And if the protestors thought about it for a moment they would realize that the Occupy Wall Street movement is occupying the wrong street, because it’s the government’s reckless spending that has caused our problems, not the corporations that have admittedly been the recipients of most of this largess.

So the question is this: is the economy, and the world, reaching an inflection point, or will it be more of the same?

It’s an important question.

The markets, clearly, are at an inflection point.

Since August the Dow has traded in a range from a peak of 11,613 on August 31 to a bottom of 10,655 on October 3. Today we sit just above the upper end of that range, at 11,644. A technical analyst would tell you we have “broken out” of the trading range, and therefore the market should continue upward to challenge the July highs in the 12,700 range.

That’s quite possible.

Over the next week or two we will see whether or not we have broken the trading range or not.

The Occupy Wall Street protests may be a non-event, or they may be disruptive enough to drive the markets lower.

Those of you who follow the work of George Ure at Urban Survival, and Clif High’s predictive linguistics work at HalfPastHuman, will know that George and Clif are expecting the October 15 to 17 period to be a period of “emotional dumping” after the build up in tension that has occurred over the last few weeks.

Clif’s data runs further predict that a large, multi-national corporation will fail, perhaps due to some scandal. Initially it will look like good, positive, news, before everything hits to crapper. His prediction is that the event of this weekend will lead to big problems in the markets on Monday.

Interesting.

That would certainly qualify as an “inflection point”.

I like to read George and Clif, because they provide an interesting perspective on the world. Unfortunately their predictions are usually wrong. Or, more specifically, their predictions are proven correct, but their timing is wrong, and without proper timing a prediction is useless. George admitted this week that his portfolio is down for the year, despite being up over 70% earlier, so even those with a window into the future sometimes can only see the fog.

So will the market crap out on Monday? Probably not, but longer term (Tuesday?) a collapse is inevitable.

I’m currently sitting with a few short positions as insurance (RSW – Rydex Inverse 2X S&P ETF), and I’m holding my gold and silver positions, and will continue to add to them on any weakness. I realize that in a market crash everything goes down, including precious metals, but I expect they will bounce back first, so I will continue to hold.

Time will tell when, and if, we reach that inflection point.

Thanks for reading, and hopefully we will all have a good week.

So, with that background, I will keep my comments brief today.

First, if you have not already done so, please refer to the special commentary I posted a week ago, Silvercorp Metals Inc. – Profit From the Short Squeeze, where I suggested that the short sellers on Silvercorp are about to get crushed. I still believe that to be the case, and on Friday, while everything else was down SVM.TO – Silvercorp Metals Inc. was on the rise. I have bet heavily on this one, and I believe that as the shorts are forced to cover, Silvercorp will go higher.

I don’t provide investment advice; I just write about what I’m doing; but read between the lines for yourself, and I suspect you will conclude that this one has no direction to go but up.

Also interesting are the markets in general. From mid 2010 to mid 2011 the Dow staged an impressive recovery, from 9,686 on July 2, 2010 all the way up to 12,807 on May 2, 2011. That’s exactly 10 months, and a gain of over 32%.

Since that peak, of course, the Dow then dropped to 10,655 on October 3. (Why not on October 2? Because the 2nd was a holiday). That’s a drop of 17%, giving back half of the gain.

The RSI is approaching 50, so it is quite possible we will have a continued rally from here, for a short period of time. As for the medium term, I see no direction but down.

Last week I sold my shorts, RSW – Rydex Inverse 2X S&P ETF, at a profit, and bought some longs, RSU – Rydex 2X S&P ETF, which I turned around and sold, three days later, also at a profit. That profit would have been greater had I waited for two more days, but let’s not get greedy.

This week, if we have a violent rally for a day or two, I suspect I will re-enter the shorts. However, I’m only doing it with play money; I’m not gambling big on my ability to pick the direction of the market.

In mathematical terms, if I had $10,000 to gamble with, I’d put $9,000 in SVM.TO – Silvercorp Metals Inc., and no more than $1,000 in a short type product. Remember, this isn’t investing, this is just gambling.

My investments continue to sit in junior and senior precious metals producers, since that’s where I see the upside. I still have some cash, so if we see a further correction (which I suspect we will), I have cash to deploy.

