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.

All is not good, because since the high for the year of 12,810 on April 29, we have experienced a series of lower highs (as indicated by the horizontal red lines on the above chart):

• July 7 at 12,719
• July 21 at 12,724 (which essentially formed the double top that lead to the massive summer drop)
• October 28 at 12,231
• December 7 at 12,196

See the problem? The Boyz keep doing their best to pump air into a flat tire, and for a period of time it sort of works, but only sort of. Then the laws of physics take over, and no matter how much air you pump in, you can’t inflate the tire to it’s former shape. More air gushes out, and the next round of tire inflation leaves you somewhat less inflated than before. Lather, rinse, repeat, over and over, with increasingly worse results.

Perhaps this isn’t surprising. The Eurozone is imploding, although every few weeks they manage to agree on a bailout, or whatever. The U.S. is also imploding, but at a slower rate, so it’s not surprising that the Dow is able to lurch forward before falling back.

Of course the same pattern is apparent with gold, with a series of lower highs:

Of course the difference with gold, as the blue uptrend line shows, is that we have also had a series of higher lows, indicating that despite all of the market manipulation, gold remains in a ten year uptrend.

So what’s ahead?

Eventually all the air in the world won’t inflate a flat tire, and down we will go. If I had to guess I would assume we will keep pumping until the end of the year, so that for the year the Dow can show a small gain (it’s up 5% year to date, although the S&P 500 is down over 2% year to date). By keeping the market positive for the year, the powers that be can say “see, all is good”, in the hopes of encouraging the sheeple to invest in stocks.

It won’t work, and the inevitable direction is much farther down, but that could be weeks, or months, from now.

In a general crash, everything will crash with it, including precious metals stocks. I suspect they will also be the first to rebound. So, the plan:

First, since it’s now tax loss season which puts pressure on losing stocks, you may want to sell your losers to free up cash (and save on taxes).

Second, because the losers will fall more than the winners during tax loss season, this would be a good time to place below market stink bids to pick up the companies you want. You will want to concentrate on companies with cash, since if we have another credit crisis arranging financing next year for projects will be difficult.

Third, keep your cash handy, because if we do get the crash, and then the inevitable flight to safety (ie. gold), the gold and silver stocks could go on the ride of a lifetime, and we will want to be well positioned.

For now, keep your bicycle pump handy.

Thanks for reading; 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.

First, the Dow has broken out of it’s three month trading range (10,600 to 11,700) (click to enlarge the chart):

It would now appear that the next resistance levels would be the double top from July, around the 12,724 level. From there it’s only a short trip to the high for the year of around 12,810 on April 29.

Hard to believe, isn’t it, that on October 4, 2011, a mere 19 trading days ago, the Dow was at 10,434. That’s a 17% gain in less than a month.

Wow.

Obviously everything is fixed in the world, and we have no more worries. The stock market is up, gasoline prices are down, so consumer sentiment is at unexpectedly high levels. And it’s not just the Dow; the S&P 500 Index had it’s best month since 1974, and the Euro is up!

For those of you who don’t remember 1974, it was a really crappy year:

Fortunately 1974 marked the bottom of the bear market, with the S&P 500 hitting 62.34 on October 4, 1974, and it’s never looked back.

So, is this the start of a new bull market? Is October 2011 just like October 1974, where we reach the bottom, and never go lower again?

If you assume a bull market is a 20% gain, we aren’t quite there yet. Of course the S&P 500 was 1,353.22 on July 7, 2011, and then it was 1,078.37 on October 4, 2011, for a drop of 20.3%, which technically is a bear market.

So, this month, we have had both a bear market and a new bull market?

Huh?

What we have had, obviously, is volatility.

So, to answer the question, is this a bear market, or a new bull market, my answer is:

Yes.

We have a saying here in Canada: if you don’t like the weather, wait ten minutes and it will change. Back on Canadian Thanksgiving Day, October 10, it was warm, and I went for a swim in our outdoor pool. Yesterday morning, October 28, the temperature was below freezing, and there was frost on the ground. (And yes, the pool is now closed for the season). It would appear that our weather is as volatile as the stock market.

