stockmarket for smaller firms ranging from young, venture capital-backed start-ups to well-established, mature organisations looking to expand, says the LSE, and apparently “has been specifically designed with smaller companies in mind.” We repeatedly hear about “the success of AIM,” how companies “continue to flourish” and how it is “hugely popular with investors”.

I think it’s time for a little dose of reality.

Let’s start by looking at a long-term chart – the FTSE AIM All-share index since 1997.

It’s hardly what you’d call a ‘success’. I don’t see companies continuing ‘to flourish’. Shockingly, the index is lower than 11 years ago, despite the fact that there has been plenty of consumer price inflation in between. My crude technical analysis says that now key support around 1000 has been broken, we are on course to retest the 2003 lows below 600, with maybe some resistance en route at 800.

Let’s zoom in and look at a more recent chart.

It’s horrible. The trend is down, down, down – even with all those oil, gas and mining stocks. How can AIM be ‘hugely popular with investors’? Are all investors on the short side – i.e. they aren’t buying this stuff, they’re selling it with the intention of buying back lower down and making their profits that way? There are a few notable exceptions of course but in general, the charts show that if your firm is listed on AIM, the price of your shares is falling.

AIM’s success

So what’s the LSE so happy about? The real success of AIM has been to get a lot of companies to launch their shares on the exchange in an IPO (Initial Public Offering). There are some 1700 or so companies now listed. And it is in the listing (which comes with endless fees) that exchange, the brokers and the advisers earn their money.

Or did earn their money. Today that source of easy money looks to have dried up – new listings have plunged. Look at the Daily Telegraph chart below:

The LSE will no doubt blame this collapse on the credit crunch. And there’s no doubt these are difficult markets, particularly for small caps. But much of the blame also belongs to the market itself.

Stock exchange operators want to companies to list and there’s nothing wrong with that. The problem is with happens next. Once a company has ‘floated’, the exchange, the brokers, the advisers and so on have all made their money. While they might like to see companies thrive, financially it doesn’t matter to them whether the company sinks or swims.

As Charles Breese, founder of Armshare.com, says, the LSE is too intent on simply recruiting new Aim entrants and is not doing enough to stimulate the secondary market, where existing holders are able to sell out and new investors can get involved.

On the exchanges in Canada, if you want to sell a stock, you offer it at a set price. That offer is placed on the exchange and if somebody wants to buy, they can at that level. In short, this is a direct, transparent market. AIM has seen fit to use a different method, the market maker system, with no such transparency. It’s a consequence of this system – and the market makers operating it – that liquidity on the exchange has all but dried up.

Read the full article

Source: What’s Wrong With AIM?

For starters, having called the Federal Reserve’s inflation-fighting bluff last week, gold and silver are looking extremely strong. ‘So what?’ you say. ‘Gold and silver were strong last year and the juniors hardly budged’.

Well, that’s just it. In the great stock market falls of August last year, and January and March of this year, the juniors sold off dramatically and painfully. But last week, as the Dow Jones plummeted towards the gates of hell – with the keeper smiling and jangling his keys – the juniors lost all sympathy with the general indices and moved up.

In other words, it looks as though they might have decoupled. At long last.

Chartists will note that the moving averages of many junior miners are lined up beautifully. Value-driven investors will note the bargain prices, which is why we are starting to see a number of significant moves from seniors into the junior sector, the most recent being a $50m investment from Agnico (NYSE: AEM) into Gold Eagle mines (TSE: GEA).

And news-driven traders will note the huge campaigns, one by Jim Puplava, host of the internet’s leading financial podcast, the other by Jim Sinclair, a veteran gold trader with a huge following, against the practice of naked short-selling which they say is rife among junior miners. (Naked short selling, or naked shorting, is selling a stock short without first borrowing the shares or ensuring that the shares can be borrowed).

After hearing five minutes of Puplava or just skim-reading Sinclair, any sensibly-minded short-seller who values his freedom will be covering his shorts quicker than you can say, ‘Securities and Exchange Commission’.

But the state of the capital markets is such that I wouldn’t be rushing to buy any explorers just yet. Mineral exploration burns cash almost as rapidly as your local council and many are having problems finding funding.

The life cycle of a miner

There is an idealised cycle in mining companies that is beautifully described by Frank Holmes in this now-famous chart.

In the first phase, the exploration phase, a bunch of geologists with beards and picks (the former is not essential) set off for the hills. They drill some holes in the ground. After some months, years – or, as in most cases, never – lo and behold, one of them strikes gold. They drill some more and find more gold in the rock. Eureka! Everyone involved jumps for joy and the stock goes to the moon.

Then reality sets in. “Actually, this thing is going to take four years to bring into production, even with all our modern mining methods. We’ve got to build a road, a mill, shafts, tunnels. How are we going to get power here? What about water? And permits. We’re going to need permits. Lots of permits. And people. We’re going to need lots of them too. Good ones.”

Finally, an accountant speaks up: “It’s going to cost X million pounds”.

“X million pounds?”

“I’m afraid so. Possibly even Y million. And it’s going to take a minimum of three years.”

“‘Oh, no. How are going to keep impatient investors interested all that time?”

The answer is: “You’re not.”

Without exciting newsflow or cashflow, investors quickly lose interest and the stock sells off. But after several years working hard on the project, developing the asset, bringing in roads and power, building the infrastructure, getting the right people in, an analyst perks up. “Hey, you remember that project. It’s not looking so bad after all. They’ll be in production by next year.” “Really?” Gradually, investor interest creeps back and the stock starts to perk up.

And here’s a company that’s at that stage…

One company that is at the beginning of that third phase in the cycle is Leyshon Resources (AIM:LRL). It’s a company I’ve tipped before as a buy below 25p. I’m a shareholder and I’m a fan.

Leyshon is developing a gold asset in China. I don’t need to sell you the China gold story. The country has become the world’s largest gold producer and, after India, the second largest gold consumer. (For more on this, see: Why you should buy this Chinese gold miner).

Leyshon has a market cap of around £50m. Its main asset is in Northern China – Leyshon owns 70% and the Chinese Qiqiha’er Geological Brigade owns 30%. They’ve so far proven up reserves of 1.2 million ounces of gold, 4.5 million ounces of silver and 120,000 tonnes of zinc. These reserves are likely to increase as they explore and develop other ore bodies nearby. They are combining Aussie mining design and expertise with low Chinese operating costs – a production cost of $250 per ounce is predicted.