(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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Now, here’s the lucky part.

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

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

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

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

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

Oops.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Wow.

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

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

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

Thanks for reading; see you next week.

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.

Last week I talked in detail about the fall of Tiger Woods. (And yes, I know I promised not to talk about him again, but I just can’t help myself. Please indulge me for three paragraphs, and then I’ll talk about important stuff like gold, the markets, and a new stock recommendation). He appeared to have it all: a great career, a beautiful wife, two cute kids. In fact, he has nothing. I will take credit for this remarkably prescient paragraph from last week’s things are not as they appear commentary:

Tiger has long told us that the most important influence in his life was his now deceased father. Was his father a philanderer? Is that where Tiger learned this behavior? During their years on the road together, Tiger as the young golf phenom, his father by his side, his mother at home, is that where Tiger learned from his father to play the field? Or did all of Tiger’s problems start when his father died, and Tiger had no-one to turn to for advice? Either way, this is a very sad story. Either Tiger’s father was a horrible father, teaching his son by example some very bad behavior, or Tiger never did grow up, and so without his father he couldn’t cope.

It turns out that, based on the revelations of his high school girlfriend, that my suspicion was correct; Tiger’s father wasn’t exactly faithful. You would need to be a psychologist to analyze why someone crushed by his beloved father’s infidelity would then repeat that horribly destructive behavior. But then again, that’s how we humans work.

Have you ever watched a stock go up, and then right at the top you finally buy it, only to watch it fall, so you panic and sell it at the bottom? That’s exactly the destructive behavior we have all engaged in, so perhaps we humans aren’t so smart after all.

Speaking of destructive behavior, can anyone think of a more destructive exercise than the Copenhagen Global Warming Summit? Obviously God has a sense of humor, since it’s freezing cold in Denmark, and the President will return home to snow and a blizzard in Washington. It’s so cold they don’t even call it global warming any more; it’s now climate change. I guess if it stays this cold we won’t have to worry about the icebergs melting. The climate change lobby has one goal: more government interference in our lives. More taxes, more government. No wonder I’m so positive on gold.

Gold

Speaking of gold, let’s review my comments from last week:

I believe we are close to an intermediate bottom for gold, so this week I started buying. I bought the usual blue chip golds, like AEM.TO – Agnico-Eagle Mines Ltd., K.TO – Kinross Gold Corp. and G.TO – Goldcorp Inc., and I put in some stink bids to increase my holdings of PAA.TO – Pan American Silver Corp., SLW.TO – Silver Wheaton Corp. and SSO.TO – Silver Standard Resources, Inc.

Now, for the chart:

I was right about Tiger Wood’s father, and I’m right about gold. This chart sure looks like an intermediate term bottom to me. Gold is now down to just below it’s 50 day moving average, which either means it’s going to crash, or it is now at support. I prefer to believe we are at support levels, because given all that’s going on in the world, I can’t see a crash for gold anytime soon. So, this week, I continued buying (see list above).

In addition to the blue chips, I also bought some ADM.TO – Andina Minerals Inc., and CEF.A.TO – Central Fund of Canada, a Canadian gold ETF. I may also buy GLD – streetTracks Gold Trust Shares, the U.S. gold ETF, but I continue to worry about currency risk.

As a result of my buying I am now only 62% in cash, my lowest cash level in many months. I am assuming that gold will continue it’s bull run, so I want to be positioned for the January advance. So why am I not 100% invested? Because a further general stock market correction is possible, and probably likely. As we saw last year with the uranium market, in a general market correction everything goes down, and the strong stocks get liquidated so that traders can cover their margin losses on their weaker stocks. So I will build positions on weakness, and with stink bids, but I’m not jumping in with both feet just yet.

Private Placements

One topic I have not discussed in these pages are private placements, where a copy raises money by issuing stock directly to investors. The placements are done at favorable terms, generally at or below market prices, and often with a warrant that allows for future upside. I have purchased many private placements over the last two years, and while many of them have lost money, a few of them have been spectacularly successful. So successful, in fact, that my profits on the winners have far outweighed the losses on the losers.

One of my winners this year was ENW.V – EnWave Corp., which is not a gold or mining stock. They make food dehydration equipment. They are a small company, with great technology, and a now short history of success, with big things to come. You can read more on the EnWave web site.

The good news is they have just announced another private placement at 90 cents per share, with a half warrant at $1.15 per share good for a one year period. EnWave is trading at around $1, so the private placement is well priced, and the warrants should be in the money at some point next year.