That’s the game plan.

The weather is great.

Off for my run.

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.

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.

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.

Sometimes I get lucky. My purchase of PBG.TO – Petrobank Energy and Resources Limited back on February 9 at $50.35 is looking good; it closed Friday at $54.69.

My trades on my gold portfolio were less than spectacular, unfortunately.

I came to the conclusion that with the massive up trend in the general markets over the last many months, we were due for a correction, and obviously this year the market has pulled back. Year to date the Dow is flat, but that’s only thanks to the rally over the last two weeks. My assumption was that general market weakness would lead to a weakness in precious metals stocks as well. I assumed this would be short term weakness, and I didn’t really want to sell my holdings, so I did some covered writing with options. As most of you are aware, you can sell call options on stocks you own. This is a strategy that works well if you like the stock and want to keep it, but also want to increase your returns.

For example, on February 4, 2010, with K.TO – Kinross Gold Corp. trading around $17.54, I sold the February 17 calls for $1.10 each. I assumed that with market weakness, Kinross would drop in price between February 4 and February 19, option expiry day (the third Friday of the month). Had that happened, I would still own my shares, and I would keep the $1.10 in premium I pocketed from selling the option.

Oops.

Despite some weakness at the end of the day on Friday, Kinross closed at $19.23, so my shares are gone. The holder of the calls will exercise their right to purchase my shares for $17, and I’ll get the $17, and I get to keep the $1.10, so in effect I sold my shares for total proceeds of $18.10, ignoring commissions. Unfortunately had I not sold the calls I could have sold the shares today for $19.23, so I lost $1.13 in the process.

I did the same with some of my shares of AEM.TO – Agnico-Eagle Mines Ltd.. I sold the February 54 calls for $2.50. Agnico-Eagle closed on Friday at $60.72, so my shares are gone for net proceeds to me of $56.50, instead of the $60.72 I could have made had I not covered, and waited until Friday, and then sold them. Looks like a bad decision, right?

Yes, this month it was a bad decision. But in January I did the same thing; I sold call options on AEM for 75 cents (they were out of the money, and close to the expiration date), and they expired worthless. So if you add that money to the pot, in effect my shares generated $57.25. That’s still a “loss” from the $60.72 I could have made, but not as bad as it could have been.

What’s the lesson here?

First, don’t do anything I do. Do the opposite, and you’ll do fine.

Second, if you want to pocket some cash by doing covered writes, you want the options to expire worthless, so you are best to sell options that are out of the money, and near expiration. That’s what I did in January, and they expired worthless. In February, I was selling calls that were at the money, or slightly in the money, so I generated a large premium ($2.50 in February, as compared to only 75 cents in January), but in the end I lost my shares because the price went up.

Third, I didn’t have to have my shares called. On Friday afternoon I could have simply re-purchased the options I sold. (Technically I “sold to open” when I sold them, so I would be “buying to close” this time). Had I done that, I would have lost money on the options, but I would still own the shares. So why didn’t I do that? Because I still expect some weakness in the shares over the next week or two, so it’s quite possible that I will be able to buy more shares at better prices.

And that’s exactly what I plan to do over the next week. I sold my shares in Kinross for the equivalent of $18.10, so I will place a bid at $18, or perhaps even lower. If I get filled in the coming week or two, I’m smart again, because I will end up with my shares, and my premium again. Is that likely to happen? Let’s look at some charts:

Gold may, or may not, have broken out of it’s consolidation since the peak at the beginning of December. My guess? We have one more test of the lows yet. We need a double bottom, to confirm the bottom, just like happened in the circled area on the chart, back in April and May. A drop back into the $1,050 to $1,075 range would represent a double bottom, and that will probably be our final buying opportunity, before gold resumes it’s rise. In other words, that’s when you back up the truck. I’m not convinced we are there yet.

As this chart of G.TO – Goldcorp Inc. shows, the previous consolidation ended with a double bottom, and we’ve been in a trading range ever since. I’m placing buy orders at $36 (with perhaps an additional order at $35, just in case in drops that far), and that’s where I’ll be buying, hopefully over the next few weeks.

