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.

So, as a break, last week I asked a simple question: Mortgage: Pay it off now, or later? My house mortgage is up for renewal at the end of the month, and I wanted your thoughts on whether or not I should use my available cash to pay it off (there’s not a massive amount remaining on it), or whether I should renew the mortgage at current low interest rates and invest the money.

You can read the comments at the end of the post, but the consensus appears to be:

Pay it off.

PaidInGold made the accurate comment that

At the end of the day, the home you live on is ultimately owned by your country. Your gold is yours if it’s in your physical possession with a 45 along with it to protect the investment.

That’s true. You may think you own your home, but if you stop paying your property taxes for a few years you’ll find out who really owns your home: the government. Here in Canada no-one I know has a “45″ to protect their investments, but I understand the sentiment: gold is something that is much harder to take from you, so it’s an important part of the picture. I agree, which is why gold is part of the portfolio, but having a place to live is also nice, which is why I assume PaidinGold concluded by saying “If your property is solid, and something to pass down to your kids, paying off the mortgage sounds sound.”

The rest of you, if I may paraphrase, said something along the lines of:

Pay it off! That’s one less debt for you to worry about, and you can sleep easier.

So, since the group has spoken, pay it off it is. I will call the bank this week, and arrange for the payoff. Thank you for your thoughts and comments. Now, back to the markets.

Gold

What’s up with gold, and gold mining shares? Obviously, gold itself is up:

For the first time ever gold hit $1,600 (denominated in US dollars), so that’s good news for gold investors. It would appear that $1,600 is a new resistance level, so we may bounce around under that level for a while before we scale the new peaks.

Interestingly, gold stocks don’t show the same “new high” pattern. Here’s G.TO – Goldcorp Inc.:

There’s no evidence of a new high here. In fact, it would appear to be more like a double top, so one could reasonably expect that Goldcorp may drop back to the mid to lower part of it’s current trading range (of $45 to $53).

I am currently 40% in cash, with the hope that I can deploy that cash in August during a shock to the system, in anticipation of the traditionally strong fall and winter period for precious metals.

So, this week I will do covered writes on the stocks that have bounced upward in the last few weeks (like G.TO – Goldcorp Inc.), and then buy back those options if we have a dip.

I’m guessing we are a few weeks away from the real fireworks, so I’ll continue to bide my time, and pay off the mortgage.

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.

First, nice run in gold and silver this week, eh? By “nice run” I mean “new all time highs” in both metals. (Yes, I know, silver is not at an all time nominal dollar high, and neither metal is anywhere near an all time inflation adjusted high, but still, if you look back on the last 20 years, these are historically high prices).

Here’s the silver picture (click to enlarge):

$42.86 looks pretty good, eh? Of course the RSI is at 81.66, so it’s solidly into oversold territory, so a pullback to the uptrend line around $40, or down to the 50 day moving average at $35.36 would not be surprising. In fact, it would probably be healthy.

The gold picture looks even better:

Gold’s break out (the vertical brown line) really only happened in the last two weeks, and it is nowhere near as oversold as silver is. So what does all this mean?

My guess is that silver’s massive upward ride is due for a pause, and gold’s somewhat laggardly performance is due for a pick up. Silver has outperformed gold for many months, but as silver gets oversold, the time will come for a breather. That time may be now. So, for that reason, I believe it’s time to start taking profits.

In addition, let’s not forget about the historical Sell in May and Go Away philosophy, that works more often than not. As we approach the end of April, moving to cash is not a bad idea. With that said, here’s my plan:

I am placing numerous sell orders, at various levels. As the prices increase, I will be selling. Here’s the chart:

So, for example, for AEM.TO – Agnico-Eagle Mines Ltd., which closed on Friday at $62.72, if I own 1,000 shares, I will put in sell orders for 200 shares at $63.50, 200 shares at $64, 200 shares at $64.50, and 200 shares at $65. As the price increases, I will sell more shares. If the price doesn’t increase, I hold. Last Monday Agnico-Eagle did trade over $63.60, so if I had had these orders in last week, I would have sold 20% of my holdings.

Of course it’s not possible to sell exactly 20% of your holdings, unless you hold a nice round number of shares. When I place these orders I will play with the numbers, so the first tranche may only be 15%, and the final tranche may be larger.

The point is that my goal, over the next few weeks, is to liquidate 20% x 4 or 80% of my holdings.