It’s a small company, and to the best of my knowledge it is not currently recommended as a buy by any newsletter writer, so if you are waiting for Dines or Casey to start pumping the stock, you won’t be happy. However, I see no problem in investing in a good company with good technology, so I’m buying. I also like the diversification, since obviously my portfolio is heavily weighted towards gold and silver stocks, and this is something completely different.

I own a few shares now, and I’ve contacted my broker to participate in the private placement. I also sold some shares early at a profit. If you can’t get in on the private placement, putting stink bids on the open market is also a good strategy.

NOTE: Do your own due diligence; you are not paying me for investment advice, so you get what you pay for. I am not associated with the company in any way.

2010 Predictions

You will recall that last year at this time I asked you to put your money where your mouth is and put your predictions for 2009 in writing, on the record. Some of you did, and two weeks from now I’ll report on how you did. At least one of you did a remarkably good job; me, not so much. So, let’s give it another try. Download the 2010 Predictions Blank Word Document fill it in and e-mail it back to me at the Buy High Sell Higher 2010 Predictions Mailbox no later than December 31, 2009. More on that next week.

Those are my thoughts for this week; I have some other ideas for 2010, and I’ll report on them next week.

Thanks for reading, and have a Merry Christmas.

All that has changed, as Tiger Woods has been revealed as a liar, and a cheat. His days as the glory boy are over forever.

I know of another golfer, by the name of John Daly. Everyone likes John. He is a jovial, happy go lucky guy. He too has had relationship issues with woman, as demonstrated by, I believe, three wives. He likes to eat (leading to weight gain up close to the 300 pound level), and drink. He has also thrown golf clubs, and his behavior lead to a six month suspension from the PGA Tour last year. He was at the bottom.

So here’s the backwards world part: John Daly has lost 150 pounds, appears to be sober, and is back playing decent golf. Tiger has announced an indefinite break from golf.

John Daly never tried to hide his problems, or run from the media. He is what he is, and everyone forgives him and loves him. Tiger, better than the rest of us, shuts the door and says it’s a private matter. Sorry, Tiger, when you get paid millions for your image, your image is not a private matter. There comes a time in life where you can’t simply run and hide on your yacht. You need to stand up and face the music, like a man. That’s what mental toughness is.

Tiger has long told us that the most important influence in his life was his now deceased father. Was his father a philanderer? Is that where Tiger learned this behavior? During their years on the road together, Tiger as the young golf phenom, his father by his side, his mother at home, is that where Tiger learned from his father to play the field? Or did all of Tiger’s problems start when his father died, and Tiger had no-one to turn to for advice? Either way, this is a very sad story. Either Tiger’s father was a horrible father, teaching his son by example some very bad behavior, or Tiger never did grow up, and so without his father he couldn’t cope.

I could care less about Tiger’s image; he has millions more than I will ever have. I have some sympathy for his wife, although it’s unclear to me how it’s possible to have a husband who sleeps around for years without you knowing. I do have great sympathy for his children who, unlike Tiger, will grow not idolizing and respecting their father, but will instead have to live with the knowledge that their father was a cheat and a liar.

Will he step up to the plate, come clean, and change his ways? So far, there is no evidence that he is capable of that.

We all make mistakes. None of us are perfect. If you are truly sorry, and you change your behavior, I’m all for forgiveness. But you have to really mean it, and you have to change. Time will tell what Tiger is truly made of. David Letterman said he was sorry, and he seemed to mean it, and the issue is over (although I haven’t discussed that with his wife). People will forgive, but only if you mean it.

So here’s my first prediction for 2010: John Daly will win more golf tournaments that Tiger Woods.

Now that I have that off my chest (and I apologize for that diversion), here is something else that is not what it appears to be:

The Dow appears to be on a nice winning streak, onwards and upwards. Yes, there is some obvious resistance just below the 10,500 level, but it looks good, right? Here’s another perspective:

Priced not in dollars but instead in ounces of gold, the Dow peaked in August, and is now firmly in a down channel. It’s not going up; it’s going down. How’s that for a different perspective? Things are not always what they seem.

So as I mentioned last week, I believe we are close to an intermediate bottom for gold, so this week I started buying. I bought the usual blue chip golds, like AEM.TO – Agnico-Eagle Mines Ltd., K.TO – Kinross Gold Corp. and G.TO – Goldcorp Inc., and I put in some stink bids to increase my holdings of PAA.TO – Pan American Silver Corp., SLW.TO – Silver Wheaton Corp. and SSO.TO – Silver Standard Resources, Inc.

I am now 25% invested, 75% in cash, and I expect to continue to deploy cash over the coming weeks. Why? Because the market is not what it seems. It is not going up. The recession isn’t over. The government can’t create jobs. The deficit is exploding upward, so the only logical choice is to come clean and buy gold.