So, to sum up:

I lost many of my gold shares today (technically options expire on the third Saturday of the month, not on the Friday, but I think in terms of Fridays), but I believe I can buy them back at less than the price I sold them for, so even though I’m heavily in cash, I’m not concerned. I haven’t lost anything, and if there is a pullback, I’ll be back in at good prices.

More on Physical Gold and Silver

The other reason I didn’t repurchase my options before the close on Friday was I was on the road, away from my computer. Every few months I make a trip to Scotia Plaza in Toronto, headquarters of Canada’s largest gold and silver bullion dealer, The Bank of Nova Scotia (today branded as Scotiabank). (You can read more in the How To Buy Physical Gold page). You can read about some of my previous trips in October 2008 and October 2009. In October 2008 there was a big shortage of physical gold and silver. I wanted to buy 100 one ounce silver Maple Leaf coins (total value $1,200) and they would only sell me 25. In October 2009 there were no shortages. This week, also no shortages, so physical supply has caught up with demand.

There was a line up when I arrived, but not a long one. It frustrates me that every transaction takes half an hour, since they have to manually fill out the purchase order, so if you ever go there, prepare to wait.

The guy beside me wanted to buy silver as a gift, so he ended up buying five silver Maple Leafs. A friend told him it was a good investment; why he didn’t do any actual research himself, I have no idea.

I asked about the prices for bars, instead of coins. Coins are easy to buy and sell, and they are divisible and easy to carry. Unfortunately in Ontario you must also pay 8% sales tax when you buy them, so the price is inflated by 8%. (Starting in July the new Harmonized Sales Tax increases that to 13%, so there goes the gold coin market). Bars carry no sales tax, and the premium is lower. On Friday a 100 ounce silver bar, all in, including commissions, was about $1,974 Canadian, or about $19.74 an ounce. That’s significantly cheaper than the $25.93 per ounce cost of a silver coin back in October 2009 (including taxes, in Canadian dollars).

A 20 ounce gold bar was quoted, all in, at $24,327 Canadian, or $1,216.36 per ounce Canadian. The exchange rate was 1.07, so in U.S. dollars that’s $1,136.79 per ounce. The spot price of gold closed yesterday at $1,117.50, and was as high as $1,126.80 on the day, so the bars were trading at a premium of around $10 per ounce, which considering commissions and exchange isn’t much.

On October 7, 2009 the spot price was around $1,045 US, and a one ounce gold Maple Leaf was $1,210 US, so obviously the premium on a coin is significantly larger than the premium on a bar. The premium over spot is $165, with the 8% sales tax on the coin representing $84 of the premium, leaving $81 per ounce in other premiums for buying a coin. A $10 premium on a bar looks pretty good.

So if you want small quantities that are easily transported and stored, buy coins. If you have lots of money and want to pay the cheapest price per ounce, buy bars.

I will spend some time this weekend calculating all of my stink bid prices to re-enter the market.

Before I go, how about that fake apology from Tiger Woods? I may screw up by selling options when I should be buying, but that pales in comparison to that guy. Here’s a great take on Tiger Woods and his fake apology.

But enough about Tiger; back to my calculations; see you next week.

I know what you want, and I’m sorry, but I just can’t give it to you.

If you want happy thoughts, read the main stream media.

Read Newsweek, with their story about Why losing 84,000 jobs last month isn’t as bad as it seems. They will tell you that:

The recovery, frustratingly slow as it seems, looks better through the rearview mirror than through the windshield. Consider how far we’ve come in the past year. The U.S. economy, which shrunk at a 6.4 percent annual rate in the first quarter, grew at a 2.2 percent rate in the third quarter. That’s a turnaround of 8.6 percentage points in six months. Looking back, with the government having lifted many of its market guarantees, the price of the financial rescue was much smaller than originally thought—and it continues to shrink with every TARP repayment.

Huh?

The United States Department of Labor issued their non-farm payroll report on Friday morning, and, to quote their release:

Nonfarm payroll employment edged down (-85,000) in December, and the unemployment rate was unchanged at 10.0 percent

Sounds good, right? According to the government, employment “edged” down, and “the unemployment rate was unchanged”, so everything is great, right?

Right?

Here’s the truth: The results were horrible.

Horrific.

