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

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

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

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

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

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

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

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

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

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

However, let me offer two cautions:

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

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

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

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

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

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

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

111111 x 111111 = 12345654321

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

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

Gold Seasonality

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

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

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

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

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

Why does gold have seasonality?

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

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

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

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

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

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

So, what am I buying or holding?

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

Key points:

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

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

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

AXR.TO – Alexco Resources Corp.

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

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

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

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

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

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

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

PHS.U.TO – Sprott Physical Silver Trust

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

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

SVM.TO – Silvercorp Metals Inc.

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

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

Time will tell.

Thanks for reading; see you next week.

Everything looks great. As if by magic, the Dow heads into the long holiday weekend just above the 50 day moving average. The RSI is turning up, and the market is making a series of higher highs (the blue horizontal lines) and higher lows (the red horizontal lines). Presumably we will see 13,000 on the Dow in June, and the bullsh*t market will continue. All is good.

Well, all is not good. The U.S. dollar is continues to fall, and the Big Boyz were not able to hold it above it’s 50 day moving average, but it’s not easy to stop a snowball rolling down hill.

Interestingly, while the Dow looks good, so does gold.

Notice the “crash” that occurred from the top at almost $1,580, intra day, at the beginning of the month, to the bottom of $1,460, intra-day, a week later. That drop of almost 8% looked bad, at the time. However, the 50 day moving average was never violated. In other words, the Big Boyz, having their fun with the paper market, were not able to suppress the market enough to even take out the 50 day moving average. In fact that low held, with the market not dropping as far around May 17, and we’ve not looked back.

Longer term, the bull market is obviously still intact:

The 200 day moving average has held for almost three years; the 50 day moving average has provided great support, and in fact every time the price has dropped to that level it’s indicated a buying opportunity.

What about silver? The picture is somewhat more volatile:

The 50 day moving average was broken, as was the longer term uptrend line, but we are back above the uptrend line, and it’s quite possible that a week or two from now we will be trading on the positive side of the 50 day moving average. Market manipulation only gets you so far; at some point the fundamentals re-assert themselves, and that’s what I believe we are seeing.

Looking at individual stocks, SLW.TO – Silver Wheaton Corp. has an interesting chart:

Obviously the 28, 30 and 32 levels are support levels, despite the recent “crash” from over $44 to under $32. So what’s next?

I don’t know.

We know that the Boys couldn’t get gold under it’s 50 day moving average, but they may well try again.

I assume one final retest of the lows is in order, so my plan is to sit and watch for another week or three yet. If we get one final plunge, that will probably be the time to jump back all in.

Time will tell; enjoy your long weekend, and see you next week.

Not much happened on the markets this week. The Dow fell 0.3% on the week, and the S&P 500 was down 0.2% on the week, for the second consecutive weekly decline.

The precious metals were similarly stagnant. Gold on Monday was as low as $1,490; on Friday it closed at $1,492.90. The silver story was similar, albeit with more volatility. On Monday silver traded down to around $35.21, which is where it closed on Friday.

Does this “mean” the correction is over? Probably not; more downside pressure is possible, but we are still in a bull market, even in silver. Here’s the three year chart (click to enlarge):

The thick blue line from the low in April 2009 remains intact, and will still be valid for prices down to $20. The green line, drawn off the November and December lows in 2008, was obviously violated throughout 2010, but the 2011 surge put us back above it, and in remains intact above $30.

The real question is this: has anything changed? Is the economy “better”? Is the debt problem over? I think not. Ultimately everything reverts to the mean, which is to say that ultimately we get back to where we should be.

You could flip a coin five times, and it could come up heads four times, and you may conclude that the coin is biased towards heads. Unfortunately your sample size is not large enough to draw that conclusion. Try flipping that same coin one hundred or one thousand times, and the results will revert to the mean, which is to say about half of the flips will be heads, and half will be tails.

Looking at gold and silver in the first few months of this year you would conclude that silver was headed to $100, and gold would easily reach $2,000. Looking at both of them now and you would conclude that silver may drop to $20, and we might see $1,000 gold.

Both assertions may be correct, but again, remember, everything eventually reverts to the mean. Eventually the true value of precious metals, and everything else, will become apparent.

The game for the U.S. dollar is over. Yes, I realize that today there may appear to be a “flight to quality” as last month’s precious metals investors decide to seek the “safe haven” of the U.S. dollar. Longer term, however, what could possibly tempt the Chinese and other foreign investors to buy U.S. dollars?

