Gold was up 4.3% on the week, for the biggest weekly gain in three months. (Silver did even better, up 5.4%). That’s four weeks in a row of increases, and gold is now half way back from where we were after the “crash”. Here’s the chart:

Gold peaked at just over $1,900 at the end of the summer, and then “crashed” to under $1,550 in late September, and then again in late December. The month of January has been a golden month, with gold now at $1,732, an increase of around 12% since the lows at the end of 2011.

More importantly, the downtrend that started with the peak last summer appears to be broken. That’s good news, and should bode well for gold going forward. More charts (all of which you can click on to enlarge):

Here’s AEM.TO – Agnico-Eagle Mines Ltd.:

Not exactly the greatest looking chart, considering it’s a blue chip gold stock. Fortunately the collapse has ended, but there’s a lot of overhead resistance before this one will look good.

G.TO – Goldcorp Inc. looks considerably better, having not suffered the same collapse:

The long term uptrend was never broken, so a move up to the $54 level shouldn’t be that big of a stretch. For Agnico-Eagle to return to old highs will take considerably longer. Therefore I would be over weighting Goldcorp, and under weighting AEM. There are even better charts, like this one of FNV.TO – Franco-Nevada Corp. (I like it, so let’s make it really big.):

This is a stock that is very close to all time highs, so again, this would be a candidate for over-weighting. (As an aside, back in July I wrote a post on Franco-Nevada Corp – Time to Buy?, and I concluded that yes, it was time to buy, and I did, and I’m quite happy with that decision, thank you very much).

The silver stocks still have some catch up to go, but I’m still holding SLW.TO – Silver Wheaton Corp.:

There is obvious support at $27.50, and new highs in the near future would not surprise me. I’m holding.

However, let me offer two cautions:

First, the Relative Strength Index on all of these stocks is getting “toppy”; anything over 70 is a warning sign, so we may be approaching a short term top. My portfolio is up 12% this month, which is obviously not sustainable over the long term, so taking a few dollars off the table now to lock in profits would be prudent. I’m currently 30% in cash, and I’ll probably increase that to 40% or more this week.

Second, the general market is looking oversold, and if the market crashes, so to will all of our stocks. Last week I predicted a near term top in the markets, with the S&P 500 at 1,315. On Friday it closed at 1,316. Here’s the chart:

So, since I predicted the top, the market has advanced 1 point. I guess that makes my prediction wrong, but that’s fine, I’m sticking with it.

To summarize: I will drastically reduce my holdings in the under performers this week (like AEM.TO – Agnico-Eagle Mines Ltd.) in anticipation of short term weakness and to lock in profits, and then I will place stink bids to increase my holdings in the better performers on any weakness.

All comments welcome; feel free to agree or disagree; see you next week.

(For those of you who missed it, 11/11/11 brought out all sorts of math nerds. My two favorite items of “11″ trivia:

If you multiply a series of ones by a series of ones, the number of ones will be in the middle of the answer. So, for example, if you multiply six ones by six ones, the answer is:

111111 x 111111 = 12345654321

Second interesting math thing, good only this year: take the age you turn this year, and and it to the last two digits of the year you were born, and the answer is 111.

But enough about that. Back to our regularly scheduled programming).

Gold Seasonality

Most gold investors know that the price of gold tends to follow seasonal patterns. Here’s a chart from pragmatic capitalism that shows November and December as good months for gold:

Casey Research publishes a similar chart; they updated it this week in their Casey Daily Dispatch, a free publication:

It would appear that November is traditionally a very good month to buy gold.

Here’s one final chart, stolen by me from goldseek.com:

This is probably the best chart, because Adam Hamilton resets each month to a base of 100, so you can see the gain in that month. Again, November and December are strong months.

Why does gold have seasonality?

In theory, it shouldn’t. We all understand why the price of tomatoes goes down at the end of supply when supply is abundant, and then goes way up in the dead of winter when it costs more to import them. Gold is mined from the ground, and in most parts of the world it’s supply is not impacted by the weather.

Demand, on the other hand, is a different story.

One theory is that farmers in places like India harvest their crops in the fall, and invest their surplus earnings in gold. (Wisely, they aren’t big fans of banks). That causes an increase in demand. After harvest comes the traditional Indian wedding season, and gifts of gold are very important, also increasing demand.

Of course in North America we have the Christmas holiday season, which starts with “Black Friday” the day after American Thanksgiving. What does a husband give his wife that has everything? Jewelry. What’s jewelry made of? Gold?

