I wonder if that’s why the U.S. dollar has been getting hammered recently?

It’s no surprise that countries like China and Russia are getting out of U.S. dollars, since there is no point in investing in a depreciating asset. If I held billions in U.S. dollars I’d be following the same strategy: say some nice things about the U.S., while in the background I’d be liquidating as much as the market can bear. I would use my U.S. dollars to buy hard assets, like companies, real estate, gold, or whatever else I could get my hands on.

Speaking of gold companies, if I had to pick one area to put my money in, that would be it. But not immediately.

Back on June 6 I explained My Conundrum, and I said that while I expect gold to perform very well in the long term, I also expect the traditional summer weakness to set in. I therefore positioned myself with 80% cash, and 20% in senior gold and silver stocks. I didn’t sell everything, because in these volatile times a sudden unexpected event could send gold soaring, and I want to be protected. For added insurance, I sold calls against the gold and silver stocks I owned.

Exactly as expected, in the last two weeks every one of those gold and silver stocks fell. Since I sold at or in the money call options, when the stocks fell the options lost their value, and today they all expired worthless. I therefore get to keep the premiums on all of the calls, which reduces my losses on the stocks.

Yes, I could have simply sold the stocks and then I would have no losses, but long term I will be buying these stocks, and I can’t pick the bottom, so this middle of the road strategy made perfect sense.

What next?

Strategy #2: Stair step stink bids

I’m not sure if that’s a real term or not, but here’s how it works, using AEM.TO – Agnico-Eagle Mines Ltd. as an example.

Agnico-Eagle closed on Friday at $59.98. In the last year it’s been as high as $78.79 (on July 14, 2008), and as low as $27.50 (on October 27, 2008). As an aside, that means that last year, from the summer peak to the fall crash, Agnico-Eagle lost 65% of it’s value. Of course that also means that from the bottom until today AEM has more than doubled in value. That’s volatility.

I therefore plan to put stink bids in at steps along the way. For example, I could put stink bids in at $28, $35, $45 and $55. Let’s say I want to own 1,000 shares (to keep the math simple), and I already own 200 shares (since I’m 20% invested). I look in my crystal ball and I see a down draft happening this summer, just like last summer, so I place my bids as follows:

• $55 – 100 shares
• $45 – 200 shares
• $35 – 300 shares
• $28 – 200 shares

If the price crashes to last October’s lows, I end up owning the 1,000 shares I want. Obviously I fully expect a drop below $55, so I’m only buying 100 shares at the $55 level, just in case I’m wrong. I’m happy to own them at $45, and at $35 it’s a great buy, so I’ll buy even more shares at that level. If another crash happens, I get even more shares at a bargain price.

What if I’m wrong and the share price starts going up on Monday, and never looks back? I guess I won’t buy any shares, but I don’t think that’s likely to happen.

There are of course two other strategies I could employ to build my portfolio.

Strategy #2: Covered Calls

I could repeat what I did in June: By the stocks, and then do covered writes against them. Again, assuming I own 200 shares of AEM that are currently trading at about $60, I could sell 2 contracts for the July 60 call option at $3.15 (you can get full quotes on Canadian options here). If AEM increases between now and July 17, I am forced to sell my shares at $60, but I pocket the $3.15 premium, so in effect I have sold my shares at $63.15, a 5% profit in less than a month. If they stay flat or fall, I have lowered my cost basis by $3.15, which gives me cash to buy more shares at an even lower price in July.

As an aside, as Peter518 pointed out on the Forum, a better strategy is to sell the options on the U.S. markets (for interlisted stocks), since the premiums are lower and the volume is higher, making for tighter spreads and faster executions. That’s true, and if I lived in the U.S. that’s what I’d be doing. However, as a Canadian, and given my negative outlook on the U.S. dollar, I prefer to limit my currency risk by staying with the Canadian options.

Strategy #3: Sell Puts

The final strategy, if I expect the price to drop, would be to sell puts. A call option gives me the right, but not the obligation, to buy a stock at a set price before a set date. A put is the opposite; I can sell a stock at a set price before a set date. If I sell the put or the call, it’s the opposite.

So, I could sell a put option, and if I’m wrong I’m forced to buy the stock. Let’s try an example:

I want to buy AEM.TO – Agnico-Eagle Mines Ltd. at $56. Today it’s at $60, so I sell a July 56 put for $1.65. If the price of AEM is below $56 on July 17 when the option expires, the holder of the option will “put” the stock to me, and I will have to buy it from them for $56. That’s fine, because I was going to place a stink bid at $56 anyway. (Actually I wanted to place a stink bid at $55, but these options trade in $2 increments). I pay the $56, but I already had $1.65 in my pocket, so it really only cost me $54.35.

If AEM goes up, the puts expire worthless and I keep the premium. If AEM crashes I shouldn’t have sold the puts in the first place, since I could now buy the stock for even less, but if I was going to place stink bids anyway, there’s no difference; that’s what I would have paid, with our without the puts.

The only problem with the put strategy is that there are margin requirements. You need some cash, or stock, in your account before you can start selling naked puts, so if I only own 200 shares, I can’t sell puts for 800 shares, unless I have the cash or other security to back up the potential loss.

Which strategy is better?

I’m not sure yet. I’ll do some number crunching and decide. On the surface, it would appear that taking in $3.15 on a covered call, at the money, is better than taking in $1.65 on a put that’s $4 out of the money. But, it depends on the price of the stock at options expiry.

If AEM is $56 on July 17 and I sold calls, my call options are worthless, so I make $3.15, and I own a stock worth $56.

If AEM is $56 on July 17 and I sold puts, the put options are in the money, and I’m required to pay $56 to buy the stock, so I own a stock worth $56, and I have $1.65 in my pocket from the premium on the put.

Conceptually the call strategy is easier to understand, so that’s probably what I will do. I prefer to do the covered writing with two or three weeks left until expiry, not a full month, since the premiums are still relatively high (there has been less erosion) and yet I’m only risking two or three weeks of movement. The perfect time to do the covered write is after a nice two or three day run up. I get great premiums, and it’s more likely a drop will be coming soon, since nothing rises forever.

As I did in June, sometime around the first or second week of July I will again cover the following stocks that I own, in addition to putting in stink bids at much lower prices to purchase more:

ABX.TO – Barrick Gold Corp. (I don’t currently own any Barrick, but if I did, I’d cover it; I’m not a big fan of this stock, so if I put in stink bids they will be at very low prices)

AEM.TO – Agnico-Eagle Mines Ltd.

K.TO – Kinross Gold Corp.

G.TO – Goldcorp Inc.

PAA.TO – Pan American Silver Corp.

SLW.TO – Silver Wheaton Corp.

SSO.TO – Silver Standard Resources, Inc.

The other stocks on my watch lists, the juniors that are not optionable, include:

WDO.TO – Wesdome Gold Mines (buy half a $1.00, half at 60 cents)

LSG.TO – Lake Shore Gold Corp. (buy half at $1.40, half at 80 cents)

CSI.TO – Colossus Minerals Inc (buy half at $1.50, half at 75 cents)

AND.TO – Andean Resources (or ASX:AND) (buy half at $1.00, half at 60 cents)

RMX.TO – Rubicon Minerals Corp. (NYSE.A:RBY) (buy half at $2.00, half at 1.25 cents) and

PG.TO – Premier Gold Mines Ltd. (buy half at $2.00, half at 1.50 cents)

I will eventually have 30% of the portfolio in junior stocks like the ones on the above list, and some others, 60% in the senior stocks, and a further 10% in whatever else appeals to me. Some of that 10% may eventually go into uraniums, or Rare Earth stocks that Dines is hyping at the moment, but for now they are so thinly traded that there is no point in putting any money into them at this point. I’ll wait for the inevitable correction this summer, and then consider my strategy.

So, to summarize: I expect weakness this summer, so I will scalp a few points using a conservative options strategy, I will start buying on dips (which I don’t expect to really start until July or August), and I will position myself for a great fall season.

Happy Father’s Day, and as always feel free to post your thoughts on the Buy High Sell Higher Forum. See you next week.

In other good news, the world did not end this week! Those of you who have followed the writings of Martin Armstrong will know that this was the week he predicted an intermediate top in the markets. Of course he may be correct; this week may indeed, in hindsight, mark an intermediate top, and the markets may fall to new lows from here. But, the markets didn’t crash this week, so let’s take comfort in that.

