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By Jordan Roy-Byrne, CMT

Yet, there are two things you should note about the large cap gold stocks. First, as a group, over time they notoriously underperform or struggle to outperform gold. Secondly, those stocks are starting to lose out to the juniors. The following chart shows our junior gold index versus the HUI Gold bugs index. As you can see, the juniors are likely to perform better than the large cap gold stocks, which themselves are on the cusp of a historic breakout.

Hence, its time most folks start learning how to invest in the juniors. It can be difficult and risky, but with the right plan in place, it can be extremely rewarding. We wanted to share some of the things we look for.

Timing

As you can see from the chart below, timing is critical. Never chase an exploration company that has already gone vertical. The same should be said for a company just going into production. The best time to buy is in the development or early production phase. Usually that coincides with a basing pattern. If the company has a successful catalyst or news, then the stock will breakout of the basing pattern and make a big move.

Share Structure

This is important for many reasons. First, it tells us how successful the company has been to date. If the company has a lot going for it and only has, say 40 or 60 million shares, then that tells you that management has done on a good job so far. However, if the company has 200 million shares and hasn’t achieved its objective yet, it is a bad sign. Moreover, how will that stock make huge gains quickly with such a large float? Hence, another reason the former scenario is highly favorable.

Financial Health

How is the company financed? Did it have to issue extra shares numerous times before adding value? Is it hugely in debt? Will it need to issue more shares again? Generally speaking, avoid those companies that have to engage in numerous financings without adding significant value. We favor the companies that can raise capital without diluting shareholders or adding significant debt.

Management

Invest in companies whose management teams have a track record. Why go with those who haven’t built a mine or developed a resource? You can perform an ongoing evaluation by looking at the company’s progress relative to the shares outstanding. Again, we want to see progress without management having to significantly dilute existing shareholders.

Political Risk

This is an obvious one. If you are going to speculate on a company with political risk inherent in its projects then make sure you are compensated for taking the risk. In fact, if it is a significant risk, then don’t take the chance unless you are compensated for that risk and the company has home run potential.

Potential

Lastly, realize that you can profitably invest in GDXJ or a great fund like the Tocqueville Gold Fund. Hence, don’t take the risk on a junior only to make 50% or 100%. You can do that with the aforementioned. Remember, that quality juniors can rise 300% or 500%. These are the ones you want to own and not those that may only rise 50% or 100%.

In our premium service, and personal investing, we’ve done quite well because we’ve strictly followed this criteria. Also, our technical acumen is a great help as far as entry and exit points. There are hundreds of junior companies, so finding a handful of outstanding prospects isn’t difficult. It only takes time. If you’d be interested in saving time and learning about some of the companies we’ve zeroed in on, then we invite you to consider a free 14-day trial to our premium service.

Jordan Roy-Byrne, CMT, Jordan@thedailygold.com, http:/www.thedailygold.com/newsletter

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I sent a quick email to my contact in Petaquilla’s IR department this morning to confirm the status of production and also sent him the link of the Panama-Guide.com article indicating production had been suspended.

Here is the reply from PTQ this morning:

We are producing gold at this time and the government is satisfied with all field inspections. Water levels in all storage facilities are at normal levels.

I take this to mean that PTQ is still producing gold and mining operations have NOT been suspended. I would not take many of these articles seriously, as none of them have yet proven to be true.

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• Petaquilla Minerals Update- 6-15-2010
• Petaquilla Minerals Financing Update
• When Will Petaquilla’s Stock Price Rise?
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I don’t usually post questions I get from readers, but since many PTQ investors probably felt somewhat disappointed by the share price reaction to the refinancing news release, I thought I would post my response to this reader’s concerns instead of just replying via email.

Question from GoldStockMania.com Reader:

I have a significant share holding in PTQ and really was somewhat surprised and disappointed at the lack of positive reaction in the shares when the gold lease deal with Deutsche Bank finally broke.  As you said this solidifies the mine’s solvency, but the total lack of buying into this news seemed very strange to me.  I don’t buy into the fact that gold being down today or the recent overall down market conditions was the cause of this weakness.

