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

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

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

So what do you do?

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

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

I agree.

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

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

So here’s the plan:

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

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

Gold is not as over-extended:

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

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

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

PHS.U.TO – Sprott Physical Silver Trust

SSO.TO – Silver Standard Resources, Inc.

SVM.TO – Silvercorp Metals Inc.

FVI.TO – Fortuna Silver Mines Inc.

So, in short, I’m happy.

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

Of course, my plans could change.

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

Simpson’s Episode #117, Bart’s Comet, original airdate February 5, 1995; episode recap:

Bart discovers that a comet is heading straight for Springfield, where everyone will be destroyed. At a town meeting the scientists tell everyone they are doomed. Homer’s response:

Homer: What’s everyone so worked up about? So there’s a comet — big deal. It’ll burn up in our atmosphere and what’s ever left will be no bigger than a chihuahua’s head.

Bart: Wow, Dad, maybe you’re right.

Homer: Of course I’m right. If I’m not, may we all be horribly crushed from above ….. somehow.

The comet speeds towards Springfield, through the polluted atmosphere. Chunks of it start to fly off. “Look!” cries Marge, “It’s breaking up!” yells Lisa. The rapidly diminishing-in-size comet punctures the Skinner weather balloon, then places a direct hit on Ned’s bomb shelter — destroying it in a pile of masonry.

Bart: Cool. [picks up what's left of the comet]

Lisa: We’re saved!

Everyone: Yay!

Selma: Sure makes you appreciate the preciousness of life.
[she and Patty light a cigarette and puff contentedly]

Moe: Let’s go burn down the observatory so this will never happen again.

Lisa: I can’t believe that extra-thick layer of pollution that I’ve
actually picketed against burned up the comet.

Bart: But what’s really amazing, is that this is exactly what Dad
said would happen.

Lisa: Yeah, Dad was right.

Homer: I know, kids. I’m scared too!

As all fans of The Simpsons know, Homer is never right. So when all of the scientists predict doom, and Homer predicts that the meteor will “burn up in our atmosphere and what’s ever left will be no bigger than a chihuahua’s head” no-one takes any comfort in his prediction. Of course that’s exactly what happens; the meteor falls harmlessly to earth, and everyone is saved.

So, with that, the longest intro ever in the history of the Buy High Sell Higher Blog, what’s my point? Am I saying that all of the doom and gloom I’ve been predicting for the last year will not materialize? Is my point that the massive government spending, and the foreclosure crisis, and the crappy economy is all nothing to worry about, and it will flame out and all our problems will fall harmlessly to the ground?

I wish.

No, that’s not my point.

My point is that even a complete simpleton like Homer Simpson can occasionally see the obvious that isn’t obvious to the masses, and he can correctly predict the future. So, for the few thousand of you who glance at this site every week, who are wondering if my predictions of the coming apocalypse are completely crazy, remember the lessons of Homer Simpson.

Yes, I have been predicting a severe correction in the stock market, which is why I’ve held 80% of my portfolio in cash for most of the year.

Yes, it’s true, that at the start of the year I predicted that the Dow would be at 9,000 on September 30, 2010, and I was far too pessimistic (it closed around 10,807).

And yes, I did predict that gold would be at $1,400 for gold on September 30, so since gold was around $1,300 I over-shot by $100. However, I did predict $1,450 for year end, and I’m feeling pretty good about that one.

So, it’s true, I do not have a perfect prediction record.

But, last week I did ask the question: is gold starting the pause that refreshes? Last week, you will recall, gold closed at $1,368.60. On Friday gold closed at $1,328.10, for a drop on the week of $40.50, or 3%. Hmmm…….that does kind of look like a “pause that refreshes”, doesn’t it? Let’s look at the chart (click it to enlarge):

Here are the salient points:

First, in the last four weeks, the Relative Strength Index (RSI) has dropped from 90 (very overbought) to 51.89, a much more acceptable buy point. In fact, as you can see from the chart, the last time the RSI was at this level was back in the second week of August, when gold was in the $1,220 range, just as it was beginning it’s un-interrupted ascent to over $1,380, for a gain of 13% in 10 weeks.

Second, for those of you who like the candlestick charts, obviously a long body indicates extreme volatility on the day, and the dark color indicates that the move was down. I’ve circled the three times on the chart where this has happened, including Tuesday, which was gold’s biggest down day since the end of June. A pattern like this generally indicates we are near a near term bottom.

Third, as the blue uptrend line indicates, gold has retreated to the uptrend line that started back in late July, but it hasn’t violated it. That’s good news, indicating we are still in a near term uptrend.

So, what’s the future? Obviously there are two possibilities:

Possibility A: The correction has not yet ended, and we will see a retreat down to the 50 day or 200 day moving average, close to either $1,285 or even $1,193. In the last three years the price has only dropped below the 200 day moving average once, and that was during the crash period from August through December of 2008:

Another crash is quite possible. As you will recall, the crash of 2008 was not just a crash in gold; it was a crash in everything. If the market gets creamed, gold could very easily get creamed as well, at least temporarily.

Possibility B: The correction has ended; the RSI is now back to the buy level, no trend lines have been violated, and it’s onward and upward from here. There’s a good fundamental case for this position, primarily the fact that Russia, China, and a bunch of others are diversifying out of the U.S. dollar and in to gold. Buying drives up prices, and that’s good news.

So which is it, A or B?

In the long term I have no doubt that it’s “B”; gold is going much higher. In the short term, I have no idea. I continue to believe that we will see extreme general market weakness immediately after the U.S. midterm elections on November 2. I assume that will hurt all stocks, including gold stocks. But I don’t know if that will be a short term drop, or a four month or more drop like we saw in 2008.

So, I will take the cautious approach. I will begin to gradually increase my gold holdings, just in case the correction has ended. However I will retain significant amounts of cash so that I have buying power if a severe correction does occur.

On October 18 I sold November call options against the gold and silver stocks in my portfolio:

• AEM.TO – Agnico-Eagle Mines Ltd.
• G.TO – Goldcorp Inc.
• PBG.TO – Petrobank Energy and Resources Limited (not a precious metals stock);
• SLW.TO – Silver Wheaton Corp.
• K.TO – Kinross Gold Corp.
• PAA.TO – Pan American Silver Corp.

Obviously these stocks have all dropped in value since then, so on Monday I will buy these options back, presumably for about half of the price I sold them for, or better, to lock in the gain on the options strategy.

