Non-Diversification Sure Worked Well This Week

by JDH on April 9, 2011

If you read last week’s post on why Diversification is over-rated, and at times diversification is stupid, you don’t need to bother reading this week, since all I’m going to do is repeat myself (with a few new comments on seasonality). What I said last week is still true this week, only more so.

(And what I said in Silver – Why It’s Better Than Gold is also correct, if I do say so myself).

This week we had the pleasure of viewing a new high in gold, and in silver. Beautiful.

Speaking of silver, over on the Buy High Sell Higher Forum MetalMeister asked the question: when will we get $50 silver? He’s guessing Memorial Day. That would be great, but that might be a bit quick; a pullback prior to that would probably be in order. Of course, if you just take the chart and draw a line, the answer is in fact somewhere around the 4th of July (click chart to enlarge):

So what do you do?

At the moment, you hold. You wait. You ride the trend. On big up days taking some profits probably isn’t a bad idea. The bigger question, of course, is when do stop holding and start selling?

To answer that question, I refer you to an article on Gold Seasonals to Flex Muscle in Coming Weeks written by Andrew Hamilton. I have no idea who he is, but his reasoning makes sense. Essentially, he’s saying that at the moment, gold is not over-bought, so it should keep rising.

I agree.

Of greater interest are his comments on gold seasonality. He accurately deduces that gold rises in the September through May period, and then consolidates in May, June and July. Why? Primarily because the Indian wedding season is the Fall, Christmas in the west is in winter, and Asian festivals carry through spring. There’s not much happening in summer, so gold goes sideways.

Of course, as Mr. Hamilton correctly points out, seasonality is just a guide. A massive shock to the system can change that. A major terrorist event, or stock market crash, in the summer would impact the price of gold, regardless of seasonalities.

So here’s the plan:

Gold and silver had a great week. They both now have high Relative Strength Index levels. For example, here’s silver:

The RSI for silver at 82.27 is very high, but as you can see, from the red circled area, it’s been this high before, and it can stay at these lofty levels for well over a month, so now is probably not the time to sell. The end of April, or into May, may be the time.

Gold is not as over-extended:

Gold had the same period of exuberance back in October, 2010, just like silver, but gold’s RSI is “only” up to 71.2, not yet at the 80+ level it achieved for weeks back in October. Gold is high, but that doesn’t mean it’s going to crash next week.

As for the stocks themselves, SLW.TO – Silver Wheaton Corp. made a new 52 week high on Friday. If that was the “break out”, we could see close to $50 before this run is over in a few weeks.

Of course with silver over $40, that wasn’t the only stock making new highs. Other picks, that I discussed last week, also made new highs, including:

PHS.U.TO – Sprott Physical Silver Trust

SSO.TO – Silver Standard Resources, Inc.

SVM.TO – Silvercorp Metals Inc.

FVI.TO – Fortuna Silver Mines Inc.

So, in short, I’m happy.

I’ll let things ride this week, and perhaps next, but as we approach the end of April I think I will sell 10% to 20% of my holdings each week, so that by the end of way I’m down to 50% invested. I will then have fulfilled the instructions to Sell in May and Go Away, and I will have cash to redeploy in the late summer.

Of course, my plans could change.

That’s my report for the week. Thanks for reading; feel free to post your thoughts on the Buy High Sell Higher Forum, and see you next week.

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