Yes, I can hear you all asking to yourself, “JDH, what are you thinking? You’ve been spouting off for weeks how gold and silver will be going up, and now that they are you are selling?”

Yup.

Why? Because nothing goes up in a straight line. I have profits, and I want to take them.

For example, my cost base on my shares in CMK.TO – Cline Mining Corporation is $2.16 per share. Cline closed on Friday at $3.64. There is more upside, but I’m sitting on a profit, and I would like to convert some of that profit to cash, which I can redeploy if there is a summer slide.

Note that I am not selling everything. I will sell up to 80% of my holdings, but only if I get the price I want. Even if I do get the price I want, I will still have 20% of my shares as a long term position. If I don’t get the price I want, I hold.

Also note the absence of two stocks that are NOT on the above list: 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.

So, even if prices take off in the coming weeks, I will not get down to 80% cash; my goal is somewhere in the 50% to 60% cash range going in to the summer, with the hopes that I can redeploy the cash if there is a correction. If there isn’t a correction, I’m sitting on cash, and profits, which is a safe approach.

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

NOTE: If you want some “food for thought”, be sure to read the Martin Armstrong discussion over on the Buy High Sell Higher Forum.

Thanks for reading, and see you next week.

As regular readers will know, I will occasionally do a covered write on stocks I own to lock in gains.

For those of you who have no idea what I’m talking about, a “covered write” means you sell options against stocks you already own. For example, if I own 100 shares of ABC Company, and ABC Company is selling for $50, I could sell one contract (which represents 100 shares) of the March 50 call options. I have sold the options, so the person who bought them has the right to purchase 100 shares of ABC Company from me for $50 up until the third Friday in March (because I sold the March 50 calls).

Why do I sell the call options? Because I get a premium for them. For example, a few weeks before expiry, if ABC Company is trading for $50, I might be able to sell the $50 calls for $2. If on option expiry date ABC Company is trading for $50 or less, the person who bought the options from me won’t exercise them, and I get to keep the $2 premium I took in. Of course this can back fire on me. If ABC Company goes up to $60, I will be forced to sell the shares for $50, so I don’t get the $10 gain; all I get is my $2 premium.

Done correctly, covered writing of options is a low risk, conservative strategy. In a sense, you can’t lose. If the stock price remains constant or goes down, you keep the premium, which reduces your cost base, or reduces your loss. If the stock price goes up, you lose your stocks, but you did get the premium, so you make money (just not as much as you would have made if you hadn’t covered).

Options can be very risky, if you are either buying them, or selling them naked. (Selling naked means you sell call options on shares you don’t own, so if they get exercised you have to go out and buy the stock, and if it’s gone up in value you can lose a lot).

Buying options is risky as well. You can make a lot, but you can lose everything. If I buy call options and the price of the stock goes up, I can make one or two times my money. Of course if the price of the stock declines, my options expire worthless. (You can read an even more detailed example of all of this in my post on Volatility is Your Friend).

So, with that long preamble, here’s why I’m the stupidest, and luckiest, person in the world.

In January, thinking that the precious metals market was going to go up, I placed a small bet on SLW.TO – Silver Wheaton Corp. by purchasing some February call options.

On January 4, 2011, when Silver Wheaton was trading around $36.65, I purchased 10 contracts of the February 38 calls, at a cost of $1.85 per share, which for 10 contracts cost me $1,850, because each option contract represents 100 shares. (Actually, with commissions, it cost me $1,872.49). Unfortunately, all precious metals continued correcting, and I was losing money.

I guessed wrong, and instead of Silver Wheaton going up, it continued to drop, like all precious metals stocks.

So, to average down my bet, on January 7, 2011, when Silver Wheaton was trading around $33.19, I purchased 10 more contracts of the February 38 calls, at a cost of $1.05 per share, which lowered the average purchase price of the 20 option contracts I now owned.

On January 13, in an effort to not put all of my eggs in the options basket, I actually purchased 500 shares of Silver Wheaton for $32.35 (indicating that the share price had fallen more than $4 from when I started buying on January 4). Not good.

Not one to admit I was wrong, on January 14, 2011 I purchased 10 contracts of the February 34 calls, at a cost of $1.33 per share. At this point Silver Wheaton was trading at around $31.38. Notice that I paid roughly the same amount for the $34 calls as I had paid for the $38 calls a week and a half earlier.

Where did that leave me? By mid January I was the proud owner of 30 options contracts that were out of the money, and on track to expire worthless on February 18.

