(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.

• Global Economy Pushed to Brink
• Dow’s worst week since October 2008
• Gold slumps record $100

Obviously I don’t like it when the baby gets thrown out with the bath water, which is exactly what transpired this week. The markets tanked, and to meet their margin calls the traders dumped their gold and silver futures, and their precious metals stocks. As a result, my stocks got hit.

It’s a bizarre situation when the U.S. dollar is a safe haven, even though we know the currency is dead. Of course it’s only a safe haven because the Eurozone countries, like Greece, are in even worse shape.

So am I sad?

Nope.

I’ve heard this song before.

I know the chorus.

I know how it ends.

For a few days, or a week, or a month, everyone piles in to the U.S. dollar and out of gold and silver. And then reality sets in, and gold resumes it’s ten year advance, and the U.S. dollar resumes it’s multi year slide. The “crash” this week in gold brings gold no where near it’s 200 day moving average.

Gold dropped almost $100 on Friday, but it will take another $100 drop to take out the 200 DMA, and I doubt that will happen. Even if it does, that’s just an even better buying opportunity.

What’s Really Happening?

The economy is collapsing, all fiat currencies are collapsing, and sane, rational investors are selling physical gold and silver and buying U.S. dollars?

Not bloody likely.

The “crash” is a paper crash, not a physical crash. Call up your local bullion dealer and ask if there was a wave of selling this week. Ask if people were lined up outside their door to convert their gold coins into paper dollars.

Not bloody likely.

Notice how the sell offs tend to start when the Comex opens in New York? The crashes don’t start in overnight trading in Europe. This is a paper driven crash, as the bullion banks take this one last opportunity to drive the paper price down so they can cover their short positions. A drop of $100 in one day is a fantastic way to cover your shorts, and save literally billions of dollars in the process.

Eventually, however, the underlying price of the physical metal will reflect market realities, and if no-one is selling physical metal, the paper price is bound to rise.

In the interim, don’t look a gift horse in the mouth. Take advantage of weeks like this and pick up stocks and precious metals “on sale”.

Weeks like this are just blips on the radar screen, not a new trend.

There may be more down days to come, but it’s in anticipation of weeks like this that I’ve maintained a cash position.

And, at the end of the day on Friday, I deployed some of that cash.

I sold my RSW – Rydex Inverse 2X S&P ETF, at a profit, which was my hedge against weeks like this. I then took some cash and purchased more shares of precious metal stocks like K.TO – Kinross Gold Corp. and FNV.TO – Franco-Nevada Corp.

I also purchased the Franco-Nevada warrants that mature in March. They were down 30% on Friday, because they are highly levered. Perfect. A big up day means a 30% gain, and that’s the kind of day I like.

But what if the crash continues on Monday?

I’ll buy more.

Gold isn’t going down to $200 per ounce. I doubt we will see $1,500, so if we are closing in on the bottom, now is the time to get positioned for the next upswing.

Buy when there is blood in the streets, like this week.

Thanks for reading, feel free to provide your comments below, and see you next week.

Franco-Nevada History

Pierre Lassonde and Seymour Schulich co-founded Franco-Nevada Mining Corporation in 1982, and, according to the Lassonde Institute for Mining website, provided shareholders with a 36% annualized rate of return over a 20 year period. That’s a pretty good rate of return, but there were some ups and downs, and shifts in direction, along the way.

Franco-Nevada began as a gold exploration company, and since in my internet searches I can find no evidence of the company “striking it rich”, I assume they never did find the “big one”.

Fortunately Pierre and Seymour were no dummies, so they copied a concept from the oil and gas industry: royalty ownership. The concept is simple, and works like this:

You have an oilfield, or a gas deposit, or gold deposit, and you need a bunch of money to develop it. Bank financing is prohibitively expensive, but you don’t want to issue shares to dilute the ownership of the company. Instead, you issue a royalty stream to investors.