To increase my holdings, I have three possible strategies:

1. Buy the stock
2. Buy the stock, but then immediately sell covered options against it to reduce the cost per share (but limit the upside)
3. Buy options

Buying options is the most risky strategy, since if the market drops, my options are worthless and I’ve lost everything. However, let’s look at the numbers:

I could buy 100 shares of AEM.TO – Agnico-Eagle Mines Ltd. for $72.17 x 100, or $7,217. If the share price increases by 10%, I make 10%, or $721.

Alternatively, I could buy a contract for 100 December call options, with a strike price of $76, for about $2. If the share price increases by 10% between now and the third Friday in December, the share price goes to $79, so my $76 options are worth $3. I invested $2, so my profit is 50%, much better than the 10% increase on the underlying stock. One contract costs me $200, so if I’m wrong I lose $200, as opposed to putting $7,217 at risk owing the stock.

The prudent strategy is to buy the stock for $72, and then sell the November 72 call options for about $2.60. If the share price exceeds $72 by the third Friday in November, my shares are called, and I’m left with my $2.60, for a profit of $2.60/$72, or about 3.6%. That’s not a bad return for a month’s work, given the risk.

So, what will I do on Monday?

I will close out the options I sold, and then I will probably re-write them to grab more premium. I will probably also place some slightly below market stink bids to pick up more shares on further weakness this week. I probably won’t buy any options, since that’s generally a losing game, but we shall see.

The first two weeks of November will be very interesting, so stay tuned; only one more boring week to go.

Thanks for reading; see you next week.

But first, it’s time for an update on our 2010 Predictions, made last December. I am pleased to report that my prediction for the Dow, on June 30, 2010, was 10,000, and it actually closed at 9,774, so I get the “closest to the pin” award. As for the gold price prediction, I predicted $1,350, and it actually closed at $1,243, so I was close, but the “closest to the pin” award goes to our perennial winner, Davidslane, who predicted a gold price of $1,180, only $62 off the actual closing price. Congratulations.

Now, back to our regularly scheduled programming.

As I have repeated for many weeks in this space, I don’t think the summer will be pretty. This week was a preview of our summer of discontent. In summary:

1 There ain’t no jobs. This is a “jobless recovery”, which of course is an oxymoron; you can’t have a recovery without jobs. On Friday the U.S. Department of Labor released the June Labor Report, and it was not pretty. Here’s the quote:

Total nonfarm payroll employment declined by 125,000 in June, and the
unemployment rate edged down to 9.5 percent, the U.S. Bureau of Labor
Statistics reported today. The decline in payroll employment reflected
a decrease (-225,000) in the number of temporary employees working on
Census 2010. Private-sector payroll employment edged up by 83,000.

Of course these numbers are “cooked”. It’s mathematically impossible to lose 125,000 jobs (including 225,000 jobs lost now that the temporary Census workers are no longer taking the census), and yet have the unemployment rate “edge” down to 9.5 percent. Well, it’s not mathematically impossible if, for some reason, in the month of June, 652,000 Americans left the Civilian Labor Force (you can find that number on Table A). So there you go. A lot of jobs were lost, but even more people decided to simply stop working, so the unemployment rate improved.

Fortunately, some members of the Main Stream Media actually figured this out. The Los Angeles Times reported that Unemployment rate dips as more workers leave labor force, which is a perfect summary of the “good news” about the unemployment rate “edging” down. In other words, it’s not good news at all.

2 The Baltic Dry Index, which is a generally reliable measure of shipping activity, is tanking, and looks ready to approach the lows in the depths of the recession from November, 2008.

3 Government deficits around the world are really, really big. That’s not good. Even worse, all of the massive stimulus spending of the last two years, has, quite predictably, done no good. You can’t simply print money and expect paper to increase wealth, just as an individual can’t go on a credit card spending spree and increase their wealth. Governments are power hungry, which makes them stupid, which is the cause of our current mess. (See items 1 and 2 above). And for a real laugh, check out some lady named Nancy Pelosi who thinks that the solution to all of our problems is to send out more unemployment insurance checks, because that will create jobs. What a nut.

4 The oil spill in the Gulf continues to spill away, with no end in sight. It is now obvious that BP and the government have no idea how to stop it, so we can assume it will continue to flow for many months to come, increasing the disaster, and increasing the economic repercussions. Real estate prices in the area will plummet, which isn’t good for the economy.

5 Real estate prices are plummeting. In Florida, 81% of homes are “underwater”, meaning the property is worth less than the outstanding balance on the mortgage. That’s a disaster.

6 An Israel-Iran war now appears inevitable. This is not a political blog, so I won’t elaborate on the reasons, but it appears that military action will start within the next two weeks, with July 11 looking like the likely date. Let’s hope I’m completely wrong on this one.

7 Gold continues to make new highs. Yes, I know, there was that little hiccup on July 1 where gold crashed $44, or 3.5% in one day. Gold was treading water right up to 10:00 am on Thursday, and then the Big Boys (JP Morgan) overwhelmed the market with sell orders, presumably to do some short selling. That’s fine; made for a good buying opportunity. All of their suppression efforts have kept the price low, but it hasn’t lead to a correction, so that’s good news for gold investors, but very bad news for governments that want to hide the fact that they are printing money. (Investors realize that printing money diminishes the value of the currency, forcing investors to flee to gold as a “safe haven”).

So, the summer won’t be pretty. It might get very ugly. So how am I playing it? With a relatively simple approach.

First, I am holding more cash than normal. In a deflationary environment, cash is king.

Second, while I have no doubt that gold will rise substantially in the medium to long term, the outlook for the traditionally weak summer period is less rosy. So, I am holding my gold and silver stocks, but to reduce my risk I am using a covered writing strategy, where I sell call options against shares I own.

As I reported last week (Gold and the Markets: Exactly as Expected) on June 25 I sold options covered by stocks I own. I sold July call options, around $1 out of the money, on:

• AEM.TO – Agnico-Eagle Mines Ltd.
• G.TO – Goldcorp Inc.
• K.TO – Kinross Gold Corp.
• PAA.TO – Pan American Silver Corp.
• SLW.TO – Silver Wheaton Corp.