For the last year governments around the world have spent trillions of dollars to pump up the economy, and to create jobs. The payroll survey, which is essentially a survey of large companies, showed a massive drop in employment, which is bad, since big businesses have better access to credit, and to global markets (so if the economy is slow in the U.S., they can compensate by selling internationally). The true picture of the American economy comes from the Household survey, which is biased towards smaller businesses that don’t have the same level of access to public equity markets, and foreign customers. That survey, if I am reading the numbers correctly, shows that employment fell by 589,000 in December (as compared to November), for a combined drop of around 3 million in the last half of last year.

Yes, I know, the weather was bad last month, and that cost some jobs. Somehow I don’t think it cost half a million jobs last month. Here’s a quote from the survey:

In December, both the number of unemployed persons, at 15.3 million, and the
unemployment rate, at 10.0 percent, were unchanged. At the start of the recession in December 2007, the number of unemployed persons was 7.7 million,
and the unemployment rate was 5.0 percent.

Again, I may be reading these tables incorrectly, but it appears that there were big job losses in construction, manufacturing, retail, wholesale, transportation and real estate, which is pretty much the entire economy. Except for health and education; that went up a little bit, so I guess we still have doctors working. And teachers.

Of course the number of “discouraged” workers is also up, and without that increase the unemployment rate would have been even higher.

The average duration of unemployment is now over 29 weeks, which is an all time high. That’s probably why workers are getting discouraged, and why the participation rate in the economy is at it’s lowest level since the mid 1980′s.

There are roughly the same number of people employed now as compared to ten years ago, but the population (of working age) is about 10 million bigger, so we have big unemployment. And the only way we won’t have big unemployment is if the economy creates a lot of jobs. So if we can create 20 million jobs in the next five years we will be back to even. But the economy has never, even in the boom times, created that many jobs in that period of time. So good luck on that one. (We need to create 100,000 jobs per month just to keep up with population growth, so losing jobs is very bad).

So what this means, I assume, is that the government will have to keep “stimulating”, and the Fed will have to keep interest rates low. And that’s why the stock market was up on Friday. Even though the economy is not recovering (it’s getting worse), investors are happy because things are so bad the government will have to save us, and that’s good for the stock market.

Huh?

Yes, in backwards world, things are bad, which is good.

So how will this play out? In one of two ways, I assume. Either the weak economy, with no-one working, will cause deflation, or the massive government spending will cause inflation. I’m betting on inflation. So I’m betting on gold.

My current portfolio is 58% cash, because I still expect further market weakness, and I want to be prepared. The rest is primarily gold and silver stocks. I have some blue chip gold stocks:

• AEM.TO – Agnico-Eagle Mines Ltd.
• CEF.A.TO – Central Fund of Canada
• K.TO – Kinross Gold Corp.
• G.TO – Goldcorp Inc.

And blue chip silver stocks:

• PAA.TO – Pan American Silver Corp.
• SLW.TO – Silver Wheaton Corp.
• SSO.TO – Silver Standard Resources, Inc.

And some speculative stocks (good juniors, with some resources, that will hopefully be take over targets in the future):

• ADM.V – Andina Minerals Inc.
• BBR.V – Brett Resources Inc.

(Note that I am a Canadian, so at the moment all of my holdings are on Canadian exchanges, because I don’t want to be exposed to any currency risk, given the precarious state of the U.S. dollar. If I was American I would presumably be holding the U.S. versions of some of these securities).

I plan to add more juniors to the mix on any weakness, but so far this year there hasn’t been much weakness, so my stink bids have yet to be filled. If there is a big run up this week I will probably do covered writes on my majors to lock in the gains in advance of options expiry after the close on Friday January 15. In fact, if there is strength on Monday and the premiums are decent, that’s exactly what I intend to do. (Note: they are changing the option symbols in Canada this weekend; the symbol will now also include the year, so no order entry will be available this weekend for options while they switch over their systems).

Beyond that, we sit, and we wait. I expect a 20% correction at some point this year, but I don’t know if it will be this week, this month, or six months from now, so buying puts, or RSW – Rydex Inverse 2X S&P ETF, is a pure gamble that I would prefer not to take. I’m up 3.2% in 2010 so far, which is about my performance for all of last year, so I have no objection to staying conservative and locking in profits.