Now, as I described above, I generally do covered writes, selling the options against shares I own, not buying them, because that’s somewhat risky. So, while I knew I had done something with the options, I forgot that I purchased them.

So, on options expiry day in February, Friday February 18, I just assumed the options would expire worthless, so there was no action required on my part. My boys had the day off school, so I took them skiing for the day. We had a great time.

My broker, TD Waterhouse, realizing that my options needed to be exercised, were frantically calling my wife, asking her what they should do. She responded by telling them that I was on a ski slope, so there was no way to reach me (I don’t take calls while skiing). She simply said to TD: do whatever you think is best.

And they did. They did all they could, which was to exercise the options. On Friday February 18 the shares of Silver Wheaton had increased to $38.68, so obviously my options, which gave me the right to purchase shares at $34 and $38, were “in the money”.

So, at the close of trade on Friday February 18, unbeknownst to me, I became the owner of 3,000 more shares of SLW.TO – Silver Wheaton Corp. These transactions occurred in one of my margin accounts, and it’s an account that I don’t watch each day. So it was with great surprise when I checked my account this week to see that I owned 3,000 additional shares of SLW.TO – Silver Wheaton Corp., and I had a negative cash balance in the account of about negative $100,000. Fortunately for me I had enough cash and margin room in my account to complete the original transaction.

I am therefore stupid for two reasons: First, I’m not watching what I own. Had I been “on the ball”, I would have realized that option expiry date was approaching, and I could have either sold the options (at a profit) or decided to exercise them. Either way, I would have been in control of the situation.

Second, I’m stupid because I didn’t realize what had happened until three weeks later! Sheesh, that’s embarrassing. (I said “Sheesh”, not “Sheen”; you can read about Charlie Sheen everywhere else; the only stupid person we will discuss on this blog is me).

Now, here’s the lucky part.

On March 9, when I realized what had happened, I decided I was probably over-invested in SLW.TO – Silver Wheaton Corp. , so I decided to sell 1,000 shares. Fortunately I was able to sell them for $42.15.

Yes, you read that right. I didn’t realize that I had bought the shares for $34 and $38, but being able to sell them for over $42 was really lucky.

As of today I still own 3,500 shares in that particular account: 2,000 shares from the options play (3,000 purchased unknowingly, less the 1,000 I sold this week), plus and additional 1,500 shares (including the 500 shares I purchased on January 7 as noted above). SLW.TO – Silver Wheaton Corp. closed on Friday at $40.73, so it could be argued that I should have sold everything on March 9. However, since I’m still optimistic on the short, medium and long term prospects for these shares over the next few weeks and months, for now I’ll sit on them.

Of course I could do the sensible thing and do a covered write to lock in some profits, but given my recent track record I’ll probably so the opposite, and either lose a bundle, or make a bundle. You never know.

In other news, as those of you who follow me on Twitter know, as I tweeted on March 8 I purchased shares of SSO.TO – Silver Standard Resources, Inc., on the assumption that we were about to break through a double top, and head for new highs.

Oops.

The arrow indicates where I made my purchase, just before the two day correction began. What’s the lesson here, people?

You should buy high, not buy almost high. On December 6, 2010 Silver Standard closed at $29.50. On Monday March 7, Silver Standard, intra day, touched $29.50, but did not exceed it. On March 9, intra day, Silver Standard got to $29.33. Obviously neither day was a new high, and my mistake was to buy too early. If I was smart I would have started buying at $29.75, or perhaps even $30, because that would obviously be a new high.

(The point of a new high is that there is no overhead resistance. At a new high everyone who owns the stock is sitting on a profit, so everyone is happy, and happy people are less likely to be selling).

Fortunately I did not buy on margin, and I did not buy options, so I can afford to wait for a day, or a week, or a month until it actually makes a new high.

I made one other purchase this week: G.TO – Goldcorp Inc.. Why? It’s a gold stock, I’ve owned it for a long time and I wanted to increase my holdings, it actually pays a dividend (albeit a very small one), and it appears to find support at the 200 day moving average. Here’s the chart (click to enlarge):

I’ve drawn blue arrows every time in the last year where the 200 day moving average has acted as support. Obviously there were two obvious occasions where it didn’t act as support (the red arrows). So, the logical conclusion is that if the 200 day moving average holds, the stock is likely headed higher. I decided not to wait until we get down to around $44.33, since I didn’t want to miss it. I may decide to put in a stink bid at $44.50 to pick up some more.