(As I posted on the Forum this week, for those who don’t know, Martin Armstrong eventually pleaded guilty and is currently serving time in jail for fraud (so we know he’s credible  . Here is a summary of Martin Armstrong’s predictions, and here’s the link to his long essay. You can judge for yourself whether or not he’s credible). The Dow and the S&P were relatively flat this week, with the Dow and the S&P down less than 1%, so on the broad averages it was an uneventful week.

Last week in my comments on gold I said:

Where is gold heading? My gut tells me we are nearing a near term bottom.

If you draw an uptrend line from the lows of November 2008, it hits where we are today. Coincidence? Perhaps. But the 200 Day Moving Average is $860.37, and gold closed on Friday at $869.10, so it’s possible that both the uptrend line and the 200 DMA are support levels.

Looking at the three month chart the $860 level also looks like support, and the RSI is as low as it’s been in months, so again, a bottom could be here.

If gold breaks below $850 this week, I will assume that we are going for a big fall. If not, we could be at a decent support level, so now may be a good buy point (although I will wait and see before committing any further cash).

Gold closed the week at $913, so all that stuff I said last week: yup, that was pretty much it. We did not break the $850 level, so the likely direction is up from here.

Not surprisingly, gold stocks did very well this week. Here is the performance this week in some of my gold stock holdings:

K.TO – Kinross Gold Corp. up 16.62%

ABX.TO – Barrick Gold Corp. up 12.29%

G.TO – Goldcorp Inc. up 10.02%

AEM.TO – Agnico-Eagle Mines Ltd. up 9.88%

Kinross was the best performer on the week, which isn’t surprising given my pessimistic comments from last week:

For example, K.TO – Kinross Gold Corp. closed the week at $16.73, a big drop from the $24 level we hit back in January, February and March. The RSI at 31.39 is also very low. Is this a breakdown with a big fall ahead, or is this a “breakdown” that was artificial, like we saw back in November, that was in hindsight a fantastic buying opportunity?

I won’t bore you with the charts, but the charts of AEM.TO – Agnico-Eagle Mines Ltd. and G.TO – Goldcorp Inc. and other gold stocks look remarkably similar. Gold itself has not broken through it’s base, but the gold stocks have, which either means they have over-corrected and are due for a bounce, or bad things are coming. In fact, even the silver stocks look the same (SLW.TO – Silver Wheaton Corp. and PAA.TO – Pan American Silver Corp., for example).

Again, it appears to me we are at a significant decision point. If these levels in gold and silver hold, we may be at a near term bottom. If they don’t, we could easily see $800 per ounce gold; we will have a good idea this week, and a very good idea before the end of the month.

So, do we have a better idea now?

I don’t know. Obviously all the gold stocks had a bounce this week, and obviously Kinross did not fall anywhere near to it’s November lows, so a bottom may be in. Historically an RSI passing over the 50 level is a good buy point. But, the stock has come a long way in a week, and the downtrend that started in February remains in place, so I’m undecided on this one. I therefore think the best option is to “hold”, although I may put in some sell orders at $22 to lock in some of the profits.

Silver stocks were also strong on the week:

PAA.TO – Pan American Silver Corp. up 10.87%

SLW.TO – Silver Wheaton Corp. up 9.21%

SSO.TO – Silver Standard Resources, Inc. up 7.55%

But what was the best performer on the week in my portfolio? DML.TO – Denison Mines Corp. up 28.37% on the week, including over a 9% gain on Friday. Denison was under a $1 earlier this month; I bought it for $1.11, and it looks like it’s headed for $2 before it gets even close to the down trend line.

A double in a month is a huge run, which I can’t believe is sustainable, so my sell order for half my holdings will be in at $2. If it keeps running, I leave some money on the table but that’s fine, I like cash in my pocket.

Beyond that, I still continue to maintain a bearish perspective. I still believe the economy is not even close to being out of the woods yet. The commercial real estate crisis and the credit card crisis is just beginning, and the problems in the auto sector are obviously not yet solved. Cash is king, and I want lots of it on hand if we see another big drop, which is what I expect. My portfolio is up slightly on the year, and I’d like to keep it that way.

The weather will great this weekend, so outside I go, thanks for reading, and please continue to post your thoughts on the Buy High Sell Higher Forum; see you next week.

This week the S&P 500 Index broke down to the same level it was at in December, 1996. That’s not a correction in a bull market. That’s a crash. We are in a bear market. We are in a recession.

But don’t take my word for it. Here are some comments on this past week’s action from The Wall Street Journal:

The Dow ended down 937.93 points, or 11.72% on the month — the worst percentage drop since 1933, when it fell 15.62%. The Dow industrials have fallen six months in a row and are now more than 50% off their record highs hit in October of 2007. The S&P 500 fell 17.74 points, or 2.4%, to 735.09. Its financial sector dropped 6.5% and its health-care sector sank 4% on fears that President Barack Obama’s reform plans will carve into the profits of drug makers and insurers. The S&P is off 53% from its October 2007 peak and has now seen its worst six-month drop in percentage terms — 42.7% — since 1932, when it dropped 45.44% in the six months ending in June.

Yup, that’s pretty bad. Obviously President Obama’s “Not the State of the Union” speech couldn’t save the markets. I suspect it’s because people are slowly realizing that trillion dollar deficits aren’t the solution to anything. Nobody believes that raising taxes on the top 2% of the population will solve all of our problems. And it won’t.

But this blog is not about the role of government in society, or about President Obama, who seems like an intelligent, well-meaning guy. Mis-guided, but well-meaning. This blog is about how to make money, and I see only two strategies going forward.

Strategy #1

Short the market. I am accomplishing this in two ways.

First, on up days, I add to my position in RSW – Rydex Inverse 2X S&P ETF, an ETF that attempts to go up by twice the amount that the market goes down. As the chart of the S&P 500 shows, this has been a great play over the last few weeks.

Second, I have been gambling with some short options. Note that I used the word “gambling”. Buying options is not investing, it’s gambling, because even if you get the direction correct, your timing must also be perfect or you get wiped out. Therefore I only gamble with a very small amount of money, funds I am willing to lose completely.

That being said, I currently own some S&P 500 (SPY) April 70 puts. They closed the week at $3.10; my cost basis is around $2.60, so I have not made a killing yet, but any further market weakness puts me further into the money. Again, this is just gambling, and even if they triple my absolute dollar profit will me miniscule, but it’s fun to play.

Strategy #2

A better strategy for profiting from the crash, government deficit spending, and the coming currency devaluation and inflation is gold.

I will let each of you play the “home game” and draw the lines however you want. My read is that gold’s bull market pullback is almost over. Here’s a closer look:

It appears to me that gold could drop into the $875 range and still leave the uptrend intact. Also possible is a drop to the 50 day moving average (currently $892), or the 200 day moving average ($858). Will that happen? Sure, it could happen.

On February 14, in my blog post with the shortest title ever, “13“, I said that “I expect some consolidation.” At that time the RSI was up in the 70 range, which generally indicates a pullback is coming. Well, gold has corrected from $1,000 down to a low of $927 on Friday, and the RSI closed at 53.83, so we have had a consolidation, probably due to profit taking.

The consolidation may continue, but we could also see a spike back up to and over the $1,000 level, so I’m not taking any chances. On January 31 I gave you all a list of my stink bids on gold and silver stocks and this week some of them got filled :

ABX.TO – Barrick Gold Corp. at $39 (Closed at $38.45 this week, but there was negative news earlier in the week so I pulled my bids, in the hopes of better prices in the future)

AEM.TO – Agnico-Eagle Mines Ltd. at $59 FILLED

K.TO – Kinross Gold Corp. at $20 FILLED

G.TO – Goldcorp Inc. at $33 (nope; Goldcorp touched $34 briefly on Thursday, and then rallied to close at $36.96 on Friday)

SLW.TO – Silver Wheaton Corp. at $6 (not even close; got down to $8 on Thursday before rallying to close at $8.68 on Friday)

SSO.TO – Silver Standard Resources, Inc. at $22  FILLED (I pulled my bids earlier in the week, and reduced them to $21, bought some, reduced them again, and bought more at $19 on Thursday; it closed at $19.35 on Friday).