Since the peak in the early part of this millennium, it’s been all down hill. Yes, there have been a few pauses, but it’s quite obvious that the U.S. is pursuing a “weak dollar” policy. They have no choice. Without a weak dollar they have no chance to sell any exports, leaving no chance to attempt to revive the economy. Unfortunately foreign investors see this, so for years they have gradually liquidated their U.S. dollar reserves, which of course continues to put downward pressure on the U.S. dollar.

They have no choice but to put those reserves in something that has a chance of retaining it’s value: gold and silver. So, longer term, the precious metals will go higher.

That leaves you with a choice: sell now, in the hopes that over the next few weeks or months you can buy gold and silver bullion and stocks at lower prices. Or, hold, because trying to catch the exact bottom is a fool’s game.

I raised cash a few weeks ago, fortunately, so my plan is to begin nibbling, with a view to deploying that cash on down days over the next few months. Not weeks, months. For example:

Obviously SLW.TO – Silver Wheaton Corp. has dropped below medium term support. But with the RSI bouncing off the 30 level, how much lower can it go? It’s already dropped from $45 to below $32; that’s a 30% correction. Sure, it could drop another 40% down to $20, but so what? Is the price of silver going to collapse for the next few years? Will there be no demand for silver in electronics? Will investors abandon it? I doubt it.

So, we start placing our stink bids, at progressively lower numbers, and we buy all the way down. If there is a “flash crash”, we buy lots, because longer term it’s going up.

Patience is the key, because we remember that eventually everything reverts to the mean.

Thanks for reading, and have a good week.

Physical precious metals are still in short supply. As the U.S. dollar continues it’s inevitable collapse, nations around the world continue to replace their U.S. dollar reserves with physical gold and silver, because, unlike fiat currency, it can’t be created out of thin air.

As the Powers That Be attempt to arrest this inevitable decline, they increase margin requirements on the COMEX, so where two weeks ago you could control a position with $12,000, today you need $24,000. Those increased margin requirements shake out the weak hands, and down goes the price.

Let me be more specific: down goes the price of the paper silver and gold. You still can’t get what you want of the physical stuff; it’s in short supply.

On Thursday, on the assumption that this correction can’t continue forever, I started buying again. At the start of the week I was up to almost 50% in cash. On Thursday I started to deploy that cash, purchasing some SLW.TO – Silver Wheaton Corp. Was that purchase premature? Probably. But you can’t pick the bottom, so I will start to buy on sell off days. We shall see if I’m making the correct choice.

And no, instead of me babbling on, here is a profanity laced video that explains this all in more detail (so if you are sensitive to such things, don’t watch). The weather is good, gardening season is finally starting, I have a vegetable garden to dig (three weeks later than last year) so off I go.

Thanks, and have a good week.

Use this link, or watch the video here:

No?

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

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

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

To the charts, batman:

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

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

Gold looks less oversold:

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

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

Gold and Silver in the Real World

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The gold picture looks even better:

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

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

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

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

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

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

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

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

Yup.

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

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

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

Also note the absence of two stocks that are NOT on the above list: PHS.U.TO – Sprott Physical Silver Trust and CEF.A.TO – Central Fund of Canada. These are physical metal holdings, not shares in companies. They are a core holding in the portfolio, and I don’t plan to trade them; I plan to let them sit as long term holds. I have some other junior shares that I will probably hold as well.

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

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

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

Thanks for reading, and see you next week.

(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.

On Wednesday I posted on RIM – Research in Motion – Why I Bought It. I won’t re-hash it here; you can read it for yourself. Then on Thursday I posted that Dines Sells Pinetree – That’s Amazing! Again, I won’t repeat myself here; if you are interested in The Dines Letter or PNP.TO – Pinetree Capital Ltd. you can follow the link and read it for yourself.

Also this week I posted a new page called Silver – Why It’s Better Than Gold. (It isn’t really “better”, but it is different, so take a minute to scan the article. I’ll wait).

Now that you are back, here’s my main point today:

Diversification is often over-rated, and at times diversification is stupid.

Allow me to explain.

I am of the view that silver (and gold) are in a long term bull market, for many of the reasons I referenced in the above noted ed Silver – Why It’s Better Than Gold article. If that’s true, it’s likely that the price of silver will continue to increase for many more months, and perhaps years, to come. Yes, it’s highly volatile, but I think we all believe that in the short, medium and long term, then trend for precious metals is up.