With the collapse in the gold price on Thursday, my gold stocks took a beating. That’s fine, that’s just a temporary hiccup, but it made the options strategy work beautifully. Here’s the summary:

• I sold the AEM.TO – Agnico-Eagle Mines Ltd. July $66 calls for $1.30 on June 25, and bought them back on July 2 for 49 cents.
• I sold the G.TO – Goldcorp Inc. July $48 calls for 91 cents on June 25, and bought them back on July 2 for 28 cents.
• I sold the K.TO – Kinross Gold Corp. July $19 calls for 60 cents on June 25, and bought them back on July 2 for 13 cents.
• I sold the PAA.TO – Pan American Silver Corp. July $29 calls for 50 cents on June 25, and bought them back on July 2 for 15 cents.
• I sold the SLW.TO – Silver Wheaton Corp. July $22 for 60 cents on June 25, and bought them back on July 2 for 15 cents.

What does this mean in real money? Here’s an example, with dollar values:

Each options contract represents an option to buy a lot of 100 shares. So, one contract of the Agnico-Eagle July 66 call sold for $1.30 would net $1.30 x 100 = $130. If you own a block of 1,000 shares, you can “cover” those 1,000 shares with 10 contracts, so your net proceeds before commissions would be $1,300. Each brokerage account will be different, but let’s assume the commissions on the sale were $22.49, so that leaves net proceeds to me of $1,277.51. So, on June 25, I owned my shares in AEM.TO – Agnico-Eagle Mines Ltd., which was selling for around $65, and I had sold the option on those shares to someone who could buy them from me for $66 anytime up to options expiry on July 17.

Then, on July 2, I re-purchased those options for 49 cents. So, it cost .49 x 10 contracts x 100 shares per contract, or $490 to re-purchase them, plus the $22.49 commission, for a total cost of $512.49.

That puts my net profit at $1,277.51 – $512.49 = $765.02

Of course the only reason I could repurchase the options for less than I sold them for was because AEM.TO – Agnico-Eagle Mines Ltd. fell from around $65 to around $62, so you could argue that the correct course of action would have been to sell the shares on June 25 and avoid the $3 per share loss. However, I can’t pick the exact tops and bottoms, and long term I plan to own the stock. I assume it will recover, so I’m satisfied to have reduced my cost of ownership by $765.02 / 1,000 shares, or 76.5 cents per share.

The results on the other shares are similar.

If we have another run up in gold early in the week, I may cover my shares again, with more July calls. Obviously the premiums won’t be as high, since a week’s worth of time premium will have eroded, but it’s possible that there will be more gains to be had. Even if it can’t be done again, do the math:

If the share price were to remain unchanged at $65, and if you could generate 76.5 cents per month writing calls against the stock, that would be an annualized return of 14%. That’s not bad at all. Of course if the share price remained unchanged the option premiums would be lower, so these profits would not be possible, and of course the share price won’t remain unchanged. However, if you cover after three solid up days, and then “Buy to Close” after the inevitable corrections like we experienced on Thursday, you can certainly mitigate some risk, and feather your nest at the same time.

Finally, back to the market. I continue to believe that the market is headed down, and this week’s action didn’t change my mind. The long term support level of around 1,040 on the S&P 500 going back to last September was broken this week, and that’s not good news if you are a bull. With the RSI at 30 a short term bounce early in the week is quite possible, but I’m betting on 900 before we will see 1,200.

I continue to hold a few shares of the RSW – Rydex Inverse 2X S&P ETF, an ETF that goes up when the market goes down. I don’t have a large holding, but it’s there as short term insurance.

Second, with play money, I am also buying puts. On June 24 I bought some August 1000 SPX puts; I paid $22 for them, and then sold them the next day for $24. I put a buy order in again on Monday at $19, and didn’t get filled, which was a tragedy, since the market had a big correction on Tuesday. I would have come close to doubling my money. Oh well, can’t win ‘em all.

On Tuesday I bought more August 1000 SPX puts for $31, and then sold them on July 1 for $38. A nice profit, but not what it could have been.

In an effort to reduce my exposure, on Thursday I dropped down a notch on bought the August 900 SPX puts for $15; at the close on Friday they were worth around $12, so I’m down on this trade so far, but there’s still time, so I’m holding.

Again, let me emphasize that doing covered writes by selling options against stocks you own is a relatively conservative strategy. Buying short term options is essentially gambling, so you would be a fool to do it with anything more than a few dollars that you won’t miss when you inevitably lose the whole bundle.

We shall see how July progresses; I suspect we will look back thirty days from now and marvel at how much worse things got.

I hope I’m wrong. If I am, no problem, I’m holding cash, so I’m not concerned.

A belated Happy Canada Day to my fellow Canadians, and a Happy Fourth of July to my American readers. See you next week.

I’ve covered all of this before, and today I will give you more of the same.

First, I have been worried about the markets for quite some time now, and with each passing day, I get more worried. Onlooker had a good comment on Black Swans over on the Buy High Sell Higher Forum on this very topic. The Great Depression was a series of setbacks; here in 2010 we had our first setback (back in 2008), and I continue to wait for the next one, whatever it may be.

As this chart of the Dow shows, there is obvious support in the 9,750 area, and it would appear that the market is poised to test that level again. If it holds, we get a bounce. If it doesn’t, we are screwed. Hello, 8,000.

So, this week, I put my money where my mouth is. On Thursday morning, the market was looking weak, so I bought some August SPX 1,000 puts (puts on the S&P 500 index). I paid between $18 and $20 for each contract. On Friday, seeing that the weekend’s weather was looking nice and I didn’t want to think about it over the weekend, I sold the puts, for $24. My profit was between 20% and 30%, which is fine for two days work.

Of course I wasn’t playing with any serious money; just a few dollars; this is not a “bet the farm” “investment”, this is pure gambling. However, if you think the direction of the market is down, then gambling to the down side makes sense.

If we see a small bounce early in the week, I’ll do it all over again. I’ll buy some puts, and hope for a nice gain over a short period. If I’m wrong, I lose a few dollars, but I’m not playing with significant sums of money, so I’m not concerned.

Gold

Of greater interest is where I have my real money: gold.

As I explained last week, with only one or two exceptions, all I have in my portfolio are gold and silver stocks. My biggest “blue chip” holdings include:

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

As I have explained over the last two weeks, in How to Juice Your Returns on a Stock you are Selling, and last week in Gold: How I Played it, and What’s Next, I assume gold and gold stocks will continue to increase in value, but they will not go up in a straight line. June is a traditionally weak month for gold, and July isn’t great either, so recent strength is a good opportunity to lock in profits.

So, on Friday, I did it again. I sold options covered by stocks I own. I sold July call options, around $1 out of the money, on:

• AEM.TO – Agnico-Eagle Mines Ltd.
• G.TO – Goldcorp Inc.
• K.TO – Kinross Gold Corp.
• PAA.TO – Pan American Silver Corp.
• SLW.TO – Silver Wheaton Corp.