A final explanation could be that investors are off on holidays for long periods in the summer, so when they return in the fall there is some pent up demand. The theory was less applicable this year, as gold enjoyed a big summer rally. Here’s the gold stock chart:

Gold stocks had a double bottom in early and late October, and have enjoyed a nice rise since then. Presumably action will be choppy, but I see no reason that gold stocks can’t surpass their September highs over the next few weeks.

So, what am I buying or holding?

First, I’m sticking with my winners. My biggest winner is CEF.A.TO – Central Fund of Canada, a nice simple way to hold gold. It’s chart looks just like the HUI chart above, but let’s take a closer look (click to enlarge):

Key points:

• rally started in July, and went bust in mid September
• a double bottom around the $21 level occurred on September 26 and October 20
• since then both the 50 day and 200 day moving averages have been exceeded, so it’s onward and upward from here
• the downtrend line that started with the peak just over $26 on August 22 is the next resistance level, but it’s quite possible that level will fall this week
• from there a test of $26 is quite likely

I therefore conclude that this stock is a good one to ride this month and next.

I could show you charts all day, but they all look similar. My other favorites at the moment are:

AXR.TO – Alexco Resources Corp.

AEM.TO – Agnico-Eagle Mines Ltd. (and by “favorite” I mean “crap, I wish I had sold this dog before they closed down one of their mines due to flooding, but now the stock is so low it’s got nowhere to go buy up, so I guess I’ll just hold until it recovers; I would only sell if I wanted to generate a tax loss to offset other gains)

CMK.TO – Cline Mining Corporation. (this is a coal play (not to be confused with the new album by Coldplay, which was beaten to crap over the last few months, but has doubled since bottoming out at a $1, so since the fundamental story remains unchanged, this is a good diversification against the precious metals)

FNV.TO – Franco-Nevada Corp. (love it, and I love the warrants for even more leverage)

FR.TO – First Majestic Silver Corp. (I’m up over 50% on this one, so it’s a good junior to play)

FVI.V – Fortuna Silver Mines Inc. (nearing a new high, so could be poised for a break out)

K.TO – Kinross Gold Corp. (one of my worst performers, but since it is one of the few senior producers that have not yet broken out, I’m holding, and I may roll the dice and average down and add to my position)

G.TO – Goldcorp Inc. (love it; I expect a new high in the next few weeks)

PHS.U.TO – Sprott Physical Silver Trust

SLW.TO – Silver Wheaton Corp. (very large holding of mine; it’s volatile, but I love it).

SMD.V – Strategic Metals Ltd. (I don’t own it yet, but I’ve got my stink bids in at $1.55)

SVM.TO – Silvercorp Metals Inc.

I have a few other small juniors on my list, but you get the idea.

Last week I started to sell my losers. I prefer to do my tax loss selling now, so I can re-deploy the cash on better prospects. If gold and silver seasonality acts as expected, I presume the next six weeks will be quite profitable.

Time will tell.

Thanks for reading; see you next week.

This week, as we make our way, sadly, to the end of the Dog Days of Summer, the markets don’t know what to do. Perhaps it was the big storm in the north east earlier this week, or the earthquake, or the arrival of Hurricane Irene.

(As an aside, what’s up with all of this stuff? Is it really necessary to evacuate New York? I guess it is, but that seems like an over-reaction. I guess it’s better to be safe than sorry).

My take: we are still in a depression. If the Dow doesn’t get above 11,500 in relatively short order, the triangle gets broken to the downside, and we may, at that point see 10,000 or lower.

In a depression stocks go down, and that’s what’s happening, despite QE1, 2, and 3 (or whatever it was that Bennie said on Friday). That’s probably why the Dow is down 3.69% year to date, and the broader measures are down even more: The S&P 500 is down 9.3%, and the MCSI World Index is down 10.33%.

Gold stocks, on the other hand, are doing much better, thank you very much.

Here’s a senior gold producer, AEM.TO – Agnico-Eagle Mines Ltd.:

As I mentioned last week, the drop from $87.50 in December down to $52.50 this month was not fun. The bounce back up to Friday’s close at $67.37 has been much more enjoyable.

As you can see from the chart, we have now completed the always bullish FFFF Pattern, the Five Fingered Fan Formation. The Fingers of the Fan are drawn from the peak to each successive lower high. Once five fingers are drawn, the pattern is complete, and if the sixth high is higher than the fifth, the bear market is over, and the stock is due for a bounce, which is exactly what has happened this month.

