Financial Sense Junior Gold Mining Index Review by Frank Barbera 05/28/2008

General Comments

All three precious metals advanced for the third week in a row with Gold gaining 2.57% to finish the week at $924.50, up $23.20 from last weeks close of $901.30. At the same time, spot Silver, which had been lagging in recent weeks, came to life and as usual made up for lost time with a stellar gain of 7.20%, with spot Silver closing at $18.15, up 1.22 /oz from last weeks close of $16.93. For Silver it was the best advancing week since late February when Silver spiked 10.72% in one week ending on February 28th. Platinum also remained robust adding another $42/oz or 1.98% to close at $2160.00 per ounce, up from $2118 the prior week. For spot Platinum, this weeks close left the white metal only $2/oz below its prior all time weekly closing high seen on 2/21/08 at a reading of $2162.00. With metal prices moving solidly higher, precious metals mining stocks were able to find relative strength traction and hold up despite a severe 3.46% decline in the S&P 500. On the week, the XAU Index ended flat, squeaking out a small gain to close at 188.10, up .22 from last weeks close of 187.88. At the same time, both the GDX and HUI ended the week with gains, with the GDX gaining .90% while the HUI advanced by 1.49%. With Senior miners holding up quite well, we were pleased to note that Junior miners also turned in a reasonable solid performance, with the selling on Wall Street bypassing the smaller miners. At the close on Friday, the FSO Junior Gold Index ended with a reading of 233.64, down slightly from last weeks close of 234.15. For the FSO Junior Mining Index, the 50 day average ended at 240.44, with the 200 day average ending at 269.69.

Financial Sense Junior Gold Index™

Mining Index

Above: the FSO Junior Mining Index (40 stocks)

Financial Sense Junior Gold Index™

Producer Index

Above: FSO Junior Producer Index

The shares of Junior Producers performed well this week just past, with the FSO Junior Producer Index ending at 266.84, up 4.69 index points or 1.78% from the prior weeks close of 262.15. For the FSO Junior Producers, the 50 day average ended at 260.63, with the 200 day average ending at 276.75, the index finishing this week back above the declining 50 day line.

Financial Sense Junior Gold Index™

Development & Exploration Index (D&E)

Above: FSO Junior Development & Exploration Index (D&E)

Financial Sense Junior Gold Index™

Junior Development Index

Above: The FSO Junior D&E Index

Among other indices, the FSO Junior D&E Index ended the week at 224.65, down 1.98 index points from the prior weeks close of 226.63, for a loss of .87%. For Development and Exploration stocks, the week saw the index close at 224.65, below the 50 day average at 232.96, and below the 200 day average at 261.65. Importantly, the 50 day average is beginning to flatten out its steep angle of descent, a potentially encouraging sign.
For Development Stage companies, the week ended with a close of 1.78 index points, with the FSO Junior Development Index ending at 476.66, down from 478.39. The 50 day average ended at 469.71, while the 200 day average for Development stage companies ended at 486.48. Finally, Exploration stocks were soft on the week, with the FSO Junior Exploration Index ending at 140.64, down 2,.07 index points or 1.45% from last weeks close of 142.71. On Friday, the 50 day average ended at 154.08, with the 200 day average ending at 186.71.

Financial Sense Junior Gold Index™

Junior Development Index

Above: the FSO Junior Development Index

Financial Sense Junior Gold Index™

Junior Exploration Index

Above: the FSO Junior Exploration Index

Financial Sense Junior Gold Index™

The D&E Index vs. Gold

Above: FSO Junior Gold’s rebased versus XAU Index of Senior Gold’s to bull market low.

In looking back at the recent history of mining stock trends, we note some very strange behaviour over the last 2 years. Going back to late 2006, we see a period of time where Junior miners were outperforming seniors probably largely based on the fact that Juniors for years have been adding reserves while at the same time, Seniors have been hard pressed to maintain reserves. For much of the last few years, Juniors outperformed Seniors based on the premise that most Juniors would have more dynamic growth in a rising metals market and would likely end up as acquisition targets for reserve starved seniors. Since the advent of the global credit crisis, we note that Seniors have outperformed Juniors reflecting the markets preference for self financed operations, operations presently generating positive cash flow and a reluctance to delve into the Junior sector which is often funded by dilutive equity financings. Only time will tell what trend will emerge from here, but two things seem clear, in that (a) Juniors are very cheap fundamentally relative to seniors and (b) a rising metal market is ultimately bullish for all mining stocks. Thus, with the fuse lite, one must imagine that it can only be a matter of time. We end this weeks update with one final chart view of the Junior Resource sector, with the next chart showing the FSO Junior Mining Index, the FSO 40 in the top clip. Next, in the middle clip, we plot the Relative Strength Ratio of Juniors to Seniors (XAU) which has been in a steady declining trend for the better part of the last 14 months. This is “The Great Contradiction” in that with metals prices near all time highs, and Senior mining stocks only a good week or two away from all time highs, Juniors reside near multi-years lows ironically, with deposits that are now much more heavily delineated (capex in the ground) then they were only a few years ago. At the bottom, we plot a very medium to long -term Wilder RSI gauge. This is a technical overbought/oversold momentum indicator, in this case, based on the R/S Ratio in the middle clip. What this tells us, is that on a historical basis, Juniors have been under performing Seniors for so long that they are deeply oversold and potentially close to advancing out of a major base. The downside excesses seen of late, seem equal to, and opposite, some of the prior upside excesses seen in early 2007 and mid 2003. Again, there are never any guarantees in the financial markets, especially with the Credit Crisis showing more signs of accelerating this past week, we note the new multi year lows seen this past week in the shares of GM (mortgage finance problems with Rescap subsidiary), Ambac, MBIA, and Bank America (more problems with Country Wide). Uncertain times to be sure.

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.