So, is my strategy working? Yes, so far, so good. Let me re-iterate what I said last week:

I have my K.TO – Kinross Gold Corp. stink bid place at $20. That looks like a reasonable retracement point to me, but I may attempt to pick up a few shares at $22, to go with the shares I already own, as insurance against a quick spike in gold. More specifically, if I want to ultimately own 1,000 shares of Kinross, and I currently own 200, I may buy another 200 at $22, and then fill in the remaining 60% of my position on down days with my stink bids.

Kinross was $10 back in November, and could return there again, but I’m not worried. If it does, that will be an even better buying opportunity.

I placed my stink bids at the end of January, and it took until the end of February for most of them to get filled. That’s fine. I can wait. Patience is a virtue.

I am now sitting about 30% in cash, but I have another 20% of my portfolio in the RSW – Rydex Inverse 2X S&P ETF, so by selling the ETF I can still have 50% of my portfolio available to be deployed.

I expect volatility to continue, so I will continue to pick my spots. Obviously I am not fully invested, so I will place more stink bids, I will not chase stocks,and I will get filled on down days. If we have some dramatic up days, fine, I will thin out my holdings and take some profits.

Obviously February was a brutal month on the market as a whole, but being largely in cash for most of the month I didn’t suffer, and I was able to start deploying the cash to build my portfolio to where I want it to be for the spring and summer.

I predicted $1,200 gold by March 31, 2009. That is looking unlikely at this point, but who knows. Of course I predicted 8,000 on the Dow by March 31, and we will need a 1,000 point rally to get there, so these are strange times indeed.

A review of everyone’s 2009 Predictions shows that we were expecting gold at $1,026 by March 31, which is looking like a good guess, but we were also expecting the Dow at 9,107, which is looking way too optimistic. I will write a report in a month to see how we did.

For now, I will stay the course. I will hold my cash, deploy it on down days, and build towards a higher gold price as the year progresses.

It was a slow week on the Forum this week, and that’s a good thing, because we all now have time to stake our positions.

Thanks as always for reading, and see you next week.

Not good. Here is a chart of the DOW since 1997:

On May 30, 1997 the DOW closed at 7,331. On February 20, 2009, the Dow closed at 7,366. That means that over the space of 4,284 days, or almost 12 years, the Dow has basically remained unchanged. No movement. No gains. No profit. I guess we will have to stop making fun of Japan’s lost decade, since we are now experiencing our own lost decade, which may well be our LQC, or Lost Quarter Century by the time this is done.

How can this be? How is it possible that we have shown no progress, made no profit, for twelve years, with no redemption in sight? Why do we have no insight?

We have no-one to blame but ourselves.

I now present the first ever installment of Story Time with JDH.

Story #1

Four years ago we renovated our basement, and I finally got my big screen TV. Really big. A projector mounted on the ceiling projected the image on the screen that’s about eight feet across. Very cool. (There is never anything on TV so I never watch it, but that’s not the point. It’s big).

About six months ago we noticed an annoying blue smear appearing, and it grew over time. A call to the guys who sold it to us said yes, the something-or-other was going, and it’s not worth fixing. They would sell us a new and improved projector for about what we paid for the last one. My wife couldn’t believe that a fancy TV can only last four years before needing to be replaced.

And that, my friends, is one of the things wrong with this world. We build products as cheaply as possible, because we only care about price, not quality or value. Our society is disposable.

Story #2, and #3, and #4, and #5

I can tell the same story again, except this time the thing that broke was a washing machine, or a dryer, or fridge, or stove, or car, or whatever. It’s all the same.

I have never, in this blog, revealed what I actually do for a living. I prefer to remain “JDH”, the guy with initials, but no name. But here’s a hint: I work with people in financial trouble. I spend my days working with people who have more debt than they can handle.

Story #6

This week I met with Tom and his wife Jane. Tom and Jane are not their real names. They are not even real people. But, their story, with very minor editing, is completely real, and it is a story I hear at least ten times per week.

Tom and Jane had good jobs, so they bought a house in 2004 for $200,000. They had no savings, but they were able to qualify for a “no money down” mortgage. They had access to credit, so they used their credit cards and lines of credit to furnish their new home, and to take a nice vacation.

By 2006 they had accumulated $40,000 in credit card debt. But, not to worry, the housing market was great, and their house was now worth $300,000, and interest rates were low, so they were able to add $50,000 to their mortgage, pay off all of their credit card debts, and even have an extra $10,000 for the down payment on two new cars, that they leased, and to take another nice vacation.

By 2008 they had accumulated another $40,000 in credit card debt. They had bought more furniture, had nice clothes, frequently ate out, and took nice vacations. Realizing they were paying a lot in interest, they phoned up their bank manager and asked to refinance their house, just like they had done in 2006.

Unfortunately, by the end of 2008 their $300,000 house was now only worth $270,000, so it was impossible to borrow against the house.

Then Tom, who was working in an auto parts factory, was laid off. Jane was still working, but her hours were reduced, so her income had dropped as well. They began to fall behind on their monthly credit card payments, so the credit card companies began charging late fees, over limit fees, and they raised their interest rates, putting Tom and Jane even farther behind.

They came in to see me for advice. I told them they should give up their two leased cars, and walk away from the house, since there was no equity in it anyway. “We can’t lose our cars and our house”, they said, “because we worked hard for those things and we don’t want to lose them!”

I am a compassionate person. I have both sympathy and empathy for people in financial distress. It always pains me to have to tell them that no, you didn’t really “work hard” for those things. You borrowed money to buy those things that you could not otherwise afford, and now it’s time to pay the piper.

And that, my friends, is what’s wrong with this world. We don’t work for things anymore. We borrow to consume.

Last week I mentioned my now departed mother. Today, a story about my father.

Story #7

There were four children in my family growing up. There was me, the oldest, and of course my siblings JEH, CRH, and SEH. (Weird that my parents gave us initials and not names, eh?). My father was a school teacher; my mother was a “stay at home Mom.” We had one TV set in the house. We didn’t get a colour TV until just before the Reagan presidency. (I may be exaggerating, but not by much). Not that it really mattered, since we were not allowed to watch TV during the week, and my brother and I had to go to bed after the first period of the hockey game on Saturday night, but I digress.

We never owned a new car. The family station wagons (a type of car popular before the minivan was invented) were always bought used. We were not poor, and my father always paid cash. No leases. No car loans.

We lived in the same house from the time I was seven years old until I moved out on my own. My parents bought the house because it was in a small town on the outskirts of Toronto. It was the best house they could afford, but it was not more than they could afford. Eventually all of us moved out. In 2000 my mother died, and in 2007 my father sold the big old house, at the peak of the real estate market, and bought a smaller house, again on the outskirts of town. As a result of the “downsizing” may father had a nice chunk of cash.

In the fall of 2007, a few weeks after he had moved into the new house, I got an e-mail from my father telling me he had bought two new cars. I was stunned. Between the ages of 16 and 70 my father had never owned a new car, and now he had bought two of them? I immediately called him and asked him what he had bought. He had bought a pick up truck, to haul gardening supplies, and a car big enough to transport his grandchildren when needed. He bought a 2004 Ford and a 2004 Highlander.

“I thought you bought two new cars”, I said to my Dad. “I did”, he said. “But Dad, it’s 2007, and the cars you bought were made in 2004. That’s not new.” “Yes, they are practically new” he replied.

And that, my friends, is the difference between people born between 1960 and 1990, my generation, and people like my Dad, born during our last “Lost Decade” between the crash of 1929 and the end of the War in 1945. To my Dad, a three year old car is a brand new car.

I lease my cars on three year leases. I turn them in after three years and get a new one. To me, a three year old car is obsolete.

See the difference? I think a three year old car is obsolete, and my Dad thinks it’s brand new!

My Dad is retired and living comfortably, with no debt. My peers all have fancy cars and fancy houses, but we all have car loans, car leases, and mortgages we can’t afford.

Why has the Dow not moved in 12 years? Because we have not created any wealth in the last 12 years. We have borrowed to consume, but we have not saved any money, we have not created any wealth.

The sub-prime mortgage mess in the U.S. was created by people with inadequate income buying houses they couldn’t afford. The government is now discussing a “mortgage bailout” to help pay the mortgages of people who should never have gotten the house in the first place.