Next week I’m planning a special feature on investment newsletters (Casey and Dines, primarily), so if nothing happens in the market this week, that will be rant for next week. Thanks for reading, and see you next week.

At this time last year I invited readers to make their predictions for 2009. You can read their predictions on the 2009 Predictions page. Each quarter I reviewed their predictions, and you can read the full reports for the first quarter of 2009, the second quarter, and the third quarter.

For December 31, 2009 the consensus, a year ago, was that the price of gold would be $1,337, and it actually closed the year at $1,096, so we were overly optimistic. However, Croaker predicted $985, and Uboat predicted $1,000, so they get “closest to the pin” honors. (Uboat remains active on the Forum; we haven’t seen Croaker since just before Halloween, so hopefully he shares his expertise with us again soon).

For December 31, 2009 the consensus, a year ago, was that the Dow would close at 8,695, and it actually close the year at 10,428, so the easy winner was Uboat, again, with a prediction of 10,000. Well done. Obviously the rest of us were either overly pessimistic, or we under estimated the impact of massive government stimulus.

For the year, Croaker was the gold prediction winner for March 31 and second to Uboat for December 31, and DavidSLane was the winner for June and September.

For the year, the Dow prediction winners were Designer for March 31 (and we haven’t seen him since August); DavidSLane and REM for June 30; Richmanch for September 30; and Uboat for December 31.

The overall winner is DavidSLane, who had his name in the winner’s circle more than anyone, and managed to end the year near the top. Well done David. What’s he thinking for 2010? You can read his 2010 predictions on the DavidSLane 2010 Predictions page.

My Predictions for 2010

Here’s the short version: who cares what I think? My predictions were wrong last year, and may very well be wrong again this year. For those who care, you can read my numerical predictions on the JDH 2010 Predictions Page. The quick summary is that I think gold will rise in 2010, for the reasons I described last week in my commentary on Why Gold Will Continue to Rise in 2010. I also believe the Dow has the potential to rise in the first quarter, primarily because the U.S. government will continue pumping money into the markets like they did in 2009. However, at some point the air will come out of the balloon, and the markets will fall as the year progresses.

In fact, it’s quite possible that the air will come out of the balloon this week. Many traders made money in 2009. So, to lock in profits, the ideal time to sell is the first week of 2010, so that you can defer paying taxes on those profits until tax time in 2011. (If you had losers in 2009, the time to sell them was before the end of December, so that you could apply those loses against other gains and minimize your tax hit). I’m not a big fan of the technicals at this point either: here’s the Dow:

Support for most of 2009 was around the 50 day moving average, and with the Dow at 10,428 and the 50 DMA at 10,265 we are not that far above it. A drop below that level would be bad news. The red down trend line drawn off the tops in 2007 and 2008 is also resistance; if it gets broken, things may get ugly.

Another number to watch is the Relative Strength Index. All else being equal, an RSI rising above 50 is bullish, and a fall below 50 is bearish. The vertical purple lines show the last two times the RSI dropped below 50 after a period above 50, and both times were bad news. The RSI has stubbornly held above 50 most days since the summer, so a decisive break below that level will send the technical traders to the exits.

Finally, the Dow was making new highs as the year ended, but it was on very low volume, and with negative breadth. Generally that’s a sure sign of a top.

My plan? I’ll probably do nothing, but if I’m feeling adventurous I may pick up some RSW – Rydex Inverse 2X S&P ETF, or perhaps by some puts, or do a covered write on some puts.

In closing, let me remind everyone why I started this web site back in November, 2006. I started this site, and I have recorded my thoughts every Saturday morning for the last 160 weeks so that I have a record of my thought process on every decision I make. What was I thinking when the markets were bottoming on March 6, 2009? In my March 7 commentary I said I was buying, which was a very good plan. Of course I should have kept buying, and I didn’t. I sold out way too early. But that’s the point. I can review my mistakes, and hopefully learn from them.

I encourage you to do the same. Write your predictions down. Or post them on the 2010 Predictions page on the Buy High Sell Higher Forum (which is also a good place to discuss what everyone else thinks).