Thanks for reading, and next week I promise to change my behavior and not waste time discussing Tiger Woods.

“The White House said the actual number of jobs created so far is likely closer to 1 million, since its report on stimulus job creation only focused on $150 billion of the $339 billion in American Recovery and Reinvestment Act funds spent so far.

“We’re solidly on track to create or save 3.5 million jobs by the time this program winds down,” administration economist Jared Bernstein told CNN on Friday. “There’s a lot more ammunition in that Recovery Act. The stimulus package is absolutely working, both in GDP terms and in terms of saving or creating jobs.”

So best case scenario, $150 billion creates or saves 3.5 million jobs. That’s a cost of over $42,000 per job.

Of course if you take the total $339 billion spending so far and divide that by 3.5 million jobs, that’s a cost of just under $100,000 per job. And if you take the worst case, which is $339 billion divided by the 650,000 jobs created or saved to date, that’s a cost of $521,000 per job.

That’s scary. Happy Halloween.

Even at $42,000 per job, would it not have been easier to simply take the $339 billion and just send a cheque (sorry, that’s a Canadian word, “check”) to every American? There are around 307 million people in the USA, so for that money every single American could have received a check for $1,000. Every family of five would have received $5,000. They could have spent the money and stimulated the economy. By the end of the bailouts the $339 billion will be over a trillion, so that’s around $15,000 per family. An ABC News report says that Jared Bernstein, chief economist and senior economic advisor to the vice president, said the cost per job was actually $92,000. But I digress.

Do you think that this week’s market action was caused, in whole or in part, by the realization that we are not out of this mess yet? Or that maybe it will get worse? Here’s a chart of the S&P 500 for October:

We bottomed on October 2, had a nice run until a double top on October 19 and October 21, and then gave it all back, and then some, closing the month around 2% lower than where we started. Sort of like September, where we bottomed at the start of the month, made a peak on the 21st, and then faded for the balance of the month:

That’s not the pattern every month, but it’s close; here’s 2009, with the highs for the month:

Mathematically, this year, the top for the month happens on the 18th of the month. In the last four month the average top is on the 25th of the month. What does all of this mean?

Nothing. Absolutely nothing. Going back 100 years I suspect that the average high for the month is the 15th, since that’s the average of the numbers 1 through 30. Keep moving, no trends to see here, except that the market is very volatile.

This week, based on my belief that we were more likely to go down than up, I bought some puts. That’s the first time in a long time I have bought options; normally I sell them as part of a conservative covered writing strategy.

On October 24 I bought 10 contracts of the S&P November 925 put for $1.35 each. My timing was wrong and the market increased, so the next day, on October 25, I bought another 10 contracts for 95 cents to average down my cost. By October 28 the market had fallen, so sold my 20 puts for $2.50 for a nice quick double. The market bounced after I sold them, so I thought I was brilliant. Of course than the market crashed on Friday, so had I waited I could have sold for over $5. Oh well, you can’t worry about what could have been.

I wasn’t playing with serious money, but I wanted a bit of downside protection.

Then, on Thursday, AEM.TO – Agnico-Eagle Mines Ltd. announced lousy results, so I picked up a few shares at $61.78 (Canadian). I thought that was a great move, since I had sold those same shares back on October 8 for $76.26. Wrong again; the further weakness on Friday brought the shares down even more, so on Friday I averaged down and bought more at $57.

So,was buying more a smart or stupid move? Time will tell. As you can see from the chart, Friday’s close has brought the stock back to the July 13 level, before the stock ran to $76 two months later. The next support is $50, and if that doesn’t hold, we could see the under $30 level achieved in the crash last fall. In hindsight I wish I was buying back during the crash last fall. Obviously Agnico-Eagle has some issues, but a $20 drop in the share price in three weeks seems like a buying opportunity to me.

A close look at their results shows that most of the loss was due to foreign currency translation for reporting purposes. Agnico has expenses in Canadian dollars, but for reporting purposes reports in U.S. dollars, so any movement in the U.S. dollar will impact on paper profits. But that’s the point: we’re talking about paper, not about reality. Going forward Agnico’s production costs remain unchanged, and expected production over the medium to long term is also unchanged. I think the market over reacted, so I’m a buyer.

Lest you think I have lost my mind, let me remind you that as of today I am 81% in cash, down from 85% last week. I don’t trust this market, so while I will place some small bets, I expect further weakness in November, so I will hold my cash.

