The weather is great here in my corner of Southern Ontario, and I want to enjoy it, so today you will be treated to a brief commentary. Also, I have nothing to say, because nothing has changed. Everything is happening exactly as expected.

I’ve covered all of this before, and today I will give you more of the same.

First, I have been worried about the markets for quite some time now, and with each passing day, I get more worried. Onlooker had a good comment on Black Swans over on the Buy High Sell Higher Forum on this very topic. The Great Depression was a series of setbacks; here in 2010 we had our first setback (back in 2008), and I continue to wait for the next one, whatever it may be.

As this chart of the Dow shows, there is obvious support in the 9,750 area, and it would appear that the market is poised to test that level again. If it holds, we get a bounce. If it doesn’t, we are screwed. Hello, 8,000.

So, this week, I put my money where my mouth is. On Thursday morning, the market was looking weak, so I bought some August SPX 1,000 puts (puts on the S&P 500 index). I paid between $18 and $20 for each contract. On Friday, seeing that the weekend’s weather was looking nice and I didn’t want to think about it over the weekend, I sold the puts, for $24. My profit was between 20% and 30%, which is fine for two days work.

Of course I wasn’t playing with any serious money; just a few dollars; this is not a “bet the farm” “investment”, this is pure gambling. However, if you think the direction of the market is down, then gambling to the down side makes sense.

If we see a small bounce early in the week, I’ll do it all over again. I’ll buy some puts, and hope for a nice gain over a short period. If I’m wrong, I lose a few dollars, but I’m not playing with significant sums of money, so I’m not concerned.

Gold

Of greater interest is where I have my real money: gold.

As I explained last week, with only one or two exceptions, all I have in my portfolio are gold and silver stocks. My biggest “blue chip” holdings include:

• AEM.TO – Agnico-Eagle Mines Ltd.
• G.TO – Goldcorp Inc.
• K.TO – Kinross Gold Corp.
• PAA.TO – Pan American Silver Corp.
• SLW.TO – Silver Wheaton Corp.
• CEF.A.TO – Central Fund of Canada

As I have explained over the last two weeks, in How to Juice Your Returns on a Stock you are Selling, and last week in Gold: How I Played it, and What’s Next, I assume gold and gold stocks will continue to increase in value, but they will not go up in a straight line. June is a traditionally weak month for gold, and July isn’t great either, so recent strength is a good opportunity to lock in profits.

So, on Friday, I did it again. I sold options covered by stocks I own. I sold July call options, around $1 out of the money, on:

• AEM.TO – Agnico-Eagle Mines Ltd.
• G.TO – Goldcorp Inc.
• K.TO – Kinross Gold Corp.
• PAA.TO – Pan American Silver Corp.
• SLW.TO – Silver Wheaton Corp.

For example, I sold the Agnico-Eagle July 66 call for $1.30. At the time AEM.TO – Agnico-Eagle Mines Ltd. was selling for around $65, so I was paid $1.30 for something that was worth negative $1 (ie. it was $1 out of the money). If AEM is trading for $66 or less at the end of the day on July 17, about three weeks from now, I keep the $1.30. For me to lose on this deal AEM will need to increase in value by more than $2.30. If it does, I lose some of the potential profit.

However, $2.30 on $65 is 3.5%, which again is not a bad return for three weeks work, with very little risk.

So I will sit and wait.

It’s not sexy and exciting picking up 2% here and 3% there over a two or three week period, but over many months it will turn into real money, with little risk.

By the time we get to the Fall, and all hell is breaking loose in the world, and the markets, I will stop covering, and let my profits run. For now, prudence makes sense.

Why am I being cautious? First, the summer traditionally is not great for gold stocks.

Second, there is the obvious concern that general market weakness will drag down all stocks, good and bad, as happened in 2008 when traders were forced to liquidate everything, good and bad, to meet their margin calls. There’s a great article on Will Gold Miners Act Like Stocks or Gold During the Crash? that correctly concludes that gold stocks will fare better than the general market in a correction, but caution is still warranted.

So, caution it is.

I am gradually increasing my cash, and I expect that this conservative approach will leave me well positioned to pick up any available bargains.

Time will tell; see you next week.