I maintain this site to learn. To learn from my mistakes, and to learn from each of you. This is not a money making venture for me. The ads that run on this site generate almost enough money to pay the cost to host the web site each month. But that’s fine, that’s not the point. The point is to learn, and that’s what I plan to do in 2010.

Happy New Year.

From the chart, it’s easy to see a series of lower highs:

1. October 12, 2007: 1,562
2. December 7, 2007: 1,504
3. May 16, 2008: 1,425
4. October 31, 2008: 968
5. January 6, 2009: 935
6. May 8, 2009: 929

Clearly, all is not well with the markets. We have had lots of rallies over the past two years, but each and every rally failed to take out the previous high. The failure after May 8 to surpass the previous 935 level is very bad news. Each successive “lower high” may only be 4 or 5% lower than the previous high (with the exception of the 968 post “crash” high on October 31, which was 32% lower than the previous high), but lower is lower.

On average each successive low after a high is 21% lower, and it takes 77 days to get there. Some are shorter. The drop from the peak on October 31, 2008 at 968 to the valley on November 21, 2008 at 800 was only a 17% drop, and it only took 21 days. The 39% drop ending on October 24, 2008 took 161 days.

If you want to extrapolate the average, from the May 8, 2009 high of 929 we are looking at a 21% drop over 77 days, so we will land at 734 on the S&P 500 on July 24, 2009.

And no, that’s not a prediction. Only a fool would compute some rough averages and assume that there is a repeatable pattern. That’s not the way life works. However, using those averages it’s not at all inconceivable that the markets will be lower at some point over the next two or three months than they are now.

What could cause lower markets? How about the bankruptcy of General Motors. Some commentators believe that the bankruptcy of GM would be an economic disaster, given the ancillary suppliers and support industries that would be hammered. Obviously bankruptcy hurts all stakeholders, but GM has been in bad shape for about 30 years, and the market has already discounted the share price, so it can’t fall below zero. (Here’s an interesting read on the history of GM’s mistakes).

The negative sentiment surrounding GM will hurt. The sell in May and go away philosophy will hurt. (Since April 30 the S&P is actually up 1.5%, but since the month’s peak on May 11 the market is down 4.5%, so selling the market in May appears to have been the correct strategy). The fact that the U.S. government’s deficit will no doubt be higher than $2 trillion this year is very bad for long term market health. After the recent rally insider selling has increased, and insider’s typically sell before a down leg. Unemployment remains high. Foreclosures are increasing. Etc. Etc.

I hate to spoil my American friend’s long weekend, but I am more bearish now than I was last week, or the week before.

My strategy is as follows:

First, hold cash. I am currently 80% in cash. My remaining holdings are gold and silver stocks, which I have continued to sell on up days. I will maintain a core position, but if the market tanks, everything will go down with it. Obviously having cash has hurt during the recent rally, but having cash will be wise if the market falls. My portfolio is up about 4% on the year, which isn’t great, but compared to the decimation of the past two years, and the fact that the market is down year to date, I’ll take it, and I’ll stay conservative.

Second, since I have yet to figure out how to play the short side of the market, so I am holding some RSW – Rydex Inverse 2X S&P ETF. These are short term holdings only. I sold some of them this week, and have sell orders already placed for next week. On weakness, I sell. If we have three strong up days, I’ll buy. I’m only using “play money” for these trades, since they are too risky to place any real money on leveraged ETFs.

Third, I am watching gold for a correction. It’s been strong recently, but as we all know the $1,000 level is a very strong resistance level, and I assume the market makers will do everything they can to hold the price under $1,000. That tells me I will have further buying opportunities, so I will be patient. Once gold breaks $1,000 it may quickly run to $1,500, and that’s why I want to have lots of cash on hand to take advantage of that buying opportunity.

Fourth, I am buying real things. Having money invested in a tanking market makes no sense, and what’s the point of working 80 hours a week and saving money if you can’t enjoy it. So, we are building a big shed on our property, and we are installing a pool. With the weak economy, swine flu, and the stupid security measures at airports I don’t plan to do a lot of traveling this summer, so I’ll do the next best thing and vacation at home. I’ll be spending the rest of today helping my brother in law install the racking in my new basement wine cellar. (I have no carpentry skills whatsoever, and he does, so I supply the food and drink, and he does the real man’s work). I will spend the rest of weekend planting the rest of my vegetable garden.