Have the bankers created any new real products in the last twelve years? Is the banking system more efficient? No, they have just given mortgages to people who should not have mortgages, and for that they received fat bonuses, and billions in bailout money.

Have the Detroit automakers created any truly new cars in the last twelve years? Do we have super-fuel efficient cars, or real hybrid cars? Do we have cars that run on alternative energy? Are cars significantly safer and cheaper than they were twelve years ago? Well, Detroit created the SUV and the massive pick up truck, exactly what we didn’t need last year when oil hit $140 per barrel. Their reward for their incompetence? Billions in bailout dollars, and millions more in bonuses for the executives, even as tens of thousands of factory workers lose their jobs, their health benefits, and their pensions.

As we all know, the First Law of Thermodynamics states that energy can neither be created or destroyed.

JDH’s first law of Money-Dynamics states that wealth can be created by work, or destroyed by waste and incompetence, but it can’t be created by borrowing or fancy bookkeeping.

Alas, we are guilty of fancy bookkeeping.

We believe that borrowing to buy a house, two cars, four high definition TV sets, three vacations a year and a meal at a different restaurant every night means we are wealthy. We are not. We are just in debt.

Marketers can create the Perennially Changing Perennial, but it’s not; it’s just the same flower we bought last year, dressed up in a fancy package with a higher price tag. Buying more stuff, on credit, does not make us wealthy. Ultimately, it makes us poor.

The Solution

What is the solution for Tom and Jane, who can’t afford to pay for their house, cars and credit cards? They have to clean house. Unfortunately selling their house and cars won’t solve their problem, because they don’t own their house or cars; they only rent them from the bank. The laws are different in many parts of the United States, where it is possible to walk away from a house and owe nothing. In Canada, that’s not the case. If you walk away from your house, the mortgage holder will pursue you for the shortfall, and the solution for a record number of Canadians is quite simple, and quite final:

Bankruptcy

If your income is drastically reduced, and if you owe more than you can ever repay, bankruptcy may be your only option. According to the Toronto Star:

Consumer bankruptcies led the rise, spiking by 50.1 per cent year over year to 7,821 people, one of the biggest year-over-year jumps in history, according to some observers. “I can’t remember an increase like that. That’s kind of blown it off the charts, frankly,” said Douglas Hoyes, a bankruptcy trustee with Hoyes, Michalos & Associates Inc. “I would have said maybe a 25 to 30 per cent increase based on our call volumes. But 50 per cent? That’s stunning.”

Yes, I would say an increase in personal bankruptcies of 50% is “stunning”, and is “blowing it off the charts.” You think that may be one reason why the stock markets are making new lows?

If you are a country, built on credit, with no wealth created in 12 years, there is only one solution.

Bankruptcy

Now yes, I realize a country can’t technically file bankruptcy. But a country can devalue their currency and renege on their existing debts by printing more money. And that, alas, is what is happening.

It’s simple math. Long term you can’t continue to borrow more than you can repay. At some point real wealth must be created, and if it isn’t, economic calamity is the result.

The point, dear readers, of this long winded, disjointed, pedantic dissertation on this cold and windy Saturday morning is this: we created these problems over a long period of time, and they will not be solved quickly.

In Canada, if a person declares bankruptcy, in most cases the process ends in nine months. Their credit report is negatively impacted for seven years, but after nine months their debts are gone, and they can get back to living. Continuing to borrow money at ever increasing interest rates only serves to delay the inevitable result.

The world economies should have taken their medicine, allowed the defaults to happen. Instead, governments are injecting “stimulus”, and are propping up failed enterprises, which is akin to borrowing from a loan shark. They have not solved any problems; they are only delaying the inevitable result. If we had let the failures happen in 2008, by 2010, after a very difficult 2009, we would be on the road to recovery.

As it stands now, 2009 will be worse than 2008, and 2010 may well be even worse.

Which is why the price of gold is on a run. It is becoming obvious that the fiat currency system is dying, so we have no choice but to put what little wealth we have into vehicles that are no someone else’s liabilities. And that’s gold.

I predicted that gold would be $1,200 per ounce by March 31, 2009. Given that fell to almost $800 about 35 days ago, and is now around $1,000, $1,200 is possible by the end of March. Very possible. However, I suspect my prediction will be wrong.

I know believe that, with everyone predicting that gold will go to moon, we will probably see a pullback. The $1,000 level was significant resistance a year ago, and I suspect that will prove to be the case again this time around. The RSI and MACD levels are looking over extended, and a $200 run in one month is probably not sustainable. I will therefore continue to maintain my small gold stock position, and remain with the rest of my portfolio in cash, in anticipation of better buying opportunities over the next few weeks.

World governments have committed to spending trillions of dollars in pork (I mean “stimulus”). They don’t want to see the U.S. dollar crash, and gold to soar, before their plans have at least a few weeks to work, so I assume they will keep a lid on gold, for now, just as a cook keeps a lid on a boiling pot. (Until, of course, the pot boils over).

I must of course point out that I have been completely wrong up to this point. I have been reducing my gold holdings all the way up over the last two months, when I should have been buying.

On January 31 I gave you all a list of my stink bids on gold and silver stocks; as of today, I have not been filled on any of them, so they remain as follows:

ABX.TO – Barrick Gold Corp. at $39

AEM.TO – Agnico-Eagle Mines Ltd. at $59

K.TO – Kinross Gold Corp. at $20

G.TO – Goldcorp Inc. at $33

SLW.TO – Silver Wheaton Corp. at $6 and

SSO.TO – Silver Standard Resources, Inc. at $22

The only caveat to the above numbers is that I may start to dabble at slightly higher numbers.

For example, I have my K.TO – Kinross Gold Corp. stink bid place at $20. That looks like a reasonable retracement point to me, but I may attempt to pick up a few shares at $22, to go with the shares I already own, as insurance against a quick spike in gold. More specifically, if I want to ultimately own 1,000 shares of Kinross, and I currently own 200, I may buy another 200 at $22, and then fill in the remaining 60% of my position on down days with my stink bids.

Or not. I have a gut feeling that the $1,000 level will prove to be significant resistance, and my stink bids may well get filled in the near future.

Cash is not a bad thing in these volatile times, and patience is a virtue, so I will sit and wait a bit longer.

And where is the Dow going? I predicted 8,000 by March 31, 2009. Looks like we already blew through that level.

My best guess now is that the Dow will retest the 1987 levels around the 2,000 level, which makes sense, since that will probably happen around the time gold hits $2,000, for a nice symmetrical 1 to 1 ratio.

Am I crazy? Have I spent too much time with people in financial distress, which has made me too cynical?

Maybe.

But for now I will hold cash, continue to dabble with some put options on the S&P 500, and look to increase my gold holdings on any pullback in the gold price.

I have talked enough. Now it’s your turn to comment on the Forum. Thanks for reading, and see you next week.

Friday February 13, 2009 proved to be a lucky day for me as finally, after many years, a true high speed internet service was installed at my house. I live in the country, and we don’t have cable or telephone DSL service, so for the past four years I have relied on satellite internet which is expensive, slower than DSL, and comes complete with a latency problem that means I couldn’t use a VOIP phone. On Friday a new wireless radio-based service was installed, and at the moment I’m getting download speeds of over 7,000 kbps (which won’t last, since there will be a limiter on it next week, to leave some bandwidth for my neighbours). Needless to say, I couldn’t be happier. It was a really cool Valentine’s Day present.

Speaking of Valentine’s Day, I am very fortunate to be married to a woman who thinks Valentine’s Day is largely a silly holiday, designed mainly to separate men from their money, buying silly stuff for their wives/girlfriends that they don’t really want. We take a more practical approach: I start the day as I start every day: I make my wife a fresh pot of coffee. I’m a morning person and not much of a coffee drinker. She’s not a morning person and is addicted to the stuff, so my daily gift to her is that I make the pot of coffee. Happy Valentine’s Day. Of course I will also select a nice red this evening, probably a Chianti.

And yes, we have now been married for 13 years, so 13 is proving to be a lucky number indeed.