But a new bull market? Call me a skeptic, but I have my doubts. We still have high unemployment and massive deficits, and the Eurozone problems have not been solved; they’ve simply been papered over.

The precious metals markets appear to agree.

Gold traded in the 1,600 to 1,700 range from September 26 to October 24, when it exited the range to the upside. That’s good news for gold investors. For the first time in more than a month gold is now above it’s 50 day moving average, and even during the correction it never dropped below it’s 200 day moving average. That means this correction was a great buying opportunity.

Let’s look at more charts. Here’s gold, over the last six months:

Here’s HUI (the Amex gold bugs index, a basket of gold stocks) over the last six months:

In October, HUI has bounced from 500 to 582, a bounce of 16.4%. Gold has bounced from a low of $1,600 to $1,744, a gain of 9%. Obviously, finally, gold stocks are demonstrating move volatility than the gold price. That’s good, because that’s exactly what should be happening. We invest in gold stocks for the leverage.

An even nicer chart, silver:

After bouncing around in the $30 to $33 range for the last month, silver has broken out of the range, ending the week at $35.37. When you consider that silver traded as low as $26 on September 26, that’s a bounce of 36% from the low, a much bigger swing than gold, or gold stocks.

Hopefully this indicates that the silver manipulation is ending. I assume the bounce was the shorts covering in advance of proposed position limits (which probably won’t come into force for many months, but it’s a start).

One final chart, SVM.TO – Silvercorp Metals Inc.:

Silvercorp Metals Inc.

On October 8 I said that Silvercorp Metals is a strong buy, because I assumed the short sellers would be proven wrong. At that time Silvercorp was trading in the $8 range. Today’s it’s at $9.80, thanks largely to the report by KPMG, commissioned by Silvercorp, that the short sellers were full of crap. Silvercorp was over $15 earlier this year, and I see no reason why it can’t regain those hits. I’ve taken a significant position, and I’m holding.

So, to conclude:

• gold, good
• silver, better
• gold and silver stocks, probably even better than the metals in the medium term
• stock market, could be a new bull market, but I think a drop of 20% is just as likely as a further 20%, so take your profits when you have them, and keep some cash ready.

Finally, last week I asked where you would invest $100,000. So far precious metals are leading the poll on the side of this page, but if the stock leverage continues, they make take the lead in the future. I favour a mix of both, but if you are worried about risk, you can’t beat physical metal.

Thanks for reading; see you next week.

Nothing much, it would appear.

I also referenced the work of George Ure at Urban Survival, and Clif High’s predictive linguistics work at HalfPastHuman, who were expecting the October 15 to 17 period to be a period of “emotional dumping” after the build up in tension that has occurred over the last few weeks. Clif specifically predicted that the tension would “hit the wall” on the morning of October 15, and would continue to grow over the weekend, so that when the U.S. markets opened on Monday October 17 they would “puke themselves”.

Oops. So much for that prediction. Nothing much happened on Monday, and in fact the U.S. markets closed the week higher than where they were a week ago. That’s not exactly “puking” themselves. The Dow was up 1.41% this week, which gives the Dow a not-so-impressive gain of 2% for the year.

The only truly historical news event this week was the capture and death of that guy Gaddafi, or Quaddafi, or whatever his name was. He was supported for decades, it would appear, by the U.S. and other foreign governments to maintain access to his oil reserves, until he became a liability, at which point NATO blew him out of the water (or the desert, in his case).

So what does this mean?

I have no idea.

If I had to guess, I assume it will be a repeat of what happened in Egypt, where the U.S. got tired of Mubarak, so they launched a “popular uprising”, which got rid of Mubarak, and left in it’s place military control. It would appear that nothing has changed in Egypt; it’s just a different group of despots running the show.

I assume the situation in Libya will be even worse. At least in Egypt there is some history of “democracy”, or local leadership. Libya for the last 42 years has had no such thing, so even if the people truly wanted democracy, they are likely ill equipped to make it happen. If you have never arranged a true election, or a truly representative government, how can you just snap your fingers and make it happen?