For example, I sold the Agnico-Eagle July 66 call for $1.30. At the time AEM.TO – Agnico-Eagle Mines Ltd. was selling for around $65, so I was paid $1.30 for something that was worth negative $1 (ie. it was $1 out of the money). If AEM is trading for $66 or less at the end of the day on July 17, about three weeks from now, I keep the $1.30. For me to lose on this deal AEM will need to increase in value by more than $2.30. If it does, I lose some of the potential profit.

However, $2.30 on $65 is 3.5%, which again is not a bad return for three weeks work, with very little risk.

So I will sit and wait.

It’s not sexy and exciting picking up 2% here and 3% there over a two or three week period, but over many months it will turn into real money, with little risk.

By the time we get to the Fall, and all hell is breaking loose in the world, and the markets, I will stop covering, and let my profits run. For now, prudence makes sense.

Why am I being cautious? First, the summer traditionally is not great for gold stocks.

Second, there is the obvious concern that general market weakness will drag down all stocks, good and bad, as happened in 2008 when traders were forced to liquidate everything, good and bad, to meet their margin calls. There’s a great article on Will Gold Miners Act Like Stocks or Gold During the Crash? that correctly concludes that gold stocks will fare better than the general market in a correction, but caution is still warranted.

So, caution it is.

I am gradually increasing my cash, and I expect that this conservative approach will leave me well positioned to pick up any available bargains.

Time will tell; see you next week.

Well, Ben, let me help you out. Get a pencil ready, and write this down.

First, and most importantly, the Federal Reserve, which you are the boss of, has printed a gazillion dollars in the last two years. Okay, I’m over-simplifying; they don’t actual print money, but they do “insert liquidity into the system” by providing low interest loans to banks, and a bunch of other techniques, all of which essentially amount to printing money. As a result, $1 dollar that I owned in 1940 is worth about 2 cents today. And the dollar I have today will be worth less tomorrow.

Here’s how it works: let’s pretend that in the economy there is only one dollar, and there is only one commodity (let’s say it’s a bottle of shampoo). That bottle of shampoo is probably worth around $1, since the sum total of all of the money could buy every commodity. Then let’s assume the government decides to print more money, so now there are ten dollars in the economy, but no-one makes any more shampoo, so there is still only one bottle of shampoo. What’s it worth? It could be worth up to $10, because again, that’s all the money there is. So, that $1 has gone from being worth one bottle of shampoo to only being worth one tenth of a bottle of shampoo. The value of money has decreased.

Expanding on the example, let’s assume that I’m the guy who owns that one dollar, and I know the government is about to print more money, which will devalue the value of that dollar I have. How can I preserve the value of that dollar? I can’t, because I don’t control the money supply. But what I can do is convert that dollar into something that won’t drop in value. I could convert it into something that can be printed easily on a printing press.

One option would be to take my dollar and immediately buy the one bottle of shampoo. Then, when the government prints more money, I have preserved my wealth. Before and after the printing I owned one bottle of shampoo. I preserved my wealth. Of course my bottle of shampoo is now worth $10, instead of $1, but it’s the same bottle, so I’m happy. If I hadn’t purchased that bottle, I’d still have my $1, but it wouldn’t be enough to buy the shampoo. I’d be screwed.

And that, Mr. Bernanke, is why investors are buying gold. They want to put their money in something that can’t be devalued. They want to put their money in something that you can’t print. They could have picked shampoo, but it’s possible that more shampoo could be produced. Plus, shampoo takes up a lot of room. Gold is much easier to manage. You can’t print it, and I can hold $100,000 worth of gold in my hand. It’s easily divisible, it won’t corrode or dry up, and it’s recognized and accepted around the world, and has been for 5,000 years.

End of lesson. You’re welcome, Ben. Any other questions, drop me a line or post on the Buy High Sell Higher Forum and we’ll do our best to help you out.

Now, on to the markets this week. The Dow closed above 10,000, the S&P 500 is still above 1,000, so all is well right? Sure, everything’s great.

Of course you could interpret this week’s bounce as a “technical bounce”, meaning there is nothing driving it fundamentally. It appears that volume was fairly light, so I don’t see the public rushing back in. We are also still experiencing massive volatility. 200 point swings on the Dow are now common. By my count (and I could be wrong), we have now had 25 consecutive sessions where the Dow has traded in more than a 100 point range. That’s pretty wild, and not indicative of a calming resumption of a bull market.

Jobless claims are also still a disaster. 456,000 was last week’s number, and looking at the four week average that number is higher than ever. Higher than during the internet bubble burst, or the aftermath of Katrina, Fannie and Freddie, or the Lehman Brothers collapse. With the Gulf oil spill causing even more unemployment, and the end of the census stimulus, numbers in the 500,000 range are sure to follow.

Doesn’t sound like a recovery to me.

So, with this negative perspective, I started to protect myself this week. I did some covered writes.

(If you are new here, a covered write is where you sell an option against a stock you already own. An option gives the owner of the option the right to purchase the stock at a set price, up to a certain date).

For example, on Tuesday I sold the June 46 call options on my G.TO – Goldcorp Inc. holdings for $1.20. Tuesday, you will recall, was the day after Monday, and Monday was a big up day for gold and gold stocks. Goldcorp was trading just shy of $47 when I covered, so I sold an option worth, say, 90 cents, for $1.20 (with the 30 cent difference being the time premium). Gold weakened, so on Thursday I was able to buy back those options for 39 cents. That’s a nice little profit for two days work. I did the same on my shares of K.TO – Kinross Gold Corp. as well; covered on Tuesday, and closed the position on Thursday.

In fact, on Tuesday I did covered writes on most of my gold and silver blue chip holdings, including:

AEM.TO – Agnico-Eagle Mines Ltd.

PAA.TO – Pan American Silver Corp.

PBG.TO – Petrobank Energy and Resources Limited (I realize this isn’t a gold stock, but with the market weakness I covered it anyway).

SLW.TO – Silver Wheaton Corp.

I also own CEF.A.TO – Central Fund of Canada, but there were no suitable options for a covered write.

I put in my “buy to close” orders on the above stocks, but they weren’t filled at my required price, so that’s fine, I will either:

• attempt to buy them back next week on further weakness, or
• let them expire worthless after the close next Friday when they expire; or
• if the stocks increase, I’ll let my stocks be called.