(For those who are interested, 13 is considered unlucky because, according to Wikipedia, in numerology, the number twelve is considered the number of completeness, as reflected in the twelve months of the year, twelve signs of the zodiac, twelve hours of the clock, twelve tribes of Israel, twelve Apostles of Jesus, twelve gods of Olympus, etc., whereas the number thirteen was considered irregular, transgressing this completeness. But I digress).

Will 13 be lucky for the markets? The Dow made it’s low on Thursday November 20, 2008 at 7,552. 13 weeks later, on Thursday February 12, 2009, the Dow closed at 7,932, a gain over those 13 weeks of 5%. The optimists would say a bottom is in. A pessimist would tell you that’s still a drop of 43% from the 14,000 level reached in October, 2007.

Last week I gave you a list of headlines showing all of the bad things happening in the economy. This week I could give a similar list, but the most important news item is probably that the Senate has now passed yet another stimulus bill. On Friday the 13th. Great.

I firmly believe that government’s can’t create jobs. All they can do is tax the current generation, or borrow from future generations, and a multi-trillion dollar deficit this year will certainly qualify as borrowing from future generations. That may give a tiny little bump to the economy at some point in the next year, but it kills the economy longer term.

Which is probably why the gold chart appears to show a break out from the down trend line. Interestingly, silver does not yet show the same break out.

So, am I buying gold? Not quite yet. Over the last 13 weeks or so gold has had a run from $700 to $950; that’s a big move, and I expect some consolidation before the move resumes. (Actually, gold bottomed in October, then retested and held that bottom 13 weeks ago in November, so the gold bottom is looking more solid that the bottom in the general stock market).

On January 31 I gave you all a list of my stink bids on gold and silver stocks; as of today, I have not been filled on any of them, so they remain as follows:

Here are my current stink bids, all in Canadian dollars, and all subject to change:

ABX.TO – Barrick Gold Corp. at $39

AEM.TO – Agnico-Eagle Mines Ltd. at $59

K.TO – Kinross Gold Corp. at $20

G.TO – Goldcorp Inc. at $33

SLW.TO – Silver Wheaton Corp. at $6 and

SSO.TO – Silver Standard Resources, Inc. at $22

I will be patient. I will sit in cash until the market comes to me. I will not chase it. A further down turn in the general markets, which is very likely, is also very likely to bring all stocks down with it, including the gold and silver stocks. So I will not chase it. I have some small core holdings in the above stocks, which is my protection against an upside break out. For the rest, I will wait.

And I will continue to wait, even it I have to wait another 13 weeks.

Monday is a holiday in the U.S. (President’s Day) and in Ontario (Family Day) so all major stock markets will be closed; we shall see how the world develops over the long weekend, and we will probably be in for some pent up fun on Tuesday.

Enjoy the holiday. We need it. See you next week.

I have been operating under the assumption that the markets would have an “Obama Bump” in late January and February before resuming their descent. That is still my operating thesis, although I have not been entirely correct up to this point. My reasoning is this:

The economy is in terrible shape, much worse than is generally acknowledged. I’m not keeping track, but it appears that there were more layoffs announced in the past week than during any other week in recent memory. We are not at the bottom yet.

However, President Obama was elected to “fix things”, and he will try. Each down day on the markets puts increasing pressure on legislators to pass another stimulus bill, and they will, perhaps this week. Long term of course the government can’t “stimulate” the economy any more than I can stimulate the sun. The government can borrow or print money and spend it, but eventually it has to be paid back, or taxed, or defaulted upon, which reverses the short term stimulus. That being said, the bill will pass, and I expect the markets to temporarily rejoice.

We amateur market technicians will look at the chart and we will say “look, the bottom is in, the lows have not been breached, this time the rally is for real!” And yes, I guess as long as the Dow hangs around above the 8,000 market, the old bottom will not be breached. (Is it just me, or does anyone else think it’s a remarkable coincidence that the Dow closed on Friday at exactly 8,000? It’s almost as if someone is trying to manipulate the markets, but I guess that’s not possible ).

I don’t trust the market, so I am maintaining significant cash reserves. I may try to play the bounce, but not with any serious money, because while the bounce might be high, it will probably be short lived, and by the end of February I expect to be setting up my short plays to take advantage of the inevitable slide.

Gold

What about gold? I tried to get the discussion started with my post this week on Point & Figure (P&F) Charts. I showed two gold charts, both of which showed that the down trend in gold remained intact.

This week on the Forum, sidewinder posted an excellent gold chart showing a series of lower highs and lower lows, indicating that the direction for gold may be more down than up. Pinetree posted a similar gold chart, and reached the same conclusion.

Well, despite what sidewinder, Pinetree and I predicted, it would appear that on Friday gold decided to break through it’s down trend line, and close at $928.40 Does this mean gold is now going immediately to $1,000? Could be, but I’m not convinced yet.

I have no doubt we will see $1,000 gold this year. In fact, I would not be surprised to see $1,500 gold this year. But, the gold market is still a highly manipulated market, so I would not put it past the Big Boys to drive the price up, break a down trend line to cause us all to jump on board, and then drive it back down for one last burst of profits on their shorts.

Also, if you look at the Point & Figure gold chart posted on The Privateer (I suggest you bookmark it), gold did have an upturn on Thursday, but using a P&F chart the down trend line remains intact. We can’t declare a new high until we actually have a new high, and that’s why I think our big gains will come when we have a decisive close above the $1,000 mark.

So, my game plan remains the same. I have lots of cash right now, and I have stink bids placed on all of my favorite gold and silver stocks. If they get filled, great. If they don’t, I will sit and wait. I am still holding some stocks in case I am wrong, but I’m currently more than half in cash, awaiting better buying opportunities later in February.

Here are my current stink bids, all in Canadian dollars, and all subject to change:

ABX.TO – Barrick Gold Corp. at $39

AEM.TO – Agnico-Eagle Mines Ltd. at $59

K.TO – Kinross Gold Corp. at $20

G.TO – Goldcorp Inc. at $33

SLW.TO – Silver Wheaton Corp. at $6 and

SSO.TO – Silver Standard Resources, Inc. at $22

We shall see whether or not I get filled. Of course the market may run away this week, and gold may hit $1,000, and being on the sidelines may cost me lots of money. Oh well, that’s the risk we take. I prefer to believe that the markets are very volatile, so a big up day will be followed by a big down day, so my opportunity will arrive at some point.

That’s it for today, good luck to your team in the Super Bowl tomorrow (I have no vested interest, so I’ll just enjoy the game), and we will talk again next week.

…in the short term the markets will go up. The American media will be full of stories about the new president. There will be wall-to-wall coverage of his Inauguration speech, and the parties that follow. Many stories will be written about a “New Day for America.” All stories will be positive.

I therefore assumed that the markets would rise, so I said that:

I may consider gambling by buying either a long ETF, or perhaps just picking up some out of the money call options on the S&P 500. I wouldn’t invest anything significant in them, but it’s probably worth the gamble. I may also consider a bull spread with options, which is somewhat less risky, but also has less potential for profit.

And that is exactly what I did.

On Monday the U.S. markets were closed for the Martin Luther King Jr. holiday, so on Tuesday morning, Inauguration Day, I placed my bets. I started by picking up some shares in RSU – Rydex 2X S&P 500 ETF, and ETF that is designed to increase by twice the increase in the S&P Index (and vice versa, of course; it drops if the S&P declines). As the morning progressed the markets continued to fall, so I “doubled down” by buying some call options (specifically the SPY Feb 85 calls, which are call options on the S&P 500 Index). I bought in tranches as the markets fell, and ended up paying $3.42 each.

Unfortunately for me my timing was somewhat premature; as President Obama spoke, and as Inauguration Day wore on, the markets continued to fall. So much for the instant euphoria I was expecting.

I guess I should have done some basic research. It turns out that 70% of the time the markets fall on Inauguration Day. The biggest recent fall was the day of President Johnson’s Inauguration, but that’s not surprising since he became president after the assassination of JFK. The next worst day in recent memory was President Reagan’s Inauguration; the market fell for the next year and a half, but then of course a 20+ year bull market started, so I guess you can’t over-analyze one day’s results. You can read Mark Hulbert’s column for more details.

Fortunately, Wednesday was an up day.