IMO this news should have moved the shares, but the low volume today and the down share price has me wondering if the Street thinks PTQ got hosed in this deal?

I know there’s other news on the horizon with PTQ,  but I just can’t figure out this news didn’t move the shares.  As cheap as the shares are here I can’t believe this is a sell-the-news event. There has to be something more to it.  Any other thoughts?  Thanks

First of all, congratulations friend for having a significant holding in PTQ. I too have a substantial holding in PTQ, in fact my largest holding is now in PTQ. Having the confidence to buy stocks at bargain basement prices seems to run contrary to the behavior of many investors. Great investors understand the fundamental difference between price and value. PTQ’s price is way too low for a producing gold miner that is currently producing about 6K oz/month and soon to be over 100K oz/year.

This company reminds me of Timmins Gold, whom I first purchased at .41 cents a share and held on through all the ups and downs. I am sitting on an extremely nice profit at this point. There is no reason why PTQ will not experience  a very similar share price appreciation soon. Timmins took a while just like PTQ and displayed extreme weakness just before making major moves up. I bought more shares on their weakness as there were no reasonable justifications for Timmin’s share price drops.

Mark my words, Petaquilla will take off like a rocket when the conditions are right. I will continue to buy on dips as long as the fundamentals for this stock are there.

Why did Petaquilla’s share price not move up on the refinancing news release?

I believe it did not for 4 reasons:

1. The financing is not complete. Only 42 million applied to debt and terms on are okay but not great. ~$30 M still needs to be refinanced.
2. The on going gold and general stock market sell off. Most stocks are being sold off right now.
3. Negative PTQ rumors being spread around.
4. Lack of trust in PTQ’s management and past history of failed execution. This will not be an issue much longer.

When will PTQ’s share price rise?

I believe you will see substantial share price appreciation as PTQ achieves each of the following:

1. PTQ shows 2-3 qtrs of profitable and consistent  gold production.
2. PTQ Ramps up to full production.
3. The remainder of PTQ’s debt is refinanced with reasonable terms.
4. PTQ launches an aggressive PR campaign.
5. PTQ gets bullish drill results from Ore del Norte drilling campaign.

Petaquilla is making enormous progress and sooner or later their share price will reflect that. However, there is still more work to be done in order for PTQ to prove their worth to the street. Also, the market often behaves irrationally and presents us all with exceptional buying opportunities so take advantage of them.  It is just a matter of time before the market catches on to PTQ.

Be patient, as these things always seem to take a bit longer than you want them to.

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No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility. Click image for clip and additional info.

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I want to discuss something that came up on the blog Friday.  An anonymous poster hinted that we were going to see more gold weakness in the days ahead because big money had to sell their positions.  Folks, big smart money traders don’t sell into weakness.  These kinds of investors don’t think like the typical retail investor who is forever trying to avoid draw downs.  Big money investors take positions based on fundamentals and then they continually buy dips until the fundamentals reverse.  The fundamentals haven’t reversed for gold so I’m confident in saying that smart money isn’t selling its gold, it is using this dip to accumulate.

With that being said, there are times when big money will sell into the market and it is why so often technical analysis, as it’s used by retail traders, doesn’t work.  They sell into the market in order to accumulate positions.  Let me explain.

When a large fund wants to buy, it can’t just simply start buying stock like you or I would. Doing so would run the market up causing them to fill at higher and higher prices.  Unlike the average retail trader, smart money attempts to buy into weakness and sell into strength.  (Buy low, sell high).  In order to buy in the kind of size they need without moving the market against themselves, a large trader needs very liquid conditions.  Ask yourself, when do those kind of conditions exist?  They happen when markets break technical levels.