If I’m going to buy back an option that I’ve sold, I want to at least double my money. So, in the Goldcorp example, I sold the options for $1.20, so I would not buy them back for anything more than 60 cents (ignoring commissions). Since I bought them back for 39 cents, I was satisfied. Since I couldn’t get a similar deal on most of the other options, I haven’t bought them back, yet.

If gold goes on a tear this week and I lose my stocks, so be it. The summer is a traditionally weak time for gold, so since I sold options at strike prices above market value at the time I sold them, and since I also got a premium, I’ll be satisfied with that result. My goal over the next month is to increase my cash position, so this is a way to do that.

Let me repeat: there are two ways to sell a stock.

First, you can just sell it.

Second, you can do a covered write on it, and let the stock be called away. So, for example, if a stock is trading at $46.75, I can sell it for $46.75. Or, I could sell the $46 call options for $1.20. If my stock gets called, I get paid $46 plus my $1.20 premium, or $47.20 in total. My only extra cost is the commissions on the sale of the options (I’m paying commissions on the sale of the stock either way). Given a choice between selling for $46.75 or $47.20, I’ll take the extra cash either way. That’s how you can juice your returns on a stock you are selling.

Also, as downside protection, I picked up some RSW – Rydex Inverse 2X S&P ETF, which goes up when the market goes down. This is a short term play, so on Monday I’ll place my sell orders for something in the range of 5% or 10% above my purchase price, and pocket the cash on further market weakness.

That’s my report for the week; thanks for reading, and see you next week.

The S&P 500 peaked at around 1,561, and then dropped to around 683. A bounce back by 61.8%, which is a key Fibonacci level, would bring the market back to somewhere in the range of 1,225 to 1,230, depending on the exact data points you use. We got close this week:

On Thursday the index peaked at just over 1,209, less than 20 points away, a fraction of one percent, from a very key level. But that was it, and it was all downhill from there. What does that mean? It means, in my books, that we do not yet have a confirmation of the great “rally”. I am not betting on great things until I see a close decisively over 1,230. 1,230 is a massive resistance level, and since we haven’t taken it out, it could be that the top is in. (Or not. I’m just showing you the numbers. You decide).

So does this mean I’m saddened by the 1.5% correction on the U.S. markets on Friday? Not at all. I don’t own the U.S. market. I own gold stocks, and they are doing great, thank you very much.

This chart of the leading gold stocks over the last three months what we market technicians like to call an “upchannel”. (I’m not really a technician; I’m just some guy who writes a blog, but that shows you that you don’t need to be a genius to see an uptrend. Just look). Obviously April was a great month to own gold stocks, and I did, so I’m happy.

I am currently 75% invested, and 25% in cash. More specifically, I am 25% in cash, 65% in precious metals stocks, and 10% in other stocks.

My other stocks include PBG.TO – Petrobank Energy and Resources Limited, obviously an energy play, and it’s holding it’s own. The real profits of course have been on the gold side, with blue chip winners like

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

Of course the speculative stocks have done even better, with my two biggest winners this year being BBR.TO – Brett Resources Inc. and CMK.TO – Cline Mining Corporation.

(As an aside, I no longer own SSO.TO – Silver Standard Resources, Inc.; I’m not happy with management, and the stock has lagged others in the sector, so I’m out of it. Sorry, Mr. Dines, you may still like it, but that ship has sailed for me).

What’s next? I don’t know. After a run like we’ve had over the last two weeks, a pullback seems inevitable, so I may start doing some covered writes to lock in profits. Or not; I haven’t decided.

I will re-iterate my long held belief that we are not out of the woods, economically, yet.

Fair disclosure: I am a Canadian, working and writing in Canada, so my perspective on the world may be biased. I come from a “socialist” country (you know, public health care, etc). Here in socialist Canada the maximum you can qualify for unemployment benefits is about 52 weeks. That is in direct contrast, of course, to my capitalistic neigbour to the south, the USA, where you can apparently qualify for benefits for 99 weeks.

Wow.

Here’s the problem: More than a million U.S. residents are getting close to the limit, and may lose jobless benefits soon. Congress has increased the length you can receive benefits three times since December 2007, and it’s unlikely they will do it again. That means in the next few months as benefits expire, consumers will have less to spend, and that will hurt the “recovery”. The commercial real estate market is contracting, and the residential construction market is also contracting. Federal stimulus programs are running out, so what will save us now?

My question is rhetorical. Our problems are baked in the cake, I’m afraid.

So, this weekend, I will continue planting in my garden, I will continue holding my gold stocks, and I will not be making any investments in the general market. It’s worked to this point, so let’s let the trend run.

Thanks for reading; see you next week.

Buying options is a high leverage, high risk game. I buy the option for, say $1, and if the underlying stock quickly increases by $2, the option could be worth $3. That’s leverage. Of course if the stock doesn’t increase in value, the option can be worthless, and I can lose everything. Big potential gains, but also potential 100% losses.

My strategy, instead of buying options, is to sell them. Since I own the stock, I can sell the underlying option without putting up any additional security or margin. Since I know that the option’s time value decreases as time goes on, I am selling something that I expect to decrease in value. If I can re-purchase it later for a lower price, I make money.

Here’s a quote from last week’s commentary, detailing my strategy:

As I reported on March 27 in my commentary on Gold Heading Higher, Market Heading Lower?:

If I’m correct and we have a bounce this week, I will follow my typical strategy and do some covered writing on these stocks to lock in my profits, and to get some downside protection.

Well, that’s exactly what I did. I bought more gold shares in the last week of March, including

• AEM.TO – Agnico-Eagle Mines Ltd. (gold blue chip)
• ADM.V – Andina Minerals Inc. (speculative junior gold)
• CEF.A.TO – Central Fund of Canada (blue chip gold fund)
• K.TO – Kinross Gold Corp. (gold blue chip)
• G.TO – Goldcorp Inc.(gold blue chip)
• PAA.TO – Pan American Silver Corp. (silver blue chip)
• SLW.TO – Silver Wheaton Corp. (silver blue chip, but with more upside)

Then, this week, I did covered writes on most of them. Brilliant, eh? The stocks went up when I said they would, and I covered to lock in my profits!

Actually, not so much.

Here’s a chart of one of my typical gold holdings:

This is the chart of AEM.TO – Agnico-Eagle Mines Ltd. On March 24 I increased my holdings, paying $56.45 per share (the blue arrow). Obviously I bought one day too early, but still, it closed Friday at 61.39, so that’s a great purchase point.