Okay, I made all of that up. There is no such thing as an FFFF formation, but that’s what I love about technical analysis. You can see whatever patterns you want to see, and you can draw the lines however you want. Ultimately the world does not follow nice trading patterns. If it did, we would all be rich, but of course if we all followed the same pattern the pattern would no longer work.

(For a different take on technical analysis, read Martin Armstrong’s thoughts on gold. He published some thoughts this week, and he appeared to be worried about a correction. The bounce on Friday appears to relieve those concerns, but again, reading his ramblings doesn’t leave me more educated; they simply leave me scratching my head: Martin, next month, is gold going up or down? That’s really all we want to know).

The one obvious benefit of technical analysis is that we can see the obvious trend, like gold:

Obviously gold is on a run, and the drop this past week, when looking at an 18 month chart, is nothing more than a blip.

So why does the chart of AEM.TO – Agnico-Eagle Mines Ltd. look so much worse than the chart of gold? Obviously there are underlying company issues, but many gold stock charts look the same.

No matter. Ultimately the price of gold determines the value of gold stocks, so I believe that over the next few weeks and months it will be the stock’s turn to play catch up.

So here’s the plan:

I’ve put in stink bids on the stocks where I want to increase my holdings. I’ve done it as a ladder, so I’ve got some bids just below market, and more 10% and 20% and even 50% below market. If they get filled, great. If not, that means stocks are rising, so my holdings will do well. Either way I win.

Assuming the world survives Irene, we can discuss it more next week. Thanks for reading.

It was a fun week, if insanity is your idea of fun. Allow me to elaborate…..

The week started on August 15 with the anniversary of the of day, 40 years ago, in 1971, when U.S. President Richard Nixon killed the gold standard. So, I started the week with my thoughts on whether or not a return to the gold standard would make any difference. (Hint: with the politicians in charge, a new gold standard would not be guaranteed to do us any good).

Every fiat currency in the history of the world has ended in failure, and yet politicians continue to believe they can continue to print money with no tether to reality, with no ill effects. That’s the classic definition of insanity, if ever there was one.

But wait, there’s more! It’s not just the politicians that are insane.

Did you read about that woman in Arizona who wants to see if she can eat enough crap to get her weight over a ton! It’s true; her goal in life is to set the record for morbid obesity. To quote the article: “The unemployed mother … cannot work because of her weight.” Ya think? So presumably she’s on welfare, supported by the state, in her quest to become the fattest person ever.

That’s insane.

Speaking of food, did you know that famous junk food eater Bill Clinton is now vegan? Is that insane, or what?

Enough nonsense; what about the markets?

Strangely, the only thing acting completely sane is the markets. We have record deficits, high unemployment, and dramatically lowered consumer confidence, so you would expect the markets to be tanking. And they are.

After peaking around 12,750 thanks to QE2, like a kid crashing from a sugar high the Dow is now below 11,000, and I see no reason why we won’t see 10,000 in short order. 9,250 is also a possibility.

Of course when that happens the government will start QE3 to reinflate the market, and that’s when the true insanity will begin.

Also not surprising is the action in gold. You would expect that during a currency race to the bottom, gold would do well, and indeed it has.

It would appear that $1,500 is now a major support level, so while a correction from these lofty heights would not be unexpected, the longer term trend is obvious.

(Speaking of unexpected, you remember those 2011 predictions some of us made at the start of the year? On the JDH prediction page you will see that for September 30 I predicted gold at $1,800, and the Dow at 10,000. It would appear that even I, the Great Cynic, was not cynical enough…….).

Interestingly, there remains some insanity in the gold stock market. Let’s review. Here’s gold:

And here’s a senior gold producer, AEM.TO – Agnico-Eagle Mines Ltd.:

From $87.50 in December down to $52.50 this month, it has not been a fun ride. Clearly gold stocks don’t follow gold exactly in the short term. (I wish they did; I picked the trend correctly, but my investments in stocks have under performed).

Over the medium to long term, however, the stocks will rise, so I’m assuming that we will be playing catch up this fall, and that’s good news.

Of course some stocks have done better than others, which is why, for example, I’m glad I own FNV.TO – Franco-Nevada Corp.

So what’s the plan from here?

I wish I knew.

I was hoping for a drop in gold so I could load up; obviously that hasn’t happened. Fortunately along with cash I maintained my core position, so I have participated in the recent rally.

I don’t expect to do much buying this week, although I am tempted to grab a few puts on the market in general. We’ll see what kind of mood I’m in on Monday.

