Amador Gold

November of 2008 has been a dark time for the “little guys” of the worldwide mining business. However, during the height of the panic sell downs in October and November, when investors sold anything and everything out of terror into virtually no bids; as prices for the small, but promising miners and explorers literally fell from dollars to mere pennies, some of those miners and explorers saw exceptionally strong buying from one very important, very telling source: company insiders. More about that below, but first a very sober damage report.

A flood of blood in the streets in Canada

It is difficult to imagine how the chart below could look any uglier. The chart is the S&P Canadian TSX Venture Exchange or CDNX. This is the index which is the closest gauge to what is happening in the small resource sector.

Just since July the CDNX plunged a 5-month record 74%. Never before has the CDNX traded at such low levels relative to gold metal. Indeed, as of Friday, November 28, the CDNX was trading below where it traded at the bottom of the gold bear market in 2001; lower than when gold changed hands for just $255.00 the ounce.

To put things in harsh perspective, below is the CDNX compared to gold monthly since the previous gold bear market ended in 2001. As recently as May of 2008 the CDNX divided by the price of gold held a ratio of about 5.0. As of last week, the ratio had fallen so far, so fast that it had dropped to under 1.0.

Even back at the end of the great 20-year bear market for gold the ratio couldn’t drop below 2.7. If the ratio was 2.74 in late 2002, when gold traded for $270 (it was), then last week’s all time CDNX low of 685.07 had the Canadian miners and explorers trading as though gold metal was at $222.00. Silver was just over $4.00 in Late 2002. So the CDNX was discounting silver to something like $3.30 the ounce.

Dysfunctional markets

What we have just witnessed is the reverse of a short squeeze. We just saw a panic liquidation. So many people, funds and investors selling in panic when there were very few buyers. When there is strong selling pressure into no buying; when the market is skewed in favor of the short sellers so severely; when there is essentially no market for something, the market becomes dysfunctional and can go to the most severe of excessive overshoots to the downside.

This report believes that is exactly what has happened in the small, less liquid and very speculative markets for miners and explorers. Some investors panicked, so convinced by the dire and worsening economic news between July and November that the world was once again plunging into a deflationary depression, that they just wanted to preserve what little cash remained in their shares of these companies.

As more and more sold into fewer and fewer buyers, ruthless Bermuda, Bahamas, Russia and Germany-based short-selling sharks (working through enabling Canadian and Frankfurt broker/dealers) kept relentless pressure on these little companies, helping to drive them to levels so low they defied all reason. In many cases companies have been driven to well below their cash on hand regardless and despite the company having viable, economic resources. Companies were looked at solely on the basis of their net cash, cash versus their pending liabilities and then discounted! No value was assigned for reserves or resources as The Worst unfolded.

It’s about liquidity

One severe problem has been simple liquidity. The trading float on many of these Canadian companies is quite large relative to the number of shares which change hands each day. Many of them are or were owned by funds of all sizes. Funds held millions of shares of companies that only usually traded a few tens of thousands of shares daily or even weekly. Funds that either blew up or were forced to sell off large blocks of the small companies at precisely the time when there was no one buying. That is bad medicine for stock prices.

The seemingly inexplicably huge drops in price accentuated the panic. The Worst had happened. Stockholders watched in horror as their beloved small junior resource companies fell in huge percentages on relatively light volume, day after day, after day. Fear ruled so much and so pervasively that the small resource sector became a killing fields for investors.

The net effect has been that the entire illiquid Canadian market has become a distortion of value instead of a measure of it for the resources sector. This report still believes that it has also become one of the best opportunities we will ever see in this generation. That’s if all the economic stimulus and government meddling in the financial markets manages to do no more damage and we see a recovery of even a fraction of the confidence that these markets used to enjoy.

Tax loss selling big business in Canada

Right now tax loss selling is a major drag on the CDNX, both in Canada and in the U.S. It is especially a factor in Canada, because liberal tax laws there allow investors to recover taxes paid in prior years by taking losses this year. That’s true even for the largest holders, for which the shares became more valuable as a tax write off in Canada than for the future prospects of the company.

When investors (taxpayers) can reclaim tax money they paid two or even three years ago, hard cash, from the government by taking a tax loss today, it has to increase the amount of tax loss selling immensely. Remember that during December. It’s why there is a rush to do significant tax loss selling in Canada in October and November.

So there really is a deluge of blood in the streets in the small resources sector. Panic selling, fear of financial Armageddon, funds blowing up or raising cash for redemptions, forced selling, short selling opportunistic sharks and tax loss selling – all into nonexistent buying – has created the mother of all CDNX plunges and, hopefully, one of the best opportunities ever.

