Financial Sense Junior Gold Mining Index Review by Frank Barbera 11/27/2007

General Comments

The awful loss of confidence in the global and particularly, US Banking System combined with the continuing collapse of Structured Finance continued to impact the financial system in the week just past. Spectacular collapses in the shares of the GSE’s, Freddie Mac and Fannie Mae underscored the concept that the credit crisis is far from over, and in fact, continues to accelerate blasting down all dominos in its path. As a result, stock investors retreated in terror with the S&P, DJIA, and NASDAQ plumbing the depths of their August lows. A post-Thanskgiving Holiday relief rally seems to have set the set stage for a counter-trend rally, and possibly a near term bad news bottom as it is unlikely that two weeks could unfold back to back with such negative news. That said, even with the bounce on Friday, broad stock market averages ended the week lower with the DJIA down 1.50%, a loss of 195.91 index points, the S&P down 18.04 index points or 1.23% and the NASDAQ down 39.54 index points or 1.49%. Yet there was a Gold and Silver Lining to the week, as an intense case of risk aversion sent capital fleeing to the safety of precious metals which recovered most of last weeks losses in fine style. For Gold, spot prices soared by $35.95 dollars per ounce, a gain of 4.57%. Silver prices gained $.30/oz or 2.074%, while Platinum also did well, gaining $30/oz to finish at $1477.00, up 2.07% as well.

In response to the stabilizing stock market and soaring metals prices, mining stocks took over in Friday’s session ending the week with nice gains, the XAU finishing up +3.40 index points or 1.96% while the HUI, the AMEX Gold Bugs Index faired even better with a gain of 18.28 index points or 4.44%. A similar gain of 4.25% was also registered by the Gold Miners Index, the GDX ETF which trades on the NYSE. Importantly, the HUI and GDX do not have Freeport Copper and Gold (FCX) as a component, while the XAU – Philadelphia Stock Exchange Index does. In fact, not only does the XAU include FCX, but FCX – a copper/base metal miner, is 21% of the index, the largest single component. Last week, FCX was down 5.24% really depressing the XAU, which is fast becoming a sub-par measure of the Precious Metals sector. Nevertheless, despite the poor showing of the XAU, the HUI and GDX showed gains in excess of 4% underscoring a good week for the Precious Metals stocks.

Elsewhere, the world of Secondary Mining stocks is typically a day or two behind the larger cap brethren, at least in this author’s experience. To that end, with a very low volume session present on Friday, many smaller cap names really didn’t have the full opportunity to strut their stuff. The week ahead will be an interesting litmus test in many ways, first to see if there is broad upside follow through in the metals and the senior golds, and second, to see if the smaller cap names begin to pick up the pace and outperform. For the week just past, the FSO Junior Mining Index of 40 stocks ended down 3.10 index points at 288.09, down from 291.19, a loss of 1.065%. For the FSO Junior Golds, the 50 day average ended at 295.98 with the 200 day average at 293.85.

Financial Sense Junior Gold Index™

Mining Index

Above: the FSO Junior Mining Index - 40 stocks

As can be seen in the chart above, the index is just below both the 50 day and 200 day averages, but that said, it would only take a 3% rise in the index to move back above both MA’s in the week ahead. In addition, during the correction of the last 10 days, the large cap golds fell by approximately 15 to 16% high to low. Over the same period of time, on a high-to-low basis, the FSO Junior Index ONLY fell by 12.50%. Considering that the Juniors have a beta on the order of two to three times the beta of the HUI or XAU, a 12.50% decline was a very small – a minor sell off, perhaps a first hint of rising relative strength.

Among the FSO Sub-Indices, the Junior Producer Index ended at 299.58, up 5.55 index points from a close of 294.03 the prior week. With the gain on Friday, the index moved back ABOVE its 50 day average at 296.38, with the 200 day average, the next resistance at 308.25. That said, the Junior Producer Index was the only Sub-Index to produce a gain for the week, with the Development and Exploration Stocks closing lower. On Friday, the FSO Junior Development Index ended at 448.73, down 21.28 index points from the prior weeks close of 470.01, a loss of 4.52%. The 50 day average for the Development Stocks closed at 498.94, with the 200 day average ending at 498.94.

Financial Sense Junior Gold Index™

Producer Index

Above: FSO Junior Producer Index

Financial Sense Junior Gold Index™

Development Companies

Above: FSO Junior Development Index

Financial Sense Junior Gold Index™

Exploration Companies

Above: The FSO Junior Exploration Index

Junior Exploration Stocks which have been strong performers in 2007, also ended the week with a modest loss, a decline of 1%. On the week, the FSO Exploration Index finished at 212.54, down 2.10 from 214.64 last Friday, with the 50 day average at 214.73, and the 200 day average at 193.59. On the whole, the Junior Miners ended the week with a down tick in the Relative Strength Ratio, the Ratio falling back toward the recent lows, as high cap miners notched solid gains and Juniors ended lower on the week.

Financial Sense Junior Gold Index™

Junior Mining Index vs. XAU

Above: FSO Index versus XAU Relative Strength Ratio with 200 day Bands

However, despite the fact that the Junior Miners ended the week lower, as I alluded to earlier, this slight lagging behavior is not at all uncommon at major turns. The key in assessing the health of the Junior sector will really come to light in the action in the days just ahead, and to that end another indicator which show real signs of encouragement is the action of the daily A/D Line. Here again, we note that the decline in the Junior Mines over the last ten days has been relatively minor, with the A/D Line just barely undercutting the 50 and 200 day averages. If the next ten days can see this indicator climb back above these important moving averages with some authority, the case will continue to build for a broadening in the bull market in mining stocks.

Financial Sense Junior Gold Index™

Junior Mining Index vs. Daily A/D Line for Small Cap Miners

Above: FSO Junior Mining Index (top clip) and Below: FSO Daily A/D Line for Small Cap Miners….

That’s all for now,
Frank

*Please note that the individual companies in this index are proprietary and will not be disclosed due to compliance and regulatory issues resulting from the relationship of FinancialSense.com, Puplava Financial Services, Inc., Registered Investment Advisor and Puplava Securities, Inc. Member Firm FINRA/SIPC.