Thanks for reading, and see you next week, assuming I don’t go insane before then.

We started talking about investments, as we often do, and one of the Boys asked a great question, to which I did not have an immediate answer. The question was:

If you had $1 million, and you could only invest it in one thing, what would you invest it in?

Interesting question.

My initial response was that the correct and prudent answer would be to invest it in a basket of junior and senior precious metals stocks, and perhaps some physical gold and silver, to take advantage of the continued increase in precious metals, while diversifying risk. Alas, that doesn’t answer the question, because a diversified basket is more than “one thing”.

(My thoughts on diversification are well known. For a hint, read my post on Diversification is over-rated, and at times diversification is stupid).

Perhaps the hypothetical million dollars should be invested in real estate? Perhaps real estate outside of North America?

Or perhaps you pick one gold or silver stock and roll the dice?

It’s an interesting question, and if you have an answer, feel free to post your thoughts in the comments section below, or over on the Buy High Sell Higher Forum.

I spent two days thinking further about the answer. I decided that, if I could only pick one “thing” to invest it over the next few years, it would be gold. With the massive amount of money printing going on it’s essential to preserve wealth, so investing in something that can’t be printed makes sense. But buying 600 ounces of gold and burying it in my backyard seems silly. Storing that amount of physical gold is somewhat dangerous, but there’s also no leverage.

Buying a precious metals mutual fund is an option, but which one? And do I really want to pay administration fees?

I want an investment that’s gold related, has relatively low risk, but high upside and leverage, but that isn’t physical gold or a mutual fund. My pick?:

FNV.TO – Franco-Nevada Corp.

Franco-Nevada has great management, is highly levered to the price of gold, but has diversification through it’s numerous different properties in different countries. I wrote extensively about it on Thursday, and yes, after I posted that piece I did start buying, and on dips I’ll buy more. Here’s that post:

Franco-Nevada Corp – Time to Buy?

I’m pleased to report that Franco-Nevada was up after I started buying on Thursday, and again on Friday, so so far, so good. On further weakness, I’ll buy more.

Speaking of gold and diversification, the problem with putting all of your eggs in one basket is that the basket can get crushed, as happened with AEM.TO – Agnico-Eagle Mines Ltd. this week, on disappointing results:

Agnico-Eagle closed Friday at $53.19, and it hasn’t been that low since April 27, 2009. You remember April, 2009? That’s when gold was under $1,000 per ounce. Gold is up over 60% since then, and Agnico-Eagle hasn’t budged. The company has some minor problems (foreign currency translation loss, cash mining costs somewhat high; you can read about them in their quarterly report), but this strikes me as a huge over-reaction.

The Canadian markets are closed on Monday for a Civic Holiday in Ontario; I plan to start buying on Tuesday if the price remains in this range or lower.

Mortgage

As for my question: Mortgage: Pay it off now, or later? from two weeks ago, thanks for your comments, I paid off the mortgage this week.

(Which of course is not to say that if some great opportunities present themselves in the next few months I won’t activate a line of credit to access cash, but that’s not the plan at this point).

In the end, I decided that no debt makes it easy to sleep at night, so that’s what I’m doing.

As we await the temporary resolution of the budget mess in the U.S., we are probably in for a volatile week, so I will start buying on dips, and otherwise enjoy the good weather of our long weekend.

Thanks for reading; see you next week.

No?

Me neither. Couldn’t care less. Kate and Bill seem like nice kids, and I wish them well, but I’m not going to disrupt my schedule to watch them get married.

What will disrupt my schedule is my head scratching over this question:

Why are gold and silver making new highs, but gold and silver stocks aren’t?

To the charts, batman:

Silver, with a 3% increase on Thursday, now has a Relative Strength Index reading of 88.38, well into oversold territory. Of course, as the chart shows, back in September/October the RSI remained oversold for about six weeks before easing off, temporarily. We are only three weeks into this current run, so we could see another two or three weeks at this level before the inevitable pullback occurs.

As I said last week, I believe it’s time to start raising cash, in advance of the inevitable pullback, but I’m not in a hurry. My sell orders are in, but on my silver stocks they are above market, so I’ll get filled on blow off up days, but I’m not panicking and selling today.

Gold looks less oversold:

Gold had the same overbought condition for six weeks in September/October, but has only just creeped into the oversold category in the last few days on this run. That may mean that gold will run a bit longer than silver before pulling back.