Thursday was a marginally up day, but Friday started off heavily to the downside. I did not want to be sitting on short term call options over the weekend, when anything can happen, so around 10 in the morning or so I sold the calls for $2.38, obviously a significant loss over the $3.42 I paid for them. Of course, as you can see from the chart, my sell point marked the start of the rally that continued until the end of the day. Had I held on, the options would have been worth around $2.65 at the end of the day.

However, I’m not losing any sleep over my decision. I expected there to be an Obama rally. There wasn’t, at least not to the extent and as quickly as I expected. When you are playing with options, you must take your profits, or cut your losses, very quickly. Sitting around waiting for a few weeks means the time premiums evaporate and you are wiped out. So I took my losses and bailed.

Fortunately I was not playing with significant dollars, so the loss doesn’t really hurt me. I held on to the RSU – Rydex 2X S&P 500 ETF, just in case the rally continues next week. I don’t have the same worries about time premium erosion.

So why was I wrong? Why did we not have a big uptick in the markets this week? It could be that the uptick will come next week; everyone spent the week watching Inauguration coverage on television, so people weren’t actively trading. It could also be that everyone is waiting for the details of the Obama stimulus package, and when it’s announced, the markets will soar.

Of course, it is also possible that the economy is in a mess, and everyone knows it, so no-one is buying.

My thoughts on the subject are well documented. I assume that President Obama is a smart, intelligent man. I assume he has smart, intelligent advisors, and I assume he will do what he thinks is necessary to “fix” the economy. Unfortunately, I don’t believe a government can “fix” an economy. I believe that only people can fix the economy. Only people can invent products, create wealth, improve efficiency, pay down personal debt, save, and do all of the things that can make an economy grow. “Stimulus” packages may bump up the economy today, but long term only taxes and inflation increase.

So, I continue to believe that we may have a bump up when the stimulus package details are announced, but in time reality will set in, and down we go.

Of course the big winner this week was the price of gold, and I’m pleased to say my blue chip gold holdings like ABX.TO – Barrick Gold Corp. and AEM.TO – Agnico-Eagle Mines Ltd. had good weeks, up 4.5% and 2.3% respectively. Silver stocks did even better. However, I see warning signs on the gold chart. It looks to me like $900 is a significant resistance point, for two reasons: First, we are getting very close to the down trend line drawn back from the highs in March, 2008. Second, the RSI is approaching 70, which has marked a significant resistance point for the last year.

Long term, and in fact over the next three or four months, I believe gold will be a great investment. However, I don’t believe the next few weeks will be kind to gold. I believe profit taking will kick in, and gold will fall into the $800 per ounce range. That will be the final buying opportunity in this cycle, and I fully expect to see $1,000 per ounce by the time the snow is gone in my corner of Ontario. (We have lots of snow on the ground, so I’m assuming it will be late March or early April before it disappears).

So, the strategy this week will be to place sell orders on half of my gold holdings at slightly above the closing prices on Friday, and take profits. I will do the same with my long ETF position. I am already sitting 58% in cash, which is where I want to be if I’m correct and we have one more down leg. I’m hedging my bets by retaining some gold and silver shares.

I hope I’m wrong. I would love nothing more than for this financial mess to be over. If I am wrong, I have cash, so my profits are capped, but I’d still be happy.

Unfortunately I believe that the real estate market has more room to fall, China is in a recession which will reduce their demand for our products, and make it harder for them to buy more U.S. Treasuries to prop up the U.S. dollar, credit is still very hard to get (which is what fueled the boom over the last few years), and price of oil is on a yo-yo string at the moment. It could be that all of this negativity is a contrarian indicator, but I doubt it.

As always, thanks for reading, and thanks for contributing on the Forum; we will all continue to muddle through this together.

I’m holding on to all of my gold and gold stocks, and I’m holding on to my short plays on the market. I’m a pessimist. I think we see Dow 5,000 before we see Dow 11,000, but I hope I’m wrong.

Well, it’s not looking like I’m going to be wrong, is it?

I’m not going to be wrong, I’m afraid, because the world has changed.

The modern world began in 1978, with the start of the reigns of those icons of capitalism, Ronald Reagan (in 1980), Margaret Thatcher (1979), and Deng Xiaoping. (Okay, okay, Deng Xiaoping was never officially the leader of China, but from 1978 onwards he had significant influence on China, and he did encourage the Chinese people to individually begin taking risks, and that did bring about the greatest increase in the standard of living that any society has ever seen in a 25 year period). In the 1980s and 1990s we all worked hard to get ahead, and taxes were being lowered to reward earners.

Those days are gone. 50% of voting age Americans no longer pay taxes. They receive from the government, and therefore have no incentive to work. A “soak the rich” methodology is now politically expedient if none of us are rich anymore. More government spending is inevitable, although I’m not sure President Obama is capable of spending as much as that other icon of freedom, George W. It’s hard to top a trillion dollar deficit, but I digress.

The change became obvious on July 13 of this year when the Boys agreed to bail out Fannie and Freddie, boosting the bank stocks (temporarily) and the U.S. dollar (temporarily) and killing the commodities markets (oil dropping from $140 to $50).

It could be argued that oil dropping from $140 to $50 is deflationary. It could be argued that the huge number of house foreclosures will drop the price of a house, which is also deflationary. Perhaps, in the short term, that’s true. Longer term, not so much.

Inflation is an increase in the money supply; deflation is a decrease in the money supply. If twice as much currency is chasing the same number of goods, prices appear to rise, which is why we think rising prices means inflation. The money supply certainly appears to be increasing, with the national debt set to increase by somewhere between 50% and 100% this year thanks to the bailouts of Fannie and Freddie, the TARP program of $750 billion to bailout out the banks, and who knows what else to bail out the auto industry and everyone else. Longer term, that’s inflationary.

Let me be more specific:

Short term, prices are falling. The price of a barrel of oil has dropped by two thirds in the last few months. House prices are crashing. Unemployment is rising, which drives down the price of labour (or “labor” for my American friends). But that is a short term phenomenon.

In the medium term, all of the new money created by governments around the world will be inflationary. There is no way you can print that much money without the money supply increasing. That’s inflationary, and that’s good for gold. Really good, if you look at Friday’s action:

Gold peaked in March, and is still in an obvious down trend, but Friday’s $51 increase in the spot price is a nice start.

Even better is the action in individual gold stocks, like K.TO – Kinross Gold Corp. , up 28% on Friday. That’s more like it. Most impressive is that the Kinross chart is different than the gold chart. Gold is still in a downtrend, but Kinross appears to have broken the downtrend, which is a very positive development. I’m not selling.

Interestingly, every gold stock is not the same.

ABX.TO – Barrick Gold Corp. had an even bigger gain on Friday, up 32% on the day. However, as the chart shows, it’s downtrend from the summer remains in place, so all is not perfect, yet. We could still be experiencing a bear market rally. In fact, by definition, that’s exactly what we are experiencing.

Let’s take a closer look at the numbers. Specifically, let’s take a look at my gold and silver holdings, and compare their closing price today to their closing price on October 31, 2008:

The table tells the tale: The major gold producers have done well, the big silver producers have done o.k., and the small silver guy (Silver Wheaton) went down.

This makes perfect sense to me. The market is tanking, so if I want to use gold as a safe haven, I’m not putting my money in the little guys; I’m putting it in the big, safe guys, and that’s exactly what happened.

What To Do From Here

My plan, for your consideration, is as follows:

First, I don’t believe all is good with the market.

Clearly the DOW is back to the bottoms of September, 1998 (7,795) and September, 2002 (7,528). The bottom on Thursday was 7,553. The optimist would tell you to look at the uptrend line (the blue line on the chart above (you can click it to enlarge it); extending back to before the 1987 crash the uptrend line is still in place, so we are simply in a huge correction within a long term bear market. The optimist would also tell you that we are at a triple bottom, which is very strong support, so we should rally from here.

I don’t believe it. The DOW was over 14,000 last year, and it fell to under 8,000 this week. A drop of almost 50% is not a correction in a bull market; that’s a bear market. We have violated the 1998 lows from ten years ago; that means the gains of the last 10 years are gone; that’s not just a correction. That’s a bear market.

Therefore, my plan is to remain short the market.