If big money is selling it is because it is trying to push the market below a significant technical level so all the technicians will puke up their shares to him.  By running an important technical level it can cause a ton of sell stops to activate, allowing it to accumulate a large position without moving the market against itself in the process.  We saw this very thing happen in the oil market recently and also in February as gold bottomed.

Technical traders wrongly assume these breaks are continuation patterns but the reality is that very often they are just smart money “playing” the technical crowd so they can enter large positions.  The key to watch for is an immediate reversal of a technical break.  When that happens you know there was someone in the market buying when everyone else was selling.  9 times out of 10 it was smart money.

At the moment everyone is jumping on the bear side for gold.  Remember we saw this exact same sentiment in the stock market 3 weeks ago.  I knew the bears were going to be wrong simply because the market was way too late in the intermediate cycle for there to be enough time left for a significant decline.

The gold bears are going to be wrong also and for the exact same reason.  It is just too late in the intermediate cycle for there to be enough time left for anything other than a minor decline.

I’m now waiting and hoping for a break of the May pivot.  I want to play that break, if it comes, like a smart money trader.  That means I want to buy into the break instead of panic sell like most dumb money retail traders will invariably do.

The reason, of course, is that gold is still in a secular bull market.  In bull markets you buy dips.

Also, the dollar, with the break below 82 this morning, is starting to show signs that it is now in the clutches of the 3 year cycle decline.  Every Gold C-wave so far in this 10 year bull market has corresponded to a major leg down in the dollar.  I’m confident this C-wave will inversely track the dollar’s move into that major cycle low due early next year.

Sentiment wise, gold has now reached levels more bearish than at the February bottom. That means gold is at risk of running out of sellers.

And finally, and most importantly it’s just simply too late in the intermediate cycle for gold to have enough time for a significant drop.  This is the 25th week of the cycle and the intermediate cycle rarely lasts more than 25 weeks.  That puts the odds heavily in favor of a major bottom either sometime this week or next.  And don’t forget, gold is about to move into the strong demand season.  Like clockwork, gold invariably puts in a major bottom in July or August before the run up into the strong fall season.

The bears are going to be wrong again.

GoldScents is a financial blog focused on the analysis of the stock market and the secular gold bull market.   Subscriptions to the premium service includes a daily and weekend market update emailed to subscribers.  If you would like to be added to the email list that receives notice of new posts to GoldScents, or have questions,email Toby: goldscents@gmail.com

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I did my last PTQ update on July 1st, 2010 and a Petaquilla (PTQ) Chart Analysis on 6-10-2010. Petaquilla managed to work its share price down to about .30 cents which was close to the bottom I forecasted in my chart analysis. The share price then moved back up a bit  to trade in a range of about .33-.35 cents. I hope you found the courage to dollar cost average down at those cheap prices. You must remember, the summer months are typically the weakest periods of the year for gold & silver.  It is a perhaps one of the best times to load up on gold, silver, and related mining stocks. I definitely took the opportunity to by more PTQ shares in the .30 cent range.

Petaquilla’s stock price has now rebounded nicely back near the levels of when I first recommended them in my Petaquilla Minerals Junior Stock Trading Card. There has been no news about why the price dipped down to .30 cents or why the price has now rebounded back to the .46-.50 cent range. Unfortunately, few people seem to understand why. With so much silence these days on behalf of Petaquilla, people are starting to talk and come up with their own explanations for the recent rise in PTQ’s share price.

Some of my readers have sent me links to various stock forums where folks are discussing buyout possibilities and such. I don’t believe we are there yet. I think Petaquilla will eventually get bought out, but not until more is known about their Oro Del Norte concession. Any potential buyers I think would be very interested in confirming just how much gold is in Oro Del Norte as well as what type of grades. Until more is known, I don’t think a buyout is in the cards just yet. It could be, but not very likely at this point.