Why the divergence between gold and silver? I have no idea, but one could speculate that there is more short covering going on in silver, which is driving the price higher. Another explanation may be that, in the real world, real people are allocating more of their money to silver, as compared to gold.

Gold and Silver in the Real World

Speaking of the real world, I had a meeting in Toronto this week, so I dropped by the precious metals desk at Scotiabank in Toronto, the largest precious metals dealer in Canada. I stood and watched. There were buyers, but not a hoard of them. We are certainly not at the panic buying stage yet.

What fascinated me was that the buyers were “average Joe’s”. I saw one guy who could be described as a “business man”. He appeared to buy five coins; not a huge purchase. The other buyers were the kind of people you see on the street every day. A saw a middle aged Asian woman purchase 5 one ounce gold wafers. I saw another young man purchase what appeared to be a 10 ounce gold bar.

As for silver, they were out of certain sizes, primarily smaller bars, but they did have one kilo bars. I’m not a big fan of schlepping around kilo bars, so I didn’t buy.

I did, however, hear one very funny line. One customer took delivery of a silver bar and the clerk, who apparently had to go down to the vault in the basement to get it, told the customer that with the shortage of silver, silver is now “good as gold.”

Anecdotally it appears that other dealers are having similar supply issues, so if you want immediate delivery of physical bullion or coins, you may be out of luck.

Now, to the question of the day: If gold and silver are making new highs, why aren’t gold and silver stocks making new highs?

My comments are somewhat long-winded, so I’ve included them as a separate post, Gold Bullion Up – Gold Stocks Flat – Why The Divergence? I’ve included lots of charts, so enjoy, and then agree or disagree.

My conclusion is that in the short term there are many reasons why the price of gold may increase, while the price of gold mining shares remains flat, or decreases, or increases at a slower rate than gold.

However, these anomalies cannot exist forever. At some point investors take advantage of the arbitrage opportunity, and shift from bullion to shares. Also, if share prices get cheap enough, there will be a wave of mergers and consolidations in the mining industry, as inexpensive companies are snapped up for cents on the dollar.

How am I playing it? In the long term, I’m all in. I strongly believe that when we look back six, or twelve or twenty months from now, we will marvel at the bargains available in bullion and gold and silver mining shares.

However, in the short term, anything can happen. A consolidation, or a big smack down by the Big Boys could happen at any time. The cartel is still short, so an engineered sell off to help them cover their short positions would not be a surprise.

So, over the next few weeks, I will continue to sell into strength. Here’s the table I showed last week, with my game plan:

Obviously this week some of my initial sell targets were reached, so on strength I sold, and increased my cash position this week. My sell orders at these levels are already placed for next week.

I have made my decisions. I will not be influenced by day to day market fluctuations. On strong days my sell orders will be executed, with no need for further involvement from me.

By early in May I expect to be well over 50% in cash, while maintaining a position in “bullion proxies” like PHS.U.TO – Sprott Physical Silver Trust and CEF.A.TO – Central Fund of Canada. These are physical metal holdings, not shares in companies. They are a core holding in the portfolio, and I don’t plan to trade them; I plan to let them sit as long term holds. I have some other junior shares that I will probably hold as well.

That’s the plan; we shall see how it unfolds over the coming weeks.

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

Gold and silver are making new highs, so why aren’t gold and silver stocks making new highs?

Well, to be fair, some of them are, like G.TO – Goldcorp Inc.. Here’s a seven year chart (click on any chart to enlarge):

$53 is a new multi-year high. Historically Goldcorp is into overbought territory, which is why I have sell orders for some of my holdings as the price continues to increase.

Of course other blue chip gold stocks look much worse, like AEM.TO – Agnico-Eagle Mines Ltd.; here’s the same seven year time period:

Both stocks are at lofty levels, but the last month or two has not been good to Agnico-Eagle. Here’s the six month chart:

From a peak of over $87 in early December to $65 on Thursday, that’s a drop of over 25%. How can a blue chip gold stock drop 25% while gold is making new highs? I’ll spare you the chart, but K.TO – Kinross Gold Corp. looks just as bad. Quite a contrast to G.TO – Goldcorp Inc., which is at least moving in the same direction as gold:

Is it possible that there is that much company specific news that some stocks are down, while others are up? Probably not. Here are some theories to explain why bullion is going up, while precious metals shares are, at best, flat:

1 It’s the hedge funds. I’m stealing this from Trader Dan Norcini, who explains it perfectly in his post on why Hedge Fund Ratio Spread Trades Continue to Distort the Value of the Mining Shares. I suggest you read his entire post, but in summary here’s the idea: in the past, there were two ways to play rising precious metals prices: you could play the commodities futures market, or you could buy mining shares. Since most mutual funds don’t play commodities, the money went into mining shares.