There is one group of investors that certainly has been buying into all the brutal carnage during October and November. They have been buying as never before and are what many feel are the smartest money in the markets, too. The big buyers are insiders of the companies themselves.

Insiders buying like crazy despite the dismal CDNX

While we have witnessed a reasonably good bounce on the HUI over the past few trading days (the HUI was up another 16% last week and, as of Friday, November 28 was actually up 64% from its Oct 10 bottom), the small Canadian resource companies barely registered any gain at all. While worrisome, it is not unexpected since so many of the best names in the resource business have been taken down to such amazingly cheap levels.

Money floods back into the best first after a brutal plunge. Only after that; only after a little confidence returns, will investment money flow seek the more risky, more speculative, but potentially much more rewarding companies on the Canadian exchanges.

When compared to the HUI, the CDNX shows a dismal performance so far.

As the Big Markets attempt to find a little confidence, let's be thankful for that. As each of you spends the quality time with family this holiday season, as is meant to be, here's a ray of hope for beleaguered, battered and beaten up Canadian junior miners and explorers.

Below is a chart of the buying/selling activity by insiders, the officers, directors and employees of Canadian companies provided by INK Research.

Source INK Research. Note: Since this graph was created, the ratio rose even higher, to 546% as of November 26.

Insiders: “Damn the torpedoes, buy, buy, buy”

Officers, directors and employees of companies can be the smartest money to watch. They are obviously in position to know whether or not their company has been mistreated by the market, whether or not their company has "things about to happen," whether or not their company is "onto something big," and, of course, whether or not their company is about to close their doors and pack it in.

In Canada, insiders are required to report all changes in their ownership positions in a timely manner. INK Research tracks those changes in insider ownership.

Nothing says "I think my company is cheap," louder and more believably than when the insiders are buying the common stock that management has already given them many options on for free. Nothing says more about what the expectations of a company's prospects are than when insiders are buying in large numbers of shares and in multiple transactions when the stock is down big (very good), or, conversely, when the insiders are selling in large numbers and often once the stock has been pummeled (very bad).

The above chart tracks the 60-day movement of Canadian companies reporting 100% buys by insiders versus companies reporting 100% sells by insiders. When this indicator is at 200%, that is a very high and usually bullish reading, such as it was back in January. Rarely does this 60-day indicator ever rise above 200%, as that indicates a very grossly oversold market in general. Remember: company stock is more often sold by insiders than bought, as stock is a form of compensation to the executives and employees of so many of these companies. So, when we see this 60-day index as high as 200% that is unusual, it is something out of the ordinary. It is screaming that insiders think Canadian stocks are way undervalued.

Well, the panic selling of all things risky accelerated in September-November. As people fearfully (and foolishly) sold anything and everything into virtually no bids, driving the share prices of many of the Canadian companies down to below-basement levels, (literally from a few dollars to mere pennies in so many of them it boggles the mind), this insider buy/sell tracking index rose right through 200%, but it didn't stop at an unheard of 250%, or even 300%. It didn't even slow down in its gigantic rise when it hit a stratospheric 350% or 400%. No, friends, this index has reached the positively, amazingly high level of over 500%!

Right or wrong, Canadian insiders think their stocks are bloody dang cheap as of Thanksgiving Day in the U.S. And, they are saying that in a most believable way: with their money.

Want to check the last 10 insider transactions on your favorite Canadian company for free? Here's the link.

Just type in the symbol in the upper right box without the exchange tag. Example: Almaden Minerals is AMM.T in Canada, but on the INK Research site just type "AMM." Gold Port Resources is GPO.V in Canada, but just use "GPO" in the INK Research search box.

With the share prices of so many companies so very low, resource investors will want to see the insiders buying and buying in large numbers on their favorite Canadian companies. That's if they want to be more confident they can come through the Cat-5 stock hurricane of 2008.

The way to view so many of the small miners and explorers at this point is that they represent inexpensive options. Very inexpensive in some cases. Options that don’t expire unless the company does.

Sure, many of the companies will not survive the brutal destruction of value we just endured. Some will, though, and if they do, they could turn into the proverbial 20 or 30-bagger every stock speculator dreams about.

Right now, when there is truly blood in the streets, seems like a very good time to see which companies have executives that think enough of the company’s prospects to risk their own cash money on their own company when the chips are way, way down. Which execs are buying these long-term “options” that trade like stock on the Canadian stock exchanges.

It’s also a good time to see which companies have execs that are throwing in the towel.

That’s it for this special Got Gold Report. Until next time, as always, MIND YOUR STOPS.