If that’s the case, would it not be logical to over-weight your portfolio in silver? Why bother buying other stuff if you believe that silver will go up by more than anything else?

A financial planner will tell you that diversification is important, because if one sector does poorly, and another one does well, at least you reap the gains from the one that did well. If you put all of your money in the weak sector, you can lose big. They would tell you to invest in “opposite” industries, so you are protected from volatility. By “opposite” I mean counter-cyclical, so you invest, for example, in luxury consumer goods (that do well when times are good), and consumer staples that perhaps do better during a recession.

That makes sense, but diversification also means you will only, at best, get average returns. Your winners will be counter-balanced by losers, so you will never hit a home run.

So, in honor of the start of the baseball season, I will offer an alternate view point: just hit home runs.

If you are confident that silver (or anything else) will do well over the next few months or years, then put most of your money in it. If you are totally completely wrong you will lose big, but if you are right, or close to right, you will win big.

In the last twelve months SLW.TO – Silver Wheaton Corp. is up 153%. Obviously the correct choice a year ago was to put all of your money in Silver Wheaton. Most other investments didn’t do nearly as well. (The S&P 500 was up 13%, which is still pretty good).

Am I suggesting picking one stock and putting everything in that one stock? No, because picking the one perfect stock would be close to impossible. If the president of Silver Wheaton resigns and that hurts the stock, I’m in big trouble, even though I was correct about the trend for silver.

What I am proposing is to diversify within the sector, while still loading up on the sector I want to own. So, to that end, this week I began buying, or increased my positions, in the following silver related companies:

In the blue chip, low volatility category:

PHS.U.TO – Sprott Physical Silver Trust As the name implies, this is a trust started by gold and silver guru Eric Sprott that holds a bunch of silver bars representing 22,298,540 ounces of silver, worth around $840 million. All bars are stored at the Royal Canadian Mint in Ottawa, Canada, and you go on the Sprott Physical Silver Trust website and see a list of all bars. That’s good, because most other ETFs loan out their gold and silver, so you don’t know what is actually there. With this one, it’s there, so you know what you are buying. Approximate portfolio allocation – 20%

CEF.A.TO – Central Fund of Canada Ltd. – This fund holds, by dollar value, approximately 45% silver and 55% gold, so it has great exposure to both metals. The Central Fund website has more information, including net asset values. At the moment the premium is only 5.4% over NAV, which is very low, so it’s a good time to buy. Approximate portfolio allocation – 15%

In the blue chip, higher volatility category (with hopefully the potential for greater gains):

SLW.TO – Silver Wheaton Corp. is the mother of all silver stocks. They have royalty streams from multiple sources, so it’s already a diversification play. It’s my biggest blue chipper winner of the last year, and I have no plans to sell. Approximate portfolio allocation – 10%

SSO.TO – Silver Standard Resources, Inc. – I have stink bids in, but no purchases this week. Approximate portfolio allocation – I haven’t decided yet, but probably no more than 5%.

Of course you want some higher risk, higher reward juniors; here they are:

SVM.TO – Silvercorp Metals Inc. – A junior producer, with lots of upside (and potential volatility, so again, stink bids are the way to play it). I’ve owned it for a while, and I’m up over 100% on it, so I have no further purchases planned, but I am holding. Approximate portfolio allocation – 3% (But it’s currently around 8% of my portfolio due to recent gains, so I’m still debating about whether or not to lighten up).

SMD.V – Strategic Metals Ltd. – I did well of this stock in the past, and I’ve got stink bids in on it now; I’d like to start buying around the $2.80 level. Approximate portfolio allocation – 2%

FR.TO – First Majestic Silver Corp. junior with potential;
Approximate portfolio allocation – 2%

FVI.V – Fortuna Silver Mines Inc. junior with potential. Approximate portfolio allocation – 1%

I’ve got a few others on the list, but you get the idea.

As you can see my plan is the heavily weight the less volatile blue chips, and then place my bets on smaller ones for increased potential return.

That’s the plan; we’ll see if I’m correct, or if I get to play the part of the April Fool.

End of the First Quarter of 2011

Now that the first quarter of 2011 is history, how did we all do in our 2011 Predictions, which you will recall, I invited you to submit at the end of 2010? The winner of the first quarter “guess the price of Gold” award goes to Peter518, who was closest with his prediction of $1,450. The actual closing price of gold on March 31, 2011 was $1,431.90, so that’s a quite close.