Today hedge funds are big players, and they can invest in whatever they want, so they buy futures, but they also hedge their bets by shorting the mining stocks. Mining stocks tend to be more levered that the underlying metal, so a drop of 1% in the metal may imply a drop of 1.1% in a stock. That’s a way to mitigate risk.

Shorting by hedge funds could explain depressed stock prices. Of course, that will only be a temporary phenomenon. At some point the shares become so depressed that the trade switches back to the shares, and off they go. But in the short term, that explanation may be reasonable.

2 The markets are manipulated. I have no proof or evidence of this. However, if you wanted to slow down the rise in precious metals, and you had the power, I guess you could short or sell the mining stocks, and move that money into physical precious metals. It could also be that with options settlement day last week, someone wanted to hammer the share prices so that more options would expire worthless, saving them some money.

3 It’s not a mystery at all. The disconnect between the precious metal mining share prices and bullion prices is simple: bullion is already out of the ground. Gold mining companies don’t have gold until they mine it, and as the price of oil goes up, it costs more to mine it, so the increase in gold mining share values is restrained by the rising cost of oil. There is some truth to that assertion. Here’s a chart of gold, expressed in terms of oil:

(Yes, I understand that it’s not a perfect comparison, but you get the picture).

Not clear enough? Remember when the price of oil collapse from almost $150 per barrel down to around $50? Here’s how USO (the United States Oil Fund) moved:

Here’s gold, for the same period:

Obviously gold is on a long term bull run. If you squint, you can see a minor correction at the end of 2008, but it’s largely an “onward and upward” chart.

Now let’s put it all together, charting gold in terms of oil over that same period:

The collapse in oil prices in late 2008 led to a spike in the price of gold, measured in units of oil. The inverse is also true, as over the last month or two the increase in the price of oil has weakened the price of gold, measured in units of oil.

4 The price of gold is measured in U.S. dollars, but many of the gold mining companies are in Canada, or are Canadian companies. They pay their operating expenses (for workers, fuel, equipment, etc.) in Canadian dollars, but sell their output (gold) in U.S. dollars. As the Canadian dollar has strengthened against the U.S. dollar (it’s now about 5 cents above parity, as compared to 40 cents below parity a few years ago), their costs have increased faster than their revenue, in Canadian dollar terms.

Here are some charts that I pieced together from www.goldpreciousmetals.com:

In the last month the price of gold in U.S. dollars has increased from $1,440 to $1,509, an increase of about 4.8%. In Canadian dollars the increase from $1,410 to $1,440 is only a 2.1% increase. That’s a huge difference.

(As an aside, that’s good evidence that the U.S. dollar is in big, big trouble. We are witnessing the collapse of the world’s most powerful currency, proving that you can’t print money like drunken sailors forever and not suffer the consequences).

5 Gold mining shares, in the short term, very often diverge from the price of bullion. That’s just the way it is. It’s not manipulation, it’s just the market. Want proof? Here’s a chart of GDX, the Market Vectors Gold Miners ETF, expressed in terms of gold:

You would expect that this chart would be a horizontal line, assuming that gold mining shares and the price of gold would move together. Obviously they don’t.

Why? Presumably because investors who buy mining shares have a different perspective than investors that invest in bullion. There are two obvious illustrations of that difference:

First, a mining share investor invests for leverage, hoping that an increase of 1% in the price of gold leads to a 2% or more increase in the share price. Why? Because mining costs are relatively fixed, so any increase in the price of gold goes straight to the bottom line. For a bullion investor, a 1% increase in price is a 1% increase. That’s it. Of course the opposite can also be true, so there’s less risk to the downside for the bullion investor as well, due to no leverage (if they paid cash for their gold bars).

Second, a mining share investor is willing to tolerate greater risk, for greater returns. If the search for gold yields nothing, the share price drops to zero. If they strike a rich vein, the share price can quadruple overnight. High risk, high reward. There is no exploration risk if you own bullion; it’s already above ground.

Let’s not also forget that there is seasonality to the stock market, epitomized by the old axiom to sell in May and go away. If you expect a correction, even a short term correction, you sell your gold mining shares. That seasonality may have nothing to do with the underlying price of gold bullion.