However, on April 6 (the red arrow), I then did a covered write, selling the then out of the money April 60 calls for 58 cents. Seemed like a good deal at the time, but of course the stock has increased every day since I locked in my profits. Oops. As of the close on Friday the bid/ask on the April 60 was $1.70 to $1.87, so I’m now down over $1 on that deal. Obviously I should not have sold the calls; I should have bought them.

Am I worried? Well, yes, a bit, since the options have one week to go to expiry (on April 17). If Agnico-Eagle drops $1.39 and closes below $60, the options expire worthless, and I’m fine. If they don’t, I’m forced to sell my shares at $60, which is a notional loss of $1.39 at today’s prices (less the 58 cent premium I took in).

For now, I’ll hold. We are obviously at an overhead resistance point (the green line), so a pullback from here would not be surprising, so this trade may still work out well. I’ll report back next week.

So, how did the strategy work?

Pretty well, actually.

This week most of the shares I covered fell, and the options expired worthless. Perfect. Here’s a summary:

• AEM.TO – Agnico-Eagle Mines Ltd. – Sold April 60 calls for 58 cents; just prior to the close on Friday the stock was trading in the $60.30 to $60.40 range, so instead of having the stock called, I purchased the options to close at 45 cents; excluding commissions, I made a small profit (58 cents – 45 cents); the commissions are small, so even after commissions I made a small profit. The stock closed Friday at $60.29, and I still own the stock.
• K.TO – Kinross Gold Corp. Sold April 18 calls for 29 cents; stock closed Friday at $17.94, so options expired worthless, and I still own the stock. I was six cents away from being exercised, so this is about as tight a trade as you want to make it.
• G.TO – Goldcorp Inc. Sold April 40 calls for 25 cents; stock closed Friday at $39.44, so options expired worthless, and I still own the stock.
• PBG.TO – Petrobank Energy and Resources Limited Sold April 58 calls for 65 cents; stock closed Friday at $52.45, so options expired worthless, and I still own the stock. (This is the only non-precious metals stock that I covered).
• SLW.TO – Silver Wheaton Corp. Sold April 17 calls for 31 cents. On Friday at 1:40 pm the stock had traded down to $17.32, so it appeared that I would lose the stock if I didn’t close my position, so I closed my position by buying back the options I sold at 35 cents. So I lost 4 cents, plus commissions, on this trade. I still own the stock. If I had waited until the close, the stock closed at $17.50, so I made the correct decision to close out the position when I did.

So, out of the five stocks I covered around April 6, I made money on four of them, and lost a small amount on one of them. Overall, a successful strategy, in my view.

My profits on the strategy were relatively small, but the risk was virtually zero. I already owned the stock, and I sold the calls for above market value. Either way, I win. If the stock goes up and my shares get called, fine, I made a premium on the option sales, and I sold the stock at a higher price. If the stock doesn’t rise over the call price, I still own the stock, and I increased my returns by pocketing the premium. Since long term I want to own these stocks, it makes sense to “rent them out” for short periods of time to increase my returns.

That’s how I view it: I’m renting out my stocks to increase my returns.

Options are a depreciating asset, so selling some whose time premiums will erode, and then buying them back for a cheaper price, makes sense.

What will I do differently next month?

Ideally, you want to cover your shares after they have had a big run up. Stocks go up, and then they go down, so the time to cover is as they are peaking. My general rule of thumb is to cover after a stock has increased for three straight days. Four is even better. Since nothing goes up forever, this timing works.

Second, I like to cover when there are two to four weeks remaining to options expiration. The longer the time remaining to expiration, the higher the time premium. However, the longer to expiration, the more likely it is that the stock will go way up, and I lose the upside, so you have to balance more time versus less time.

So, for next month, I’ll wait for some up days to cover, and try to cover as far out of the money as is possible to still generate a decent premium.

Tiger’s creepy new Nike ad where he talks to his dead father? Yes, I know that Nike is the only major advertiser that has actually stuck with Tiger, so they have to do something, but was this it? I’m not sure I’ll be buying much Nike gear in the future.

Or should we talk about all of the parodies of the Tiger Woods ad? Or spend the day telling Tiger Woods jokes? (Hey, I heard that Tiger had a 69 today! Now I’m going to check to see how he did at the Masters!)

Or should we discuss the power of Oprah to blackball someone who wrote an un-authorized biography of her?

How about something more scientific, like the first species ever discovered that can live without oxygen? Or a discussion of why baseball games are so slow?

Not interesting? Okay, let’s talk about stocks, and the stock market.

Remember, back on March 26, 2010, I wrote a blog posting on: Cline Mainlining: Time to Buy? At that time CMK.TO – Cline Mining Corporation was trading at $1.35, and I said “at around $1.35 per share, this looks like a great buy.” The day after I wrote that post, I started buying. (I’m not like all of those other newsletter guys who buy a stock, and then pump it up in their newsletters. Of course I don’t actually have a newsletter, and I don’t have that many readers that it would make a difference, but that’s besides the point).

In that posting I commented that

The problem? The capital cost required to bring the New Elk coal mine into full production by 2013 is $65 million. At their year end on November 30, 2009 they had virtually no cash, so the $6.9 million they just raised won’t be enough to finish the job. Further financing will be necessary.

The good news is that on March 30 they completed more financing, which could raise as much as $45 million. So, I projected they needed another $58 million or so, so with this round of financing they are pretty close to where they need to be. So why, on Friday, was the stock up 22%? On huge volume?

I have no idea what’s going on. Obviously the 30 cent to 60 cent range was a trading range for about a year, and once it broke out of that range, it was onward and upward from there. The RSI is very high at 82, but’s it been very high for the last month, so who knows how much longer it has to run? Here’s one final quote from me: “If the mine is worth $1 billion, and there are 93,397,942 shares outstanding (including 8 million in options), each share is conceivably worth over $10 each.”

It’s possible that someone has decided that yes, $10 is a fair price, and they are buying. The volume of 9.5 million shares on Friday is much larger than the average volume of 1 million shares traded per day, so obviously something is up (other than the share price). If you have any theories, post them on the Buy High Sell Higher Forum. For now, I’m holding.

Gold

Now for my other favorite topic. Let’s look at some charts. (To see a bigger version of the chart, click on the chart).