You need $1 million; I’ve got a $1 million. I agree to give you the $1 million, and in exchange you agree to give me 10% of all oil produced from your well, or gold from your mine, forever.

You still own 100% of your mine. You control it. You manage it. All I get is a share of the profits.

From my point of view as an investor, I write a cheque (or a check if you are in the U.S.), and that’s it. I don’t have to worry about management, or production, or regulatory problems, or unions, or anything. In fact, all I need to do is due diligence. If I purchase royalty streams in solidly managed companies, with good resources, I do well with no further work.

And that’s what Franco-Nevada did. While still ostensibly a gold exploration company, they blew half the money in the bank, $2 million, on a 4% royalty interest in Western State Minerals. It turned out to be a sweet deal, and by 2003 that one investment was generating $23 million annually for Franco-Nevada.

By the late 1990′s Franco-Nevada only owned one mine, Midas, in Nevada. In April 2002, Franco sold Midas to Normandy Mining for 20% of that company’s shares and a 5% royalty on the mine. That’s where the fun began, when AngloGold of South Africa offered to pay a nice premium to buy Normandy (which of course was 20% owned by Franco), to give Franco a 60% gain on investment.

But, as I said earlier, Pierre and Seymour were no dummies, so they figured they would start a bidding war by contacting Newmont Mining and saying to them, “hey guys, why don’t you buy all of Franco-Nevada”.

And they did. And Lassonde became the president of Newmont, and Seymour became a director.

But wait, there’s more!

In 2002 Newmont decided to spin out all of it’s royalty interests (to concentrate on mining), so a new company, Franco-Nevada Corp. was formed (not to be confused with the old Franco-Nevada Mining Corp.), doing a $1.1 billion IPO, which, at the time, was the biggest mining company IPO in North American history. After the IPO, Pierre Lassonde became the Chairman of the new Franco-Nevada.

Why Invest in Franco-Nevada?

Let me count the reasons:

1 Franco-Nevada is projecting growth of 60% this year (which isn’t surprising given what the price of gold is doing).

2 As discussed above, the royalty stream model is low risk.

3 Risk is further reduced through project diversification. They have well over a 300 different projects in their portfolio, so if a few of them “go south” it won’t matter. Diversification exists geographically (less than half of their projects are in the U.S.), and by commodity type (74% is gold), and by project (no single asset represents more than 15% of NAV).

4 Leverage, baby: You can buy gold, or a gold ETF, and if gold goes up 10%, you make 10%. With the revenue stream model, there’s greater leverage, so you make more than just the increase in the price of gold, because the royalty stream, in simple terms, is pure profit. Since 2007 gold is up 71%, and Franco-Nevada’s gold revenue is up 332%:

Franco-Nevada Leverage to Gold Price

(You can see the chart, and read the entire management presentation, by downloading this pdf document from their website). All management presentations are also available.

5 Franco-Nevada pays a monthly dividend of 4 cents U.S. per share, which at current prices is an annual yield of just over 1%. Okay, that’s not much of a reason to buy a stock (who cares about dividends these days?), but at least it’s something. The dividend has increased in each of the last four years. (Of course if I was an institutional investor, and if I grasped that fact that Franco has one of the highest yields in the gold sector, I might be very tempted to jump on board).

That’s all well and go, but why buy now?

First, are you asleep? Have you not noticed the price of gold making new highs?

Second, there should be company specific good news in the next two months. For example, the Tasiast Mine in Mauritania should start sending royalty payments soon, with increases in resource estimates possible. (And yes, the Tasiast Mine is owned by K.TO – Kinross Gold Corp. which is probably a good buy at it’s current price, but that’s another story for another day).

Another possible win for the company is the drilling program happening at the Detour Mine in Northern Ontario. Their processing facility is viable if gold is over $1,000 per ounce, so I don’t see viability being a problem.

You want another reason? Take a look at the chart:

Do I own any Franco-Nevada?

Not yet.

(I’m not one of those newsletter guys who buys up a bunch of shares, and then writes a post to get everyone to buy. Of course with my three readers, I doubt I can influence the price anyway……..).