My only holdings now in my main account are conservative gold and silver plays: AEM.TO – Agnico-Eagle Mines Ltd., K.TO – Kinross Gold Corp., G.TO – Goldcorp Inc., PAA.TO – Pan American Silver Corp., and SSO.TO – Silver Standard Resources, Inc. I may shop for bargains over the next few weeks, but I don’t expect to be parting with my cash any time soon.

I still worry that interest rates will suddenly increase. I’m probably totaling wrong on that, because low interest rates depreciate the currency, which makes it easier to sell goods abroad. That’s why every country is keeping their interest rates low. Unfortunately a low currency also makes purchases from foreigners more expensive. Do you raise interest rates to protect the dollar? That would increase unemployment, and plunge us deeper into recession.

No easy answers, I’m afraid.

My final worry is the H1N1 flu. Here in Ontario it’s front page news. Long lines at vaccination clinics (all of which are free to the public here in Canada). Now there is shortage of the vaccine, which is increasing everyone’s worry level. My 11 year old son woke up at 6:00 am this morning having difficulty breathing, so my wife immediately took him in to get him checked. His lungs were clear, and he has no fever, so he was home an hour later, but that shows you the heightened sense of worry we are all feeling.

Absenteeism at many schools is over 20%. Everyone knows many people who were off sick this past week. Sadly there are now stories of children dying from H1N1. H1N1 is serious, and it’s not going away.

Last week I wrote about the End of the World (Maybe), and I quoted from the work of George Ure and halfpasthuman.com who were predicting a “turn” in our emotional tension around the October 25/26 period. Did anything turn? Are you more nervous and tense today than you were last week?

If you invest in the stock market, after Friday’s action you may be more tense. If any of your family or friends have H1N1 you may be more tense. I’m not saying their doom and gloom predictions were correct. I’m just saying that today I’m not a rosy-eyed optimist.

I’ll hold my cash, and we’ll see how I feel next week. Happy Halloween. This may be one of our scarier Halloweens in recent memory, for more than the usual reasons.

Interestingly enough, Brady was not sharp, and with two minutes to go in the game Buffalo was in the lead. New England scored a touchdown to bring the game close. For the kickoff after the touchdown Buffalo brought in their “hands” team, so that if New England attempted an on-side kick, their skill players could recover the kick and preserve the win. New England realized that, so they kicked the ball deep into the end zone. Buffalo’s Leodis McKelvin caught the ball, and he had a decision to make: run the ball out, or drop to his knee and have the ball automatically brought out to the 20 yard line.

The obvious decision is to take a knee in the end zone, and Buffalo has the ball on their 20 yard line with just over two minutes remaining. You run one play, and then the clock stops for the two minute warning. You run another play, and New England uses a time out to stop the clock. On third down you run another play, and New England uses their final time out to stop the clock. If Buffalo can’t make a first down, it’s now fourth down, and they punt, and New England gets the ball, in decent field position, with probably more than a minute remaining. Giving Tom Brady more than a minute with good field position is dangerous if you are the opposing team.

The other option is to run the ball out. That’s a problem, because your normal blockers are on the bench. Buffalo had the “hands” team on the field to protect against a New England on-side kick. The “hands” team is a bunch of smaller, skilled players, not the big burly blockers you want if you are going to run back a kick off. So, if you run the ball out, you won’t have much blocking.

Leodis McKelvin decided to run the ball out. Of course with no decent blocking New England put on the pressure to strip the ball, and they did, causing a fumble. New England recovered the fumble, and a few seconds later scored the touchdown that won the game.

Typical New England. Typical Buffalo.

Sometimes when you are winning late in a game you are not expected to win, you think you are invincible. You run out a kick off instead of taking a knee. And you lose the game.

In hindsight, however, there was no “correct” decision.

Taking a knee was the conservative approach, and if Buffalo could have then made a first down, the game would be over. They made first downs all night, so they probably had one more in them; New England does not have a great defense.

However, running the ball out also makes sense, since you are running even more time off the clock. But, if you run, you can not fumble! You put two hands on the ball, and do everything in your power to avoid a fumble. They fumbled, and they lost.

Wow. That was a long, boring, story, particularly for those of you who don’t care about a week-old football game.

So let me tell you another story. A story about the gold market.

Three weeks ago I bought the following gold and silver stocks:

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.

SSO.TO – Silver Standard Resources, Inc.

Then, on Friday September 11, as they were approaching their high points for the week, I covered them. I sold September call options, slightly out of the money, on each of these stocks. The options were set to expire on September 18, so one of two things could happen: These stocks would continue to advance, and I would lose my stocks, which is fine, because if that happened I would make a profit of between 4% and 12% on each of them. The stocks would get called at a higher price than I paid for them, and I get to keep the premium from the options I sold.