You can’t, so we are probably faced with more of the same.

So, for Mr. Gaddafi, this week was definitely an inflection point.

The Markets

Last week it was not just human events that were at a possible inflection point; the markets were also, apparently, nearing the end of a period of indecision. The Dow appears to have broken out of it’s three month trading range:

Will this be a decisive break-out, leading to a challenge of the almost 12,800 level we saw in the summer? Perhaps, but given that the RSI is now up to almost 70, my assumption is that the rally will run out of steam sooner rather than later.

The Big Question

So now we get to the “Big Question”: where should you park your money?

Let’s assume you have no debt, and you have managed to save $10,000, or $100,000, or $10 million, or whatever. Where do you put that money?

The S&P 500 started this millennium at 1,469.25 Here we are, almost a dozen years later, at 1,238. The stock market, therefore, over the last dozen years has managed a return of negative 16%. In fact, we are now trading at about the same level we were at in December, 1998. That’s 13 years of no gains.

In fact, it’s worse than that, since if you use the Fed’s inflation calculator one dollar of value in 1998 is worth 72 cents today, a loss of almost 30%. In other words, your wealth has eroded by 30% over the last 13 years.

What about real estate?

According to the S&P/Case-Shiller Home Price Indices, in December 1998 the composite 10 city index had a value of 92.14. By July of this year (the most recent figures available for free on their site) the index is 154.29, for a gain of 67%. That’s much more impressive than stock market returns. Of course using the same inflation adjustment noted above, 92.14 in 1998 is the equivalent of 127.41 today, so a 154.29 level is only an inflation adjusted gain of 21%, which isn’t great for 13 years of “work”.

Given the back log of foreclosures, it’s likely that house prices will remain stagnant, or weaken, over the coming months and perhaps years, so this positive real estate rate of return may not continue.

What about gold stocks?

In 1998 the HUI (a basket of senior gold stocks) was trading at around 100. Today it’s around the 515 level, which on an inflation adjusted basis equates to a gain of around 272%. That’s obviously better than the stock market, or real estate.

The best investment over that time period?

Gold itself.

Back in 1998 gold was trading at around $300 per ounce, or $414.82 in today’s inflation adjusted dollars. So, with gold around $1,643, that’s an inflation adjusted gain of just under 300%.

Over the last 13 years the correct answer, then, was to invest all of your money in gold.

But, as those mutual fund commercials say, “past performance is no guarantee of future performance.” So what does the future hold?

I don’t know, but I’d like to hear your thoughts. If you had $100,000 that you wanted to invest for the long term (say five to ten years, or more), where would you put it?

• the stock market, because over time stocks rise;
• real estate, because over time real estate increases;
• precious metals stocks;
• other stock market segments? Energy?;
• cash;
• physical gold and silver;
• hard assets (like a shovel)?

Each of those investment alternatives has it’s disadvantages. With inflation, cash erodes. The markets and real estate haven’t done much better. The stock market is a rigged game. Physical gold and silver has no counter-party risk, but did you really want gold bars in your house? I don’t.

So what’s the answer? Feel free to post your comments here, or on the Buy High Sell Higher Forum, or take the poll on the right hand side of this page, and let me know the answer. Hopefully by next week I won’t be so confused.

Thanks, and have a good week.

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

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

It’s an important question.

The markets, clearly, are at an inflection point.

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

That’s quite possible.

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

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

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

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

Interesting.

That would certainly qualify as an “inflection point”.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That’s the game plan.

The weather is great.

Off for my run.

See you next week.

First, SVM.TO – Silvercorp Metals Inc., as many of you may be aware, has been the subject of allegations of accounting irregularities. The short sellers piled on, and drove the price down.