If the world tanks, at least I’ll have food, drink, and a cool place to relax.

Finally, I’m staying healthy. Sitting around worrying about the economy is not productive. With the return of nice weather I’m spending more time biking and running outside. I much prefer a morning run outside than half an hour on the treadmill watching the talking heads on CNBC, which only upsets me. My son and I did a 5 km run last month, and I’ve got another one next weekend, so that should keep me healthy and out of trouble.

And that’s my advice to you this Memorial Day Weekend. Shut off your computer, spend some time with your family, and use at least some of your hard earned money to invest in something you and your family will actually enjoy. Thanks, and see you next week.

The upside of being sick (from food poisoning or the flu, I’m not sure which) is that I spent a day without watching CNBC, or hearing any market commentary whatsoever. The good news for each of you is that I will keep my comments brief today, since I’m not sure how long I will last before I crash again.

The first order of business today is to give the results of our first ever 2009 Predictions contest. At the start of the year some of you emailed in your predictions for the price of Gold and the Dow at the end of each quarter. The consensus estimate was that on March 31, 2009 the price of gold would be $1,026 per ounce, and the Dow would be trading at 9,107. In fact, gold was trading at around $919, and the Dow closed the quarter at 7,609, so we were high on the price of gold, and way too optimistic on the Dow.

“Closest to the pin” awards go to Croaker, who had the gold price at $950 per ounce, which means that everyone in the survey was too optimistic. Good job Croaker. I predicted gold would be $1,200 per ounce, so I was not even in the ballpark.

As for the Dow, the best guess was by Designer, who predicted a Dow level of 7,900, which turns out to have been a very good guess. In fact on both April 2 and April 3 the Dow did touch the 7,900 mark, so that was a very good guess. I predicted Dow of 8,000, which was also hit on April 2 and April 3, so I too will take some credit for being close.

What does this all mean? Nothing. Guess are fine, but unless we guessed correctly and put our money in the right place, we didn’t make any money. My portfolio on the year was up 3.5% on March 31, so although my guesses were close, they didn’t translate into great riches, which of course is the objective here.

Before I get to where we go from here, I would like to pick up on some comments made over on the Forum. A number of you have commented on the ETFs. Adiandunn, re-appearing after a long absence, commented that “almost any leveraged ETF is a bad long term investment.” Richmanch made the point that, and I paraphrase, “while this is a bear market rally, not the start of new bull, there may be money to be made on the upside, short term.”

I agree. Leveraged ETFs are a short term gamble, not a long term multi year investment. Leverage helps you on the way up, and kills you on the way down, so you have to take your profits when you can get them. In fact, after a long absence, I even posted on the Forum this week, when I commented that I had sold my shorts (specifically RSW – Rydex Inverse 2X S&P ETF) and placed a small bet in FAS – Financial Bull 3X Shares. The long-anticipated introduction of the revised mark to market rules caused a bump up in the general markets, so being out of the shorts made sense. I only held the FAS for two days, took the profit, and sold.

So where do we go from here?

I believe that this bear market rally will soon run out of legs. I have no idea if that will happen in April, or a bit later, but the Dow has bounced from 6,547 on March 9 to 8,017 on April 3, a gain of 22%. That’s a big gain for less than a month, and given that the RSI is now over 60, a pullback is inevitable (unless you actually believe that a 20% gain constitutes a new bull market; I don’t).

I’m not going short now, but I am holding cash (46% of my portfolio, at the moment).

Gold has been beaten down this week, and the case can be made that we are in a downtrend. However, since the October lows we have made a series of higher lows, and with an RSI down to 39.88 I don’t think the correction will last much longer. I hope the $875 levels hold; if not, we could see a fall to the $850 or even $800 range. If that happens, I’ll be adding to my positions. In fact, I will probably place some stink bids this week to increase my holdings in the event that we have an unanticipated blip to lower levels.

Longer term, unemployment is still high, personal debt levels are high, bankruptcy rates are increasing, and all governments are spending like drunken sailors, which is inflationary and very good for gold.

Those are my thoughts for this week; I’m going back to bed; thanks for reading; see you next week.