I continue to hold RSW – Rydex Inverse 2X S&P ETF, an ETF that attempts to increase by twice the drop in the S&P 500. In other words, a drop of 10% in the S&P should lead to a gain of 20% in this ETF. As the chart shows, it’s extremely volatile (obviously twice as volatile as the market). On Friday it was down over 9%, but there are days when it can be up over 10%. It’s volatile, but it’s a great hedge against further drops, and I’m in the money on it now. It’s currently 20% of my portfolio, so that shows you how bearish I still am.

Second, I’m holding my gold and silver shares, as shown in the table above. I realize we are still in the correction phase of the market. However, as I described in detail discussing gold price manipulation in previous posts, the gold price has been artificially depressed by JP Morgan (to increase their profits on the short side), and JP is working with the government (hence the sweat deal on Bear Sterns) to keep the gold price down, lest the populace realize how bad the situation really is (hint: it’s really bad). If gold was at $2,000 per ounce the talking heads couldn’t show up on CNBC and say “now’s the time to buy”. No-one would buy until a new currency was established.

But, you can only keep the lid on a volcano for a limited period of time. Gold was up over 5% on Friday, finally getting over $800 (intra day) for the first time since October, and actually touching it’s 50 day moving average, also for the first time since mid October. Those are positive signs, that lead me to believe the shorts are unwinding their positions, and are even perhaps moving to the long side.

I continue to expect investors to increasingly take delivery of Comex gold contracts in December (which may even lead to a Force Majeure on the gold market if the gold doesn’t exist in the warehouses to cover the contracts. We could easily see $1,000 or more per ounce by the end of next month, so now is not the time to sell gold shares. (Physical gold bullion isn’t a bad idea either).

That being said, the first wave back to gold shares will be a flight to quality, so the senior producers should increase faster than the unproven juniors. So, I’m in the seniors now (see table above), and will only move into the more speculative juniors once the seniors have had a run.

Could I be wrong? Of course. I’ve been wrong for the past year and a half, which is why my portfolio is down 46% year to date. It’s been a disaster. However, as price deflation ends and inflation kicks in, gold will soar, and there will be serious profits to be made.

Timing wise, I expect continued volatility, but since I don’t know when the explosive uptick will start, I’m staying put. (It may have started on Friday, but realistically a pullback for gold on Monday would be more logical, with the big move upward not happening until December or January).

Finally, I’m keeping a third of the portfolio in cash. If I am wrong, I’d like to have some cash on hand for further bargains. (And yes, I believe we will see Dow 5,000 before we see Dow 11,000).

That’s the game plan, so please continue to post your thoughts on the Forum; we’ll chat again next week.

The advantage of all of this volatility, for me, is that I wake up around 5:30 am every day wondering what the Asian and European markets are doing. I go downstairs to my basement work out room, flip on CNBC, and then, while I’m on the treadmill, the elliptical, or lifting weights, I’m watching the market action. My physical condition has never been better. Want to lose weight? Watch CNBC while you work out; you may find yourself spending hours in front of the TV; just making sure you are moving while you do.

(As an aside, most guests on CNBC recommend that you “don’t sell” because long term everything will come back. Alas, that’s been the wrong advice over the past few months).

Here’s how my Wednesday went: I got up at 5:30, started running on the treadmill, and watched CNBC explain the futures markets. Asia and Europe were down, and it looked like we were set for a big down day in North America. Then, at 7:00 am, the Fed and a bunch of other central bankers did a “co-ordinated rate cut”, bringing rates down by half a percent. The futures turned around, and the markets were looking up. I got into my car around 8:00 am to drive to Toronto, listening to CNBC on the way in (Note to self: satellite radio can be addictive). By the time the markets opened, the euphoria had worn off, and markets were down. Then up. They finally closed the day down.

Friday was no different. The Futures were lower during my 6:00 am workout, with Asia off 9%. By 9:38 am the DOW was down to 7,958; at 3:36 pm it was at 8,885, a swing of almost 900 points, or 11% in one day. It finally closed at 8,452, down a mere 1.5% on the day.

While I was in Toronto on Wednesday, I stopped by the precious metals desk of Scotiabank at Scotia Plaza. As I reported in my thoughts on gold last week, it’s hard to find any metal to buy, anywhere. Scotiabank is the largest precious metals dealing bank in Canada, so if anyone would have anything, they would. I asked to buy some silver bars. They had none. Nothing. Zip. One ounce, 1,000 ounce, all the same: nothing.

In my quest to actually buy some physical gold or silver, I asked for 100 silver Canadian Maple Leafs. With silver in the $12 per ounce range, I didn’t think a purchase of $1,200 worth of silver would be a problem. It was. I could only buy 25 coins. That was it. The biggest bullion and coin dealing bank in Canada, at their main branch, on top of their main vault, could only offer me a few hundred dollars worth of coins. I took them, although it’s such a small quantity that I’m not sure it was worth the bother.

They did have some gold Maple Leafs, but I’m still shocked at the shortage of silver.

On Wednesday on the Forum Davidslane posted this link to a great gold video on CNBC with the CEO of Swiss Asia Capital, making the point that there is a huge dis-joint between the paper market and the real market.

Ya think?

When I can’t even buy $500 worth of real silver from the biggest silver dealing bank in Canada, it’s obvious there is something out of whack somewhere. It makes you wonder what’s going to happen when the people trading the paper actually want physical delivery of the underlying precious metal. If it isn’t there, the prices will spike, big time.

So, it’s obvious that owning gold and silver stocks, and whatever physical metal you can find, is not only prudent, but also great insurance for the rough times ahead.

If that’s true, why was gold down $36 on Friday, closing around $850, after having traded over $900 earlier in the week? What exactly is going on?

I have no idea. But, since I’m writing this blog, allow me to speculate:

Measured from the March peak, gold is obviously in a down trend. Equally obvious is that gold has been range bound between $825 and $925 since mid September. Until gold breaks above $950, gold will remain in a down trend. This down trend is bizarre, given that the world is ending. The DOW lost 18% this week, the government is bailing out everyone, and yet we don’t have a rush to gold? You can’t buy the physical metal anywhere, and yet we don’t have higher prices?

I can only assume that the government, or the big boys, or both, have their fingers in the pie, and are holding the price of gold down to allow the big boys the chance to cover their shorts and get out whole. They can manipulate the market for a while, perhaps for a long while, but eventually the lid will be blown off.

You can buy gold futures on the Comex, and most buyers never take delivery. You are buying a piece of paper. So it’s fairly easy to manipulate the market.

In fact, I just had an idea. I call them the “Buy-High-Sell-Higher.com Gold Certificates” and here’s how they work. Each certificate entitles the bearer to 100 ounces of gold.. You send me your money, and I’ll send you your certificate. Simple. As the price of gold increases, the certificate’s value increases. Send your money now. You don’t have to worry about physically storing the gold; I’ll worry about that.

There’s only one catch. I don’t actually have any gold. The certificates are backed by my promise, but not by any real gold. However, as long as you believe they are backed by gold, everything will be fine. (Incidentally, I have modeled my certificates on the U.S. Dollar, also backed by nothing).

The only flaw in my scheme will be that, if any of you actually want to take physical delivery of the underlying gold, I will have a problem. I don’t have the gold, and my entire scam (I mean investment opportunity) will collapse.

That’s the problem with all of the paper gold being traded. If people want the actual gold, and it isn’t there, you’ve got a problem. And, of course, that’s why real people are standing in line to buy physical gold.

The market’s crashed this week because of fear, as accurately stated by whatupdoc in his forum posting on fear, quoting Adam Hamilton:

Fear can only grow until everyone remotely interested in selling immediately has already sold.  After they are out, selling pressure abates dramatically so any bidding starts driving prices higher.  And of course higher prices cause fear to deflate fast.  Thus

Strong contrarian traders can capitalize on this V-bounce tendency.  During periods of extreme fear, we need to be buying bargains while everyone else is selling in terror.  During times when the majority expects the stock markets to fall forever, we need to be throwing long with all we’ve got.  And with the VXO rocketing into the 70s this week, mind-bogglingly high, fear has to be at unsustainable extremes.

The fear may continue next week, or it may not. I’m betting that it will, because we are not out of the woods yet.

America has record trade deficits, and a record government deficit and debt. The average North American person is carrying more debt than ever before. (The average Canadian now has debt equal to over 131% of their annual personal disposable income, the highest level ever, and I assume it’s just as bad in the United States). The housing bubble has burst. The stock market bubble has burst. Things are not good, and they will not improve tomorrow.