“Not yet” means I will be buying, and soon. In fact, I will interpret all market weakness as a buying opportunity.

I will buy the shares, and if we have a steep correction I may also buy some warrants (FNV.WT on the TSX for warrants exercisable at $32 per share, expiring March 13, 2012, which are really just a medium term option).

Fasten your seat belts, and let’s see what happens.

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.

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.

Some of you probably read the daily musings of one George Ure, who writes a daily column on his Urban Survival website. George publishes every morning at 8:55 am Eastern Time, and during the week it’s free. He pulls stories from the usual sources, like Drudge, and comments on them. All well and good, since I don’t have time to read every story on the web. On Saturday and Sunday he publishes on his Peoplenomics site, for subscribers only, at a cost of $40 per year.

George is a bit of a nut, and he has no idea how to use the spell checker function on his computer, so his columns are full of spelling mistakes. That being said, he does provide an interesting perspective on our crazy world. (For the record, I consider calling someone a “nut” to be a compliment).

Even more crazy, George often reports on the work of Clif High at halfpasthuman.com. I say crazy, because Clif analyzes the future based on what he calls “predictive linguistics”. In simple terms, predictive linguistics samples large portions of the public internet with an eye toward “sensing the future” based on subtle changes in language.

Huh?

Stay with me on this one.

Clif believes that we humans can sense the future, and by analyzing changes in our language we can predict the future. He claims to have predicted, in one form or another, major events like 9/11.

Do I believe it?

Not really.

On one level, we can all predict the future. For example, I can predict that on December 25, 2015 I will be gathered around a tree, with lights on it, with my family, opening presents. My prediction will probably come true, but that doesn’t necessarily mean I can see the future. Of course we do anticipate events, and our anticipation of those events probably does impact the future. A small child dreams of Christmas, and that anticipation makes Christmas for a child even more magical and real that it may otherwise be.

But anticipation is not really predicting the future. My readings of Clif’s work over the last few years don’t indicate, to me, any greater level of accuracy than what you or I could achieve by reading the paper and projecting forward.

So here’s the crazy part: For at least the past year, Clif has been predicting a major “tipping point” during the period of November 8 to 11, 2010. It appears that the tipping point will be financial in nature, and probably caused by, or as a result of, the destruction of paper currency.

Great.

Of course, on the surface, that probably isn’t a surprise to any of you. We all know that fiat money is a rigged game, and eventually all paper money dies. It’s just somewhat disconcerting that this may become visible to everyone starting on Monday.

More interesting, I think, is that other commentators are picking up on this idea of a “tipping point”. Tyler Durden published an article by Mike Krieger stating that The Tipping Point Has Arrived. A story on Thursday said that the Bank of America is getting closer to a Tipping Point. Obviously many others would consider the partial de-throning of Obama this week with the Republicans regaining control of the House to be another example of a Tipping Point. The Fed’s expected decision to keep printing money we don’t have is also a potential Tipping Point.

President Obama is in India for a visit; could that lead to a tipping point? I don’t know, but obviously the Secret Service is worried about his safety, or else they would not be constructing a bomb proof 1 km long tunnel so that he can visit a museum./

But back to Clif High. He issued an update to his forecast on November 3 with his new Tipping Point Numbers. Apparently:

The emotional tension level plateau has grown. It had been previously forecast to start on the 8th, but now shows as beginning on November 5, 2010, at approximately 2:30 PM Pacific Coast Time (UTC =+ 8). Further, the plateau of building emotional tension now extends out further to the 14th of November instead of the 11th.

The ‘break’ in the tension values that indicates the tipping point after which we are into emotional release language starts on November 14th at 6:50AM Pacific Coast Time (UTC=+ 8).

So we have had conditions alter such that the plateau is now starting earlier and lasting nearly 3 days longer.