I believe PTQ’s price rebound has more to do with the status of their gold loan refinancing. The slowly increasing share price is likely an sign that something good is cooking beneath the surface. To me it implies that confidence is growing in the completion of  the gold loan. Perhaps it is nearing completion or it has been informally approved by all the banks involved. I think this is more likely than a buyout at this point. It could also be that some of the drill results from the Oro Del Norte concession are leaking out too. Who really knows but the guys on the inside?

Here is the response I received from Petaquilla’s Investor Relations this afternoon:

The refinancing is coming along very well, we are waiting for the Panamanian banks to finish their due diligence in order for them to participate and be part of the package.

We should be close to finish this transaction in the following weeks if not sooner.

Apparently there are multiple banks involved, of which some are Panamanian. This definitely explains why it is taking a while to wrap everything up. So I would not expect this to be done by tomorrow or roughly anytime “soon”. I bet we are talking sometime in late August or early September before the gold loan is completed.

I firmly believe this stock is going way up before the end of this year and I plan to keep accumulating PTQ shares while the price is still heavily discounted. As always, please do your own due diligence and only invest money you can afford to lose. Also understand that stock investing is not the same thing as a savings plan.

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I hope this catches on like a wildfire all over the US as this would definitely send a strong message to those people who claim to work in Washington for the best interest of US and its citizens… Would you considering using gold, silver, and copper coins in place of dollars?

If this is the beginning of a new trend in the US and hopefully around the world, it could be the end of the dollar as we know it. Obviously this is not good for the Federal Reserve. The implications here are very serious. This could be one of the first major signs of US citizens loosing confidence in the Dollar. That’s really all it takes folks… just for enough people to wake up to the fact that the dollar is just worthless pieces of paper masquerading as real money.

Either in anticipation of QE2 which will cut the value of the dollar by another 50% once another $2 trillion in toxic crap becomes the “assets” backing the viability of the dollar, or just because they are sick of Fed policies, mid-Michigan has taken monetary matters into their own hands, and in one simple act, completely bypassed the destabilizing influence of the domestic currency printers. As ConnectMidMichigan reports, “New types of money are popping up across Mid-Michigan and supporters say, it’s not counterfeit, but rather a competing currency. Right now, you can buy a meal or visit a chiropractor without using actual U.S. legal tender.” The plan is so simple, it just may work – after all if one can’t get away from the Fed’s probing and pickpocketing long fingers, all one has to do is learn to live without its parasitic pieces of paper. And not just paper: “I sell three or four every single day and then I get one or two back a week,” said Dave Gillie, owner of Gillies Coney Island Restaurant in Genesee Township. Gillie also accepts silver, gold, copper and other precious metals to pay for food.” So yes, you can eat gold…. and load up your gas tank with it.

More from CMM:

“Do people have to accept dollars or money? No, they don’t,” Gillie said. “They can accept anything they want or they can refuse to accept anything.”

He’s absolutely right.

The U.S. Treasury Department says the Coinage Act of 1965 says “private businesses are free to develop their own policies on whether or not to accept cash, unless there is a state law which says otherwise.”

That allows gas stations to say they don’t accept 50- or $100 bills after a certain time of day in hopes of not getting robbed.

A chiropractic office in Lapeer County’s Deerfield Township allows creativity when it comes to payment.

“This establishment accepts any form of silver, gold, chicken, apple pie, if someone works it out with me,” said Jeff Kotchounian of Deerfield Chiropractic. “I’ve taken many things.”

Jeff Kotchounian says he’s used this Ron Paul half troy ounce of silver to get $25 worth of gas from a local station.

While the government and banks don’t accept them, many others do.

So why is there interest in these competing currencies?

Is it just novelty or is there something deeper?

If the ruling kleptocrats, pardon, the Fed, demand on being such an intimate part of everyday life, and procuring all of the population’s real wealth and cash producing assets in the process, said population has a choice of either going with this sheepish approach, and meekly allowing the loaded gun to be parked at its temple, or do what Michigan, with its 99.9% real unemployment, has decided to do. Src: zerohedge.com

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At the time of my most recent article we had just begun the stock market rally out of the July 2^nd bottom and I suggested the rally would be able to continue higher, which it did, until the SP-500 1100 level stopped it on 3 consecutive days.  Since then, we have taken 45 points off the index and today began a successful rally from 1057 that ended the day at 1083.