Conclusion

So, what does this all mean? It means that in the short term there are many reasons why the price of precious metals may increase, while the price of mining shares remain flat, or decreases, or increases at a slower rate than bullion prices.

However, these anomalies cannot exist forever. At some point investors take advantage of the arbitrage opportunity, and shift from bullion to shares. Also, if share prices get cheap enough, there will be a wave of mergers and consolidations in the mining industry, as inexpensive companies are snapped up for cents on the dollar.

How am I playing it? In the long term, I’m all in. I strongly believe that when we look back six, or twelve or twenty months from now, we will marvel at the bargains available in bullion and gold and silver mining shares.

However, in the short term, anything can happen. A consolidation, or a big smack down by the Big Boys could happen at any time. The cartel is still short, so an engineered sell off to help them cover their short positions would not be a surprise.

It may therefore be prudent to raise cash in the short term, while still maintaining a core position, and load up on the inevitable corrections.

Here’s a chart of gold (for larger versions of all charts, click on them):

It would appear that gold consolidated between October and the end of January, and has spent most of the month of February on the rise.

Here’s a chart of a senior gold stock, AEM.TO – Agnico-Eagle Mines Ltd.:

Here’s the same chart, but as a point & figure or P&F chart:

Obviously the news is not good, with a double bottom breakdown, and a downside price target of $63.

So why is it that gold seems to be recovering, but gold stocks aren’t? Agnico-Eagle isn’t the only one; here’s the chart of K.TO – Kinross Gold Corp.:

And yet, other charts look fine, like this one of G.TO – Goldcorp Inc.:

Why the difference? I have no idea.

Here’s the chart of silver:

Looks pretty, good, eh? New highs, and lots of strength. Not surprisingly, the silver stocks are looking good as well, like SLW.TO – Silver Wheaton Corp.:

So what does all of this mean?

Again, I have no idea, but if you want a guess, it looks like silver is looking a lot better than gold at the moment.  However, here’s another perspective on gold:

As a point and figure chart, gold has ended it’s bearish correction, and now has a bullish upside target of $1,620.

So there you have it.  As a non-expert, my expert analysis is quite simple: gold and silver will either go up or down, as will the underlying stocks.

So how will I play it?

I will ride the stocks that for whatever unknown reason are doing well, like CEF.A.TO – Central Fund of Canada, which has just had a triple top breakout:

or if you prefer a more conventional view of the chart, making the triple top breakout more obvious:

Stocks like Central Fund I hold, or perhaps even increase my holdings.  For the others that are looking weak, I’m not giving up; I’ll simply do covered writing against them to give me some downside protection.

For example, as I tweeted this week, I did covered writes on G.TO – Goldcorp Inc. and SLW.TO – Silver Wheaton Corp. this week, to lock in some gains and to protect against the downside.

Yes, I know, Silver Wheaton has been strong, and will go higher, but after the large run I covered half of my holdings with March options, which expire in about three weeks.  Unless Silver Wheaton goes on a huge run, I will bank some or all of the premiums.  I put in an order to buy back the options I sold at half the price I sold them for, so on a day of weakness I cash out.

That’s the plan, anyway.

So, my question for you: why are some gold stocks doing well, and others doing poorly?  Is it a fluke, and therefore an arbitrage opportunity (ie. buy the weak ones, since they have the best chance to catch up, and sell the strong ones, since they’ve already had their run), or should the weak ones be avoided because they are, well, weak?

I’ll let you decide, either by posting comments here, or over on the Buy High Sell Higher Forum.

Thanks for reading; see you next week.

For a year now we’ve been reading the stories about how everything is getting better, and the recession is long over. Anyone with any daily activities in the real world knows that this is not the case.

A huge bookseller, Borders, just went bankrupt. Shopping malls across the country will lose a major tenant. How can this be good news?

Sadly, that’s the least of our problems. Far more worrisome is the biased reporting we are subjected to every day. Case in point: Egypt.

Giddy reporters reported from Cairo that a friendly, jubilant group of happy Egyptians camped out for 17 days until the dictator resigned. There was joy in the streets. All is well.

Alas, the truth is much more ugly than that. It wasn’t a jubilant mob. It was a gang of thugs, intent on destruction, as revealed in the tragic case of Lara Logan.

Lara Logan is the Chief Foreign Correspondent for CBS News. While reporting on the “peaceful protest” she was repeatedly sexually assaulted by thugs yelling, ‘Jew! Jew!’ Apparently a gang of 200 thugs abducted her and assaulted her for 30 minutes before she was rescued.