Here’s gold, in $U.S., over the last year. Obviously we have observed a steady trend upward over the last year, and over the last month. However, we are now approaching resistance at the January highs, about where we are trading now (the purple line). The RSI at 67 is looking overbought, so a slight pullback from these levels would not be surprising. So, how am I playing it? As I reported on March 27 in my commentary on Gold Heading Higher, Market Heading Lower?:

If I’m correct and we have a bounce this week, I will follow my typical strategy and do some covered writing on these stocks to lock in my profits, and to get some downside protection.

Well, that’s exactly what I did. I bought more gold shares in the last week of March, including

• AEM.TO – Agnico-Eagle Mines Ltd. (gold blue chip)
• ADM.V – Andina Minerals Inc. (speculative junior gold)
• CEF.A.TO – Central Fund of Canada (blue chip gold fund)
• K.TO – Kinross Gold Corp. (gold blue chip)
• G.TO – Goldcorp Inc.(gold blue chip)
• PAA.TO – Pan American Silver Corp. (silver blue chip)
• SLW.TO – Silver Wheaton Corp. (silver blue chip, but with more upside)

Then, this week, I did covered writes on most of them. Brilliant, eh? The stocks went up when I said they would, and I covered to lock in my profits!

I should be charging good money for this blog! My thoughts on CMK.TO – Cline Mining Corporation alone were worth the price of a $1,000 per year subscription! Send money now!

Actually, not so much.

Here’s a chart of one of my typical gold holdings:

Here is the chart of AEM.TO – Agnico-Eagle Mines Ltd. On March 24 I increased my holdings, paying $56.45 per share (the blue arrow). Obviously I bought one day too early, but still, it closed Friday at 61.39, so that’s a great purchase point.

However, on April 6 (the red arrow), I then did a covered write, selling the then out of the money April 60 calls for 58 cents. Seemed like a good deal at the time, but of course the stock has increased every day since I locked in my profits. Oops. As of the close on Friday the bid/ask on the April 60 was $1.70 to $1.87, so I’m now down over $1 on that deal. Obviously I should not have sold the calls; I should have bought them.

My apologies. I will refund your subscription price.

Am I worried? Well, yes, a bit, since the options have one week to go to expiry. If Agnico-Eagle drops $1.39 and closes below $60, the options expire worthless, and I’m fine. If they don’t, I’m forced to sell my shares at $60, which is a notional loss of $1.39 at today’s prices (less the 58 cent premium I took in).

For now, I’ll hold. We are obviously at an overhead resistance point (the green line), so a pullback from here would not be surprising, so this trade may still work out well. I’ll report back next week.

Now, more charts.

First, remember the gold chart I already showed you?

Here’s the same chart, but with the Euro as the baseline:

See? Gold is at a new high. What would it look like compared to Canadian dollars?:

No where near a new high. In fact, in Canadian dollars, it’s in a down trend. How about this chart, with gold compared to the Dow?:

Again, with the recent strength of the Dow, gold does not look anywhere near as strong. Cool, eh? The unit of measure effects the perceived performance. It would therefore appear that gold is a currency play (well duh). As a Canadian, I’m disappointed that our currency is so strong (we are now around parity with the U.S. dollar). Without our dollar strength, gold would be doing even better. But that’s the point. Gold is the ultimate hedge against currency weakness, as proven by these charts.

One final note: We are still not yet at the Fibonacci retracement level of 61.8% that would be somewhere in the 1,225 to 1,230 range on the S&P 500, so I’m still expecting a big pullback in the near future. Like I’ve been expecting for the last year. A stopped clock is correct twice a day, and I will be proven correct at some point as well.

Time will tell. See you next week.

But I digress.

I will summon my strength and focus long enough to discuss our favorite yellow metal: gold. There was much talk in the news this week about the apparent fact that gold gets slammed just before options expiration. There was an article on the GATA site (which I tweeted about, so if you want clips of my brilliance in between weekly commentaries, follow my feed on Twitter, or just watch it on the right side panel on this site) this week, which follows many other articles written over the last year or so, like this one. Here’s the chart (click on it to enlarge):

I have attempted to draw, with blue hours, the futures contract expiration dates. I may not have the date precisely correct (see note above about copious consumption of wine), but you get the general idea: to prevent long call option holders from cashing in, the price gets hammered just before expiration, to prevent long gold holders from generating profits.

I also put in some resistance lines. It looks to me like $1,060 is strong support. If we break that, look out below. The challenge is to break through the red resistance lines at around $1,140, $1,160, and $1,220.

We all know that gold is headed much higher; the only question is “when”? Presumably the gold suppression schemes could last for some time to come, but it is also possible that golds ten year rise will continue. Gold has not come even close to testing the 200 day moving average, and even the 50 day moving average has offered reasonable support.

As we sit today, gold is at $1,107, just a hair above the 50 day moving average of $1,106. Even better, the RSI is at 49, and whenever we cross over the 50 level to upside good things happen.

To sum up: options expiration has passed for another month, we appear to be at a good support level so downside risk is minimized, and the RSI is at a great level for an upward push. So, I conclude that gold will do well over the next period of time. So, this week, I took the opportunity to average down my costs, and I bought more gold shares. Here’s what I bought this week (on Wednesday and Thursday, at the low points on the week):

• AEM.TO – Agnico-Eagle Mines Ltd. (gold blue chip)
• ADM.V – Andina Minerals Inc. (speculative junior gold)
• CEF.A.TO – Central Fund of Canada (blue chip gold fund)
• K.TO – Kinross Gold Corp. (gold blue chip)
• G.TO – Goldcorp Inc.(gold blue chip)
• PAA.TO – Pan American Silver Corp. (silver blue chip)
• SLW.TO – Silver Wheaton Corp. (silver blue chip, but with more upside)

If I’m correct and we have a bounce this week, I will follow my typical strategy and do some covered writing on these stocks to lock in my profits, and to get some downside protection. I am now only holding 27% cash, my smallest cash position in two years, so let’s hope I’m correct.

One stock I didn’t average down on this week was BBR.TO – Brett Resources Inc. a speculative junior gold that is doing great. It’s my first big winner of the year, and I’m up close to a double on it. I think the run has just begun, so I’m holding.

My new purchase for the week was CMK.TO – Cline Mining Corporation. I believe the story is compelling, so I have started accumulating a position. It’s had a great run already this year, so I will wait for a pullback to increase my position. I posted my full thoughts yesterday, and you can read my thoughts on Cline Mining Corporation here.

And the market in general?

I’m no technical analyst, so I’m flying blind here, but if the top was around 1,561, and the bottom was around 683, then the Fibonacci retracement level of 61.8% would be somewhere in the 1,225 to 1,230 level. We are sitting at 1,166 now, so this upside bounce could have another 59 points to go, or around 5%. That will be a level I’ll be watching very carefully, because if it doesn’t hold, down we go.