For the record, I predicted $1,500, so I was somewhat optimistic (as I usually am). The average for the group was $1,463, so the group was also optimistic, but not that far off.

In the “guess the closing price of the DOW” category, the winner was JohnB, with a prediction of 12,500. The actual closing price of the Dow was 12,319.73, so that’s also very close. Honorable Mention goes to both Peter518 and yours truly, JDH, with our prediction of 12,000. The group average prediction was 12,333, so as is often the case the group was once again eerily accurate.

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.

- Patience is a high virtue. (Chaucer, The Canterbury Tales, often followed by the come back “but virtue can hurt you.”)

- Maxima enim..patientia virtus (Latin, Patience is the greatest virtue)

- Patience est une grant vertu. (French, Patience is a great value)

In case you missed the theme after reading the title and the four quotes above, our topic today, class, is patience is a virtue. Allow me to elaborate.

But first, one more quote, if I may:

- Every object in a state of uniform motion tends to remain in that state of motion unless an external force is applied to it. (Newton’s First Law of Motion). Or, more simply stated, an object in motion tends to stay in motion.

Huh? What is this, a blog about the stock market, or a discussion of patience, virtue, Latin, and French? What’s next, a discussion of Galileo’s concept of inertia? (Pretty much the same as Newton’s First Law of Motion, but Galileo did get there first, but I digress).

The answer is yes, this is about all of those things. Allow me to demonstrate with a picture of an object in motion (click to enlarge):

This is a seven year chart of SLW.TO – Silver Wheaton Corp. If you had paid under $2.50 in 2005, and had showed patience, you would now own a stock worth almost $43. Of course the value in the summer of 2005 had only increased slightly to the value at the bottom of the crash in 2008. That’s a lot of time for only a little gain. But again, if you showed patience, you would have been amply rewarded.

Here’s the one year chart of SLW.TO – Silver Wheaton Corp. (click on all charts to enlarge them):

What I find interesting about this chart is the number of “corrections” or “pullbacks” that have occurred. I can count at least five minor corrections in the last year, and one major one (from early December to late January, that dropped the price by more than 30%).

But again, if you showed patience, what was worth $17 a year ago is worth $43 today. That’s a 150% gain. Not bad for showing patience. Of course if you had sold at the peaks and repurchased at the bottom you could have made a lot more than 300%, but that’s not easy. Case in point; here’s a six month chart of SLW.TO – Silver Wheaton Corp.:

I have circled the six obvious red candlesticks we have observed in the last six months. The candlestick is red, or “filled”, because the closing price was less than the opening price. Long filled candlesticks show extreme selling pressure, because the closing price is a lot lower than the opening price.

As you can see, on Thursday we had a long red candlestick, indicating that perhaps we had reached a near term top, and the bears were in control. I therefore decided that on Friday morning I would start selling my shares, or at least do a covered write to protect my gains.

And yet, when I checked the market mid morning on Friday, I saw that SLW.TO – Silver Wheaton Corp. and most of the other silver stocks were up. I therefore decided to hold off on selling for the time being.

Patience, grasshopper.

I’m not a day trader, or even a “week trader” or “month trader”. I know from past experience that I can’t pick the tops and bottoms. Even if I do sell at a top, it’s highly unlikely that I will buy back in at the bottom. I’ll either miss it, or forget, and the stock will recover to higher than what I sold it for, so when I buy back in I’m no further ahead.

So even though we could easily drop from here, how far could we drop in a bull market? Perhaps back to the 50 day moving average, currently just under $37? That’s a $6 drop, but even a drop of that magnitude would only put us back to where we were in mid-February. In my mind that would simply be another buying opportunity.

My point is this: if the long term trend is up, showing patience and letting the trend carry you along is the correct strategy.

Don’t believe me? Here’s the last eight years of action in silver:

The chart goes from well under $5 to over $37 today. That’s a nice long term trend. Obviously corrections have happened over days and weeks and months, but since the bottom of the crash in 2008 silver is up almost four times. That’s a powerful long term trend.

So, unless you believe that the trend is over, show patience, and hold.

I have many more thoughts, but time is our enemy, so for now I’ll stop, but I reserve the right to make some additional posts during the week.

That’s for reading, and see you next week (or sooner).