So, apparently, the tension amongst us has already started to build, with the peak happening around November 14. (Of course it is now November 6, which is after “November 5, 2010, at approximately 2:30 PM Pacific Coast Time”, and I don’t feel any increased level of emotional tension, but I suppose that’s just me).

To quote Sidewinder from his post yesterday on the Buy High Sell Higher Forum, commenting on this prediction:

So maybe the war begins in earnest in a fortnight. That’s November 14th at 6:50 AM Pacific time. Can’t wait to read what they will have to say after this. Then again, sooner or later they will be right. (this happens every year…. the predictions that is)

Yes, I agree. Lots of predictions, but very few successes, and even a stopped clock is correct twice a day, so eventually one of these predictions will be correct.

And yes, I agree, this all sounds crazy. If only there were a sign, somewhere, of growing tensions. Well, here’s a sign, from Thursday’s gold chart:

How about that action on Thursday, with gold up $44.40, or 3.29% in one day. That’s a sign for you. On Friday gold continued the rally, gaining another $2.70, to close at yet another all time high of $1,395. Will we see $1,400 next week? (I don’t know, but I did predict $1,450 by year end, so I’m looking pretty good at the moment).

(The Kitco Gold Index breaks down the move in gold; at the close on Friday they showed that gold advanced by $1.70, which was caused by a $12.60 drop due to the strengthening of the U.S. dollar, counter-balanced by an increase of $14.30 due to buying. Clearly investors are buying gold).

The action in silver is similar, or even better.

So, what does this mean, strategy wise? Good question.

If you believe that the world is going to end, or be very disrupted around November 14, this may be an academic discussion. If the banks and brokerages are all shut down, you won’t be able to get at any of your electronic money, so massive profits will be moot.

However, if you believe that the financial world will suffer but not end, there are very clear strategies you can employ:

First, have a few dollars of paper currency in your wallet, just in case.

Second, go shopping this week and fill up your fridge, and your pantry, with whatever food and supplies you will need over the next few weeks and months. If the world does grind to a halt, you want to have a good supply of the essentials, like toilet paper. If the world doesn’t end, no big deal; you bought stuff that you will use anyway, so there’s no incremental cost to you.

Third, buy gold and silver. Buy physical gold and silver, and buy gold and silver stocks.

Finally, hold some cash, because if the market does tank, there will be great bargains available.

That’s the strategy I’ve implemented. I’m still holding cash, but over the past three weeks I have bought gold and silver stocks on down days. In the past three weeks I have increased my holdings of:

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

(I also hold some juniors, but I won’t bore you with an extensive list).

I haven’t just bought; I have also covered. So, for example, I buy stock ABC for $30. The next day it is trading for $31, so I immediately sell a call option against the stock I own. For example, I sell a November 32 call for $2. If the stock is trading at less than $32 at the close on November 19, the options expire worthless and I pocket the premium. If the stock continues to run all the way to $40, I am forced to sell my shares for $32. However, I’m okay with that, since I only paid $30 for them three or four weeks earlier, with the $2 I made on the covered write my profit, ignoring commissions, is $3, which on a $30 stock is 10%, and that’s fine for a month’s work.

I’m not covering all of my stocks. I keep a few uncovered, so that if the market does blast off to the upside, I participate fully.

If the market tanks, and takes the gold and silver stocks with it, like happened in 2008, I’m okay with that, because I know it will only be temporary. I limit my downside with the covered writes, and I deploy my cash to take advantage of bargains.

One final note on my covered write strategy. I will not necessarily wait until the option expires. If I can buy back the option for considerably less than I sold it for, I’ll do it.

For example, if I sell an option for $2, and then the stock drops and the option is only worth 50 cents a few days later, I will buy back the option for 50 cents. I still profited by $1.50, so holding out for that final 50 cents is not prudent, particularly when dealing with volatile stocks that can bounce back quickly.

So, that’s my plan.

If the world still exists next week, check back and we’ll see where we are at. In the meantime, I look forward to your insights over on the Buy High Sell Higher Forum.