This week was a puke, but I don’t think it was “The Big Puke”, because fear is still present, and the underlying problems have not been fixed.

My guess is this bear market lasts for another six months, and probably ends somewhere in the Dow 2,000 to 5,000 range. Last week, I gave you my plan, and here it is again:

The Plan Going Forward

Last week I said:

First, we are not out of the woods yet. The sell off after the bailout bill was passed proves that. So, for downside protection, I bought some RSW – Rydex Inverse 2X S&P ETF. This ETF is designed to go up by twice as much as the drop in the S&P. I bought it early Friday afternoon, and it sharply increased after that, so I’m actually in the money on that one. I assume that once earnings season starts, followed by tax loss selling season, the market will continue to fall, so I want to be protected. RSW is now 7% of my portfolio, and I will probably increase my holdings on up days.

Well, RSW closed the week up 43%, so that was nice insurance to have.

I will also continue to hold the solid gold stocks, like ABX.TO – Barrick Gold Corp., AEM.TO – Agnico-Eagle Mines Ltd., K.TO – Kinross Gold Corp. and G.TO – Goldcorp Inc. They got hammered on Friday, but that will probably be a good excuse to buy more next week (and I was buying on Friday).

(As another aside, just think how much more profitable the gold miners will be now that the cost of oil has dropped; they use a lot of heavy machinery, so that will help them).

I am now officially exhausted, and since it is Thanksgiving weekend here in Canada I won’t be watching CNBC. The weather is supposed to be great, so I’ll be spending the weekend outside. I’ll resume my worry about the end of the world next week. I do however think the market will continue to go down the toilet, hence my title this week: Circling the (toilet) bowl on the way down.

I’m exhausted, but you are welcome to respond on the Forum, and I encourage you to do so.

Thanks for reading, Happy Thanksgiving, and see you next week.

There can be no doubt that we are in a bear market, as the Dow is now down almost to where it was 3 years ago, and falling fast. Unfortunately, I can’t find anyone who said, a month ago, that the worst was yet to come, and we should all be loading up on puts and shorts of whatever we could sell short. Including me.

Last week I rambled on about Barber Shops and Gold, and ended by asking for your comments on my strategies. I mentioned that RIM.TO – Research in Motion Ltd. looked cheap, and I bought some. On the Forum, jjj000 said that:

chart on RIMM looks scary to me.  I see 50 as an easy possibility.  I would hedge that long position with some Jan 40 PUTS.  In fact I might pick some of those up on Monday if RIMM bounces. In this market… I think it’s a little crazy to play against bad news on a stock.

Well, it turned out that jjj000 was correct; RIMM was scary, it was the wrong move, so I dumped it on Friday at a small loss. Puts would have been a better idea.

Gold

Project1947, a new member, in their first post, said

The two year gold chart you showed remains in down trend.    Maybe it is brave to go against right now, but it might also be very foolish.

Only time will tell who is correct on that one, but for the record, here is a two month gold chart:

From the base around $740 in the second week of September, in five trading days gold peaked at over $920, for a gain of 24% in a week, with over $100 of that gain happening in one day. That uptrend ended yesterday when the blue uptrend line was broken, so for now the red down trend line rules the roost.

Looking at a one year chart gives a similar story:

Again, the chart looks bad. The peak of over $1,000 in March was followed by a peak of under $1,000 in July, followed by the recent peak of just over $920 earlier in September. It doesn’t take a mathematician to understand that a series of lower highs is a down trend. The fact that gold is now below both it’s 50 day and 200 day moving average shows we are going in the wrong direction.

But, for some perspective, here’s the three year chart:

Factoring out the massive drop and bounce in early September, the argument can be made that the long term uptrend remains in place, and we are still in an obvious, long term, bull market for gold.

For a better perspective, here’s an 8 year gold chart, showing that we are in an obvious uptrend.

(Have fun! Create your own charts! Go to www.kitco.com and pick your own time periods!)

The point, dear reader, is that it’s been rocky of late, but that long term we are moving in the right direction: up.

My views on gold are well documented, and I believe they are shared by most of you. In short, the U.S. and other governments continue to create money to “bailout” the economy, and each extra dollar they create reduces the value of the remaining dollars. So far, here’s the scorecard: Fannie Mae and Freddie Mac were nationalized, Merrill Lynch and Washington Mutual were bought out, ,Bear Stearns and AIG are gone, and Lehman Brothers is bankrupt and has collapsed. The U.S. government will spend a trillion dollars or whatever it takes to soak up the mess.

The result of all of this spending will be, as with all paper currencies since the dawn of time, the dollar will eventually reach it’s true value, which is zero.

The only class of assets that can’t be created out of thin air, and are not therefore someone else’s liability, are physical metals, like gold and silver. So, this week, and started investigating the purchase of physical gold. (To save you having to read all of my notes on this, I’ve created a separate page on physical gold and silver that you can read at your leisure, and comment on as you see fit). I decided that, since I own no physical gold or silver, I would like to start by buying some coins, and since I’m Canadian, I thought a gold maple leaf would be a good place to start.

I went on-line, found the nearest coin shops here in Ontario, and started calling. The answer I got everywhere was the same: “We don’t have any.” One large coin and bullion dealer told me, and I quote, “we don’t have any gold or silver coins, or any bullion. As soon as we get any, it’s gone immediately. Unlike last year, physical gold is now being sold at a significant premium to the spot price, when we have any.”

I then went on-line, and read this notice on the home page of kitco.com, an on-line bullion dealer:

In order to reflect current market conditions for Silver Maple Leaf and US Silver Eagle coins, Kitco is temporarily increasing its bid (buyback) prices for these particular products. Our current bid for these items is now $1.35 USD above the silver spot bid quote found.

In other words, the spot price means nothing; we will pay you more than the spot price. How is it possible that the spot price of gold is falling, and yet their is no physical supply? Doesn’t basic economics tell us that if supply is short, prices go up? How can it be that, if no gold is available, the price of gold isn’t $1,500 per ounce or more?

The answer, it would seem, is gold and silver price manipulation. The theory here is that the government knows that precious metals are the only real measure of value, and if they let the price of gold rise to it’s true level, it would be obvious to everyone that paper money is worthless. So, the government does what it can to suppress the price of gold and silver. They sell their own bullion, and they encourage bullion banks to do the same. They encourage short selling of the metal to drive the price down.

(Interesting, isn’t it, that they ban the short selling of financial stocks, but encourage the short selling of gold).

You can do your own research on this one. Start with the Gold Anti-Trust Action Committee, then read more on silver market manipulation and read Ted Butler’s comments. I have no proof that the market is being manipulated, but I can’t think of any other explanation to explain why the spot price is down, but there is no physical supply.

The Plan Going Forward

Here is my current thinking:

First, we are not out of the woods yet. The sell off after the bailout bill was passed proves that. So, for downside protection, I bought some RSW – Rydex Inverse 2X S&P ETF. This ETF is designed to go up by twice as much as the drop in the S&P. I bought it early Friday afternoon, and it sharply increased after that, so I’m actually in the money on that one. I assume that once earnings season starts, followed by tax loss selling season, the market will continue to fall, so I want to be protected. RSW is now 7% of my portfolio, and I will probably increase my holdings on up days.

Second, I’m raising cash by selling anything that isn’t a solid blue chip company (whatever that means), or a junior with a potentially explosive upside. I am currently one third in cash, and that’s probably about right. On the big down days, I can deploy the cash, or just sit on it.

Third, I will continue to hold the solid gold stocks, like ABX.TO – Barrick Gold Corp., AEM.TO – Agnico-Eagle Mines Ltd., K.TO – Kinross Gold Corp. and G.TO – Goldcorp Inc. Those four stocks are now 25% of my portfolio.

Fourth, I will hold some juniors, but only those with strong upside, due to special situations or upcoming drilling results.

Finally, I will keep my eye open for special situations, like SMD.V – Strategic Metals Ltd., a stock that I have owned in the past, and started buying again this week (you can read my full comments on my Strategic Metals Ltd. post).

It’s been an eventful week, and probably will be again next week, so thanks for reading, and please continue to on the Forum.

Thanks for reading, and see you next week.