Or, perhaps I’ll buy some call options if we get close to that level.

If I do, I’ll keep a closer eye on it, and make sure I either sell or exercise, so that I know what’s happening.

I’ll plan to do a better job of keeping my eyes open this week.

Thanks for reading the blog of a guy who clearly has no idea what he’s doing; see you next week.

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.

Of course we have the continued nonsense with airport security. It doesn’t appear that there were any excessive delays this American Thanksgiving week; time will tell if air travelers will continue to let the TSA violate their privacy in the name of security, or if they will rebel, and/or stop flying. At least we have lots of people on the internet creating videos about it. Thanks to Sidewinder’s blog for posting this one:

Even more crazy was the controversy started by no other than The Pope himself, who said in a new book that condom use may be justified in some circumstances. As you know, the most common use for a condom is to prevent pregnancy, but the Pope is against that, because sex is only if you are married and are making babies, so condoms are a sin. But now, if you are a male prostitute, then condoms are okay, because they may help prevent the spread of sexually transmitted diseases.

Huh?

So if I’m a woman who already has ten kids and I don’t want number eleven, asking my husband to use a condom is a sin, but if I’m a male prostitute I’m good to go? Sheesh, with logic like this I wouldn’t be surprised if at some point in the future we hear about a big scandal involving sexually repressed priests behaving inappropriately with young boys, and then having the higher ups cover it all up. (Oh wait, that already happened).

When the head of a big institution comes out and changes one of their fundamental policies, that’s a tipping point. Of course it has nothing to do with the collapse of the financial markets and all of the other problems we were expecting, so it doesn’t fulfill any predictions, but it’s a start.

Is the impending marriage of Prince William and Kate Middleton a tipping point? There’s lots of whining about it, so maybe. Personally, I wish them well, and I couldn’t care less.

Could the fact that the President was injured and required 12 stitches during a basketball game be a tipping point? I doubt it, but I loved the press report after the game, describing other presidents who required medical attention while president:

Recent presidents have had a number of medical scares.

George W. Bush choked on a pretzel and briefly lost consciousness, falling and hurting his head.

Bill Clinton had surgery and used crutches for months for a torn tendon in his knee when he stumbled on steps at the Florida home of golf pro Greg Norman.

The elder Bush, George H.W. Bush, was hospitalized for an erratic heartbeat while jogging at Camp David, a problem later diagnosed as a thyroid ailment. The senior Bush also collapsed at a state dinner in Tokyo, which the White House blamed on an intestinal flu.

Jimmy Carter fainted briefly while jogging near Camp David.

Ronald Reagan was shot in the chest in a 1981 assassination attempt.

Yup, one guy choked on a pretzel, one guy tripped on the stairs, and oh yeah, one guy was almost assassinated. I’m guessing the assassination attempt should probably get more attention than the pretzel incident, but that’s just me.

Of course there are more serious problems in the world, like the soon-to-be war between North and South Korea. But hey, let’s not worry about that. Let’s talk about all of the crazy Black Friday shoppers, looking for the deals. You know, like the mall food court locked down after reports of gunshots. Or the Marine who was stabbed at Toys R Us.

My point is this: the main stream media gives equal weight to stories about war, and stories about male prostitute condom use. Our task is to filter out the noise, and determine what’s important, and what isn’t.

What’s important is what is always important: real life. We continue to live in a world of massive government deficits and debt, high unemployment, a collapsing real estate market, and general economic malaise. It’s not a pretty picture. Insiders can see that it’s not a pretty picture; that’s why insider selling is at record levels.

So my plan continues, with some modifications for the coming week.

This past week, as stocks dropped in value, I added to my holdings of:

• AEM.TO – Agnico-Eagle Mines Ltd.
• ADM.V – Andina Minerals Inc.
• CMK.TO – Cline Mining Corporation.
• K.TO – Kinross Gold Corp.
• G.TO – Goldcorp Inc.
• SLW.TO – Silver Wheaton Corp.

This week my plan will be to increase my holdings of junior precious metals stocks, and, for the first time in two years, to start dipping my toes back into the uranium market, which has been very hot of late. (In fact it may be too hot, and I may have missed it; I’ll investigate that this week).

Which uranium stocks look good? I haven’t decided yet, but feel free to share your thoughts over on the Buy High Sell Higher Forum (which will save me from having to do extensive research)

Thanks for reading, and see you next week.