If the shares finished below the strike price, that’s fine too. I get to keep the premium, which lowers my cost of ownership, and I get to keep the stocks, which longer term I want to own anyway.

Sort of a Leodis McKelvin type decision. Play conservative and take a knee, or be aggressive and start running.

As it turned out, the market pulled back considerably on expiration day, Friday September 18, and all but one of my stocks closed below the option strike price, so all but one of the options that I sold expired out of the money. I get to keep the premium, and I still own my stocks.

Only SSO.TO – Silver Standard Resources, Inc., which I covered by selling the September 24 calls, got called away because it closed on Friday at $24.32 Still, I’m not crying. I got to keep the premium of around 90 cents per share, and I sold my shares for $24, which is more than the $23.46 I paid for the shares three weeks earlier. So my profit is 90 cents plus 54 cents or about 6%, not including commissions. That’s not bad for less than three weeks work.

And remember, that six percent profit is on my losing trade, where my stocks were called. On the other trades I still have the stock, and I kept the premium.

Friday was options expiry day, and based on my un-scientific observations it is not unusual for stocks, or commodities, to pull back to just below where all of the options are written, so that the options expire worthless. This is not a unique observation on my part. There are lots of articles, like this one, that reach the same conclusion. Fine. If they are going to expire worthless, then I want to sell them, not own them.

Do I think gold is going to drop? No, of course not. We are in the early stages of a bull market. In fact, the Australian Privateer web site shows a confirmation on their gold chart of the gold rally. But nothing goes up in a straight line. In fact, last week I said that an RSI over 70 was worrisome, so as the chart here shows, the big drop of Friday brought the RSI down to 66, which is still high, but not as high as 70.

A pullback to below $1,000 would not be surprising. Even a pullback to $950 would not shock me. So my plan this week? I will place some stink bids below where we are trading now, and continue buying on big drops. Then, two weeks from now, on up days I will do what I did this month: selling calls, out of the money, on my positions. I will continue to pocket premiums until we get through the expected market weakness in October and November, in anticipation of better things ahead in 2010.

You can try to run the ball out and make a big play. But that’s risky.

If you want to run the ball out, put two hands on the ball, keep your head down, and hang on tight.

Even better, take a knee in the end zone, bring it out to the 20, and don’t lose.

Because now, in this market, it’s not about winning. It’s about not losing. So buy on dips, do some covered writing, and if we do have another crash in October, you will be mostly in cash, so you won’t lose.

(Yes, I know, the recession is over and everything is fine. Call me a skeptic, but since bottoming at a 12-year low March 9, the S&P 500 has gained 58% and the Dow has gained 50%. Since bottoming at a six-year low, the Nasdaq has gained 68%. Those would be great gains in a bull market, but this isn’t a bull market. This is a dead cat bounce, and it’s not sustainable. The Big Boys have made their money; now it’s time to cash in, and that will drop the market. So I like cash).

So I will keep mostly in cash, make a few bucks doing some covering on stocks I want to own anyway, and I’ll take my chances from the 20.

Thanks, and see you next week.

Last week I made the case that $1,000 is a psychologically important level for gold. I said that a sustained close above $1,000 is long term positive for gold. That is, in hindsight, and imprecise statement. A close above $1,025 is probably a more accurate indicator of a sustained break out.

As you can see from the chart, we have closed above $1,000 twice before, at the peak in March 2008, and again in February 2009. The fact that gold is above $1,000 has put it back in the news, but technically it doesn’t mean anything, yet. Until we see $1,025, we won’t see $1,500.

The other worrisome sign is that the RSI is now at 74, which is an historically high level, and generally indicates a pullback is likely.

So, what’s my strategy?

Two weeks ago I bought the following gold and silver stocks:

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.

SSO.TO – Silver Standard Resources, Inc.

This week I bought more. Then, on Friday, as they were approaching their high points for the week, I covered them. I sold September call options, slightly out of the money, on each of these stocks. The options expire on September 18, so one of two things will happen: These stocks will continue to advance this week, and I will lose my stocks. That’s fine, because if that happens I will make a profit of between 4% and 12% on each of them. The stocks will get called at a higher price than I paid for them, and I get to keep the premium from the options I sold.

If the shares finish next week below the strike price, that’s fine too. I get to keep the premium, which lowers my cost of ownership, and I get to keep the stocks, which longer term I want to own anyway.

Long term I expect the stocks to increase, but short term I worry about a correction, so doing covered writes is a way to have my cake and eat it too. Yes, I’m limiting my upside, but if another market correction is imminent, protecting against the downside is a prudent course of action.

Check back next week and see how it all worked out.