I posted a special commentary on Friday, Silvercorp Metals Inc. – Profit From the Short Squeeze, where I stated my opinion that the short sellers are probably wrong, and it’s likely the stock will see a nice rebound as the allegations are disproved. The stock is already up from it’s lows, and I suspect there is more upside as more information refuting the allegations is made public, so I’m a buyer at these levels. Only time will tell if my optimism is well founded. All comments welcome.

The second order of business is the September quarter end.

All of the news reports are reminding us that this was the worst quarter since the credit crisis in 2008, with the Dow down more than 12%. Interestingly, you, the readers of this blog, saw it coming.

Back in December, as you will recall, I asked readers to provide their predictions for each quarter end in 2011. The winners for the third quarter are as follows:

JohnB predicted that the price of gold would be $1,550 on September 30; the actual closing price on Friday was $1,622.30. Congratulations to JohnB.

For the record, I predicted $1,800, so if the contest had ended two weeks ago my prediction would have been perfect. Alas, the correction over the last two weeks took me, and a few others, out of the running.

In our guess the Dow category, yellowcaked is the winner, predicting a Dow close of 10,500. The actual close was 10,913.38. Well done.

I predicted 10,000, so I wasn’t that far off, all things considered.

The group as a whole predicted a gold price of $1,558, which was better than anyone’s individual prediction.

The group predicted the Dow at 11,300, which again was closer than any individual prediction.

I guess that’s the wisdom of crowds in action.

In case you are wondering where we will end the year, you predict a gold price of $1,621, only slightly higher than we are now, and the Dow at 10,892, almost unchanged from current levels.

Interesting. Check back at the end of December to see how we did, and check back next week for more on gold, the markets, and whatever else strikes my fancy……

According to the Silvercorp website:

Silvercorp Metals Inc. is engaged in the acquisition, exploration, development and mining of high-grade silver-related mineral properties in China and Canada. Silvercorp is the largest primary silver producer in China through the operation of the four silver-lead-zinc mines at the Ying Mining Camp in the Henan Province of China….

Now with US$230.5-million in cash, no long-term debt, strong operations and the lowest production costs among its global industry peers, Silvercorp sees today’s unprecedented market volatility as one ripe with opportunities to grow its business in the long term.

Sounds like a great story, doesn’t it? So why does the chart look like this?

Why did the share price drop from $15.30 on April 8, 2011, to a low of $6.20 on September 13, 2011? Obviously the decline in the silver price played a part, but the bigger reason is allegations of fraud by some determined short sellers.

In early September an anonymous letter was e-mailed around, alleging accounting fraud.

On September 10, 2011 the B.C. Securities Commission announced it was investigating allegations made against Silvercorp Metals Inc. based on an anonymous letter sent to the Vancouver-based company last week. I will reserve comment on the wisdom of a quasi-government agency launching investigations based on anonymous letters.

Then on September 13, 2011 Muddy Waters LLC announced that they were shorting the stock.

In simple terms the allegations are that the amount of silver in the ground, and being mined, is over-stated. Once the short sellers start shorting, down goes the price.

Needles to say, Rui Feng, the CEO, is quite pissed at these allegations, and he’s fighting back. The company has hired KPMG Forensics to do a review, which they assume will prove that no fraud has occurred. They have also invited many analysts on-site to actually see the trucks full of ore, and the milling operations.

So what’s my take?

I believe the short sellers are wrong, and they have handed everyone a great buying opportunity.

So, I’m buying. I started buying this week, and I will continue to buy as the price continues to increase. I assume the 50 day moving average will be breached to the upside shortly, and then the 200 day moving average will be next. I’ll start thinking about selling over $10, but if the price of silver resumes it’s ascent I don’t see why the yearly high over $15 can’t be achieved.

Fasten your seatbelts, and watch the action. A short squeeze is fun to watch, because as the shorts start covering the price can be driven much higher, very quickly.

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

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

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

So am I sad?

Nope.

I’ve heard this song before.

I know the chorus.

I know how it ends.

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

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

What’s Really Happening?

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

Not bloody likely.

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

Not bloody likely.

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

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

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

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

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

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

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

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

But what if the crash continues on Monday?

I’ll buy more.

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

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

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