I have little doubt that the momentum generated today will soon yield another attempt to crack through 1100.  However, I am skeptical that we will be able to get much higher than 1100 on this particular rally.  Please, let me show you why.

I use a momentum indicator, the True Strength Index (TSI) to generate buy and sell signals.  One of the pre-cautionary techniques I employ is to anticipate divergences between price movement and the indicator’s movement.  The following chart of both the VIX (Volatility Index) and SP-500 gives us a confirmation today that a rally is newly underway.  Namely, the TSI indicator’s reading of the VIX has turned down and for the SP-500, it has turned up.

What the chart does not specifically tell you is that the SP-500, when it reaches 1100+ this time, is highly unlikely to also reach a TSI reading greater than its previous high of .62  This means that a new price higher than 1100 will be accompanied with a lower high reading of the TSI, thus creating an unfavorable divergence.

Likewise, the VIX low TSI reading of -.55 is unlikely to be surpassed with this rally.  The next chess move, then, will be for the SP-500 to correct downwards after surpassing 1100, then try to overtake the TSI high it makes in the initial process of cracking 1100.

This next chart is of the $TICK and, like so many indicators I have reviewed recently, it shows us that we are not presently at one extreme reading (urgency to buy) or the other (urgency to sell).  If you peruse the chart from left to right you will notice that as the tick drops, price drops.  And as the tick rises, price rises.

Our current reading is near the $TICK indicator’s 200 dma, suggesting neutrality, but a longer term view suggests the $TICK is likely to complete its current pendulum swing (begun at SP-500 1010) by going to an extreme much higher – carrying price with it.

Gold was a little over $1210 when I last wrote to suggest it was going to have a difficult time climbing much higher until it firt corrected.  Indeed, with this morning’s low of $1175, gold has now corrected and looks poised to head higher with a stumble or two along the way.

What follows is the daily chart of GLD.  I am using two indicators below price action – the True Strength Index (TSI) and below that the Money Flow Index (MFI).  What I have been looking for from each indicator was a specific condition to identify a potential bottom in gold price.  With today’s action, both indicators gave the green light buy sign.

First, I was looking for the TSI to set up a positive divergence with price i.e. price makes a lower low while the indicator makes a higher low.  That did happen with today’s positive action.  The other thing I was looking for was MFI to take out its previous high and that is now in place, as well.

You will notice that TSI divergences (lime green) have correctly identified several of gold’s bottoms in the past.  Also, the MFI technique I use (hot pink) has also been very effective in identifying recent bottoms in gold.

I am very concerned that today’s gold movement was not accompanied by high volume.  And I believe today’s intra-day $1175 low was completed pre-market of opening trade in New York – so stock investors were treated to a rising gold price at the start of trade and really were never subjected to a plunge in price.  Both these issues make me suspicious of this bottom, though my indicators certainly look favorable.

For now, I think the ZERO crossover that GLD needs to make on the TSI indicator is a critical piece in the short term.  Currently at TSI -.27, it is very possible for gold to generally rally higher now, hit the ZERO level and get turned back – possibly to new lows.  For now, however, I see no reason why gold has not indeed bottomed and is ready to rally higher.  I will reassess the ZERO crossover issue when we get there.

If you enjoy technical analysis, maybe are curious to learn more about the True Strength Index indicator and how to use it, or just like to be a part of discussion about market and gold price direction, I invite you to visit my website. www.theTSItrader.blogspot.com I provide some useful data on 15 mining stocks with explosive projected earnings, a study of the gold secular bull market beginning in 2001 with charts, and heck, I even post my trading record.  Or, you can drop me a line at: tsiTrader@gmail.com

Good trading to you,
John Townsend
The TSI Trader

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