I’m not naive. I realize that sexual assaults happen every day here in North America. But I have never heard a story of a famous reporter, reporting on an event, being abducted and raped while reporting on a major story here in North America. A rape by a gang of 200 is not an isolated incident. It appears to be endemic to Egyptian society.

Travel industry stories from 2008 detail how sexual harassment is simply standard practice in Egypt. Sadly, nothing has changed.

Am I saying that Egyptians are evil, and Americans are saints?

No.

In fact, I’m making the point that CBS News is evil as well, because it was not CBS News that broke the story of the abduction and sexual assault of their senior correspondent. I was watching CBS News last Sunday night as they reported on the joy of the Egyptian Google employee who was released, and how social media was changing the world. They failed to mention that their own reporter was recovering in hospital.

How can you do a story on Egypt and forget to mention that your own reporter is in the hospital? Easy, I guess, if you aren’t really reporting on the story, but instead are creating the story of rebirth in Egypt. And that’s the problem. The media doesn’t report. They create.

Congratulations to the Boston Herald and other outlets for reporting the truth.

The truth is that we are in a mess, despite media reports to the contrary. Gold, silver, and other precious metals, and other real assets, will be the only store of value as we race to the bottom. So, I’m continuing to hold my positions in the following precious metals stocks:

AEM.TO – Agnico-Eagle Mines Ltd.

AXR.TO – Alexco Resources Corp.

ADM.V – Andina Minerals Inc.

CEF.A.TO – Central Fund of Canada

FR.TO – First Majestic Silver Corp.

FVI.V – Fortuna Silver Mines Inc.,

K.TO – Kinross Gold Corp.

G.TO – Goldcorp Inc.

SLW.TO – Silver Wheaton Corp.

SVM.TO – Silvercorp Metals Inc.

I’m also reviewing various uranium stocks, and more junior precious metals stocks; I’ll have more on that next week. For now, batten down the hatches, and prepare for the continuing storm.

Has gold bottomed, or is their more carnage to come? My answer, of course, is that yes, gold has bottomed.

Need proof? Here’s the chart (click to enlarge):

It would appear that the area just above $1,300 is a significant support level, and now that we have spent a week above that level, we should continue to increase from here. The RSI is powering up to the 50 level, which is generally an excellent buy point, and the MACD Histograms at the bottom of the chart have just turned positive, for the first time this year, so it all looks good to me.

We haven’t seen a major follow through in the stocks, yet (although my portfolio did recover 5% this week), with one exception: IMG.TO – IAMGold Corp., a stock we haven’t discussed here since 1997 (click to enlarge the chart):

IMG formed a double top in May and October of last year, but has continued to make a series of higher highs, and this week actually made a new 52 week high.

I haven’t owned IAMGold Corp. for a a few years now, and I have no plans to buy it (presumably because I’m an idiot; a stock making a new high is exactly the kind of stock you should be buying), but it is very important for the health of the overall gold sector that stocks start making new highs. Someone has to lead the sector, and it appears that IMG is taking on that role, at least for now.

A more typical pattern can be viewed in the chart of AEM.TO – Agnico-Eagle Mines Ltd.:

Agnicio-Eagle didn’t “double top”; it made highs in May and October, and then again during the blow off in December. But the higher they rise the harder they fall, and AEM got killed along with the rest of them, dropping from $87.91 on December 6 all the way down to $66.91 on January 24, for a drop of almost 24%. Yikes. A recovery back over $72 is nothing to write home about, but again, a rally has to start somewhere, and I suspect this is where it begins.

My assumption is that the JP Morgan and the rest of the Big Boys spent the month of January hammering the price of gold and silver so they could cover as many shorts as possible, and now they will move to either the sidelines, or the long side, and ride it back up. That’s what they do: ride it down, ride it up, lather, rinse, repeat, over and over.

The weak hands get scared when it drops and sell. They then get excited when it goes up, and they buy. Since we know how volatile this market can be (and a drop of 24% on a blue chip stock in a matter of six weeks is obvious volatility), and since we are convinced that the medium and long term trend is up, the logical strategy is to hold.

I’m not on margin, and I don’t have a million dollars invested in options that will expire next week, so I can wait. I’ll be patient. I am now 87% invested, with only 13% in cash, so I’m poised for a big run up over the next few months. Perhaps I should have more cash on the sidelines, but since I have no need to sell anytime soon, I’ll stay invested and take my chances.

Thanks for reading; stay patient; see you next week.