(Of course we blew through all of the other Fibonacci retracement levels at 50%, 38.2%, and 23.6%, so this could all be just more mumbo jumbo. Time will tell).

If you want my guess, I don’t see how the market can go much higher from here. The 1,230 level was around where we were when Lehman Brothers collapsed, and back then the economy looked much better. Unemployment was just over 6% (it’s just under 10% now), the deficit was a mere $500 billion (it’s more like $1.5 trillion now), and even auto sales, which have picked up to an annual level of 10.3 million now, were still up in the 12.5 million range. The economy may appear to be recovering (due in large part to government stimulus), but we are still not back to where the economy was at these market levels, so I suspect while this bounce may last for a few more weeks, that will probably be it.

If I’m in a gambling mood I may grab some short term S&P call options, but only with play money. The shorts can start as we approach the 1,225 to 1,230 level.

Those are my thoughts; feel free to post comments; see you next week.

I have decided to spare you the complete details of my trip. However, for those who are interested, I have posted my thoughts as separate blog entries, which you can read here:

• The Hoover Dam: Proof that Government Works, or Capitalism at it’s Best?
• Why Airport Security is Just a Show, and What Can be Done to Fix It (I think airport security is silly)
• Sundance Helicopters in Las Vegas – An Example of Good Service
• Southwest Airlines Sucks

My personal favorite is the Southwest Airlines Sucks story. I had never flown Southwest before, so I didn’t realize that you can’t actually buy a seat on their flying bus, and of course they don’t fully explain that in advance. Instead, you have to rush to get a seat. Needless to say, even though I now understand their system, I will never fly Southwest again. And of course airport security is equally stupid, but again, I won’t bore you with my comments here.

I will, however, give you my thoughts on Las Vegas, and what it tells me about the economy in general.

According to the Las Vegas Review-Journal, McCarran Airport’s passenger volume dropped 8.2% last year. That’s still over 40 million passengers, so the airport is still the 17th busiest in the world, and seventh in the U.S., but obviously the recession is taking it’s toll.

The streets in Vegas were crowded with people, and the two shows I went to were full, but the casinos were certainly not full. There were more empty tables and slots than full ones. Does that mean anything? Perhaps not, but clearly the boom is over, or at least on hold at the moment.

I’m not a gambler (well, not at casinos; my stock picks are another matter). In fact, I didn’t gamble at all this week. We spent our time going to shows and site seeing. I like Vegas. The city is clean, and the buildings are awesome.

My overall impression is that the world, like me this week, is somewhat out of sync.

There are headlines that make it appear that we are recovering:

• California Home Prices Head Higher (from Friday’s Wall Street Journal)
• Boeing Sees Demand Accelerating
• Stock highs signal bull market that’s still raging

But there are others that suggest the opposite:

• Trump project will cut smaller checks;
• Supply of Foreclosed Homes on the Rise Again (from Friday’s Wall Street Journal)
• High End Repo Man Thrives
• Tool Firms Seek U.S. Aid

So which is it?

We have massive government debt, very high unemployment, record high consumer debt, and yet the general stock market looks great (click on any chart to see an enlarged view):

The S&P 500 is in an obvious year long uptrend, it’s broken through to new highs, and it’s trading well above it’s 50 and 200 day moving averages. If you follow the theory to “buy high, sell higher”, than now would be a time to buy, as the market is making new highs. The only warning sign (other than the weak state of the general economy), is the high RSI level, which generally, at levels around 70, is predictive of a correction. Of course a three year chart doesn’t look as good, but again, up is up.

So here’s where we are out of sync: is the market up because it’s predicting better times ahead, because the recession is over and the recovery has begun? Or is the market up because the government has spent trillions in stimulus dollars to artificially prop it up? That’s not an easy question to answer.

Here’s the same chart again, but instead of using dollars as the measuring stick, I’ve replaced it with the price of gold:

Using this view it’s obvious that the market is going up, but not nearly as much as is indicated when using dollars as the unit of measure. There are still some obvious resistance levels we still have yet to reach before a new high for the last twelve months is reached. In fact, if you look at the same chart on over a three year time frame, we are still in a down trend:

The horizontal purple lines show that the market has been in a trading range for the last year, in stark contrast to the big uptrend presented in the first chart. It’s quite obvious from this chart that we are approaching a decision point: either the long term red down trend line will continue, or the blue uptrend line that started a year ago will take over. We are clearly out of sync at the moment.

What’s my guess?

Well, I’ve been completely wrong for the last year. I did not anticipate the current strength in the market. In fact, I predicted that the Dow would be at 9,000 by the end of March, so unless we have a crash in the next two weeks, I will be wrong again. (DavidSLane’s prediction is looking pretty good though. He should be writing this blog instead of me, although he too, like me, appears to have been overly optimistic on the price of gold).

Having said that, I refuse to admit that I have been wrong. I prefer instead to say that I underestimated the willingness of the government to spend like drunken sailors, and it is that spending alone that accounts for the market’s strength. At some point reality will strike. Perhaps tomorrow, perhaps six months from now, but at some point fundamentals must become paramount again. So I will stay the course.

I will remain with lots of cash (I have about 50% cash now). I will hold selected precious metals and oil stocks, like:

• AEM.TO – Agnico-Eagle Mines Ltd. (gold blue chip)
• ADM.V – Andina Minerals Inc. (speculative junior gold)
• BBR.TO – Brett Resources Inc. (speculative junior gold)
• CEF.A.TO – Central Fund of Canada (blue chip gold fund)
• PBG.TO – Petrobank Energy and Resources Limited (my go to play on the energy market)
• K.TO – Kinross Gold Corp. (gold blue chip)
• G.TO – Goldcorp Inc.(gold blue chip)
• PAA.TO – Pan American Silver Corp. (silver blue chip)
• SLW.TO – Silver Wheaton Corp. (gold blue chip, but with more upside)

I will also do covered writes after periods of strength. If the stocks are up strongly two or three days in a row, I will lock in my profits by selling calls, no longer than one month old, out of the money. It didn’t work during the strength in February, but it worked wonderfully this month, I was able to pocket some cash in advance of the weakness late this past week.

We can’t be out of sync forever. At some point reality will strike, and I’ll be well positioned to take advantage of bargains.

That’s my report for this week; now I have to go try to adjust my internal clock. See you next week.