I guess David Letterman had an interesting week, being forced to admit that he did some things with staff members he shouldn’t have done. Dave will survive, because he “got out in front of the news story”, admitted what he did, and so everyone will move on.  I think the whole things kind of creepy, since this guy is 60 years old and just got married in the spring to his long time girlfriend and mother of his six year old son, but that’s just me.

Jim Balsillie learned that a big hammer is not always the best tool if you are trying to open a glass jar.  Had he played nice he would own an NHL team somewhere, and if he bit his tongue a year or two from now he could move the team to a city of his choice.  Instead, he helped engineer a bankruptcy, and it backfired.

But these two stories, in the grand scheme of things, are mere diversions.

About the only interesting news for us Canadians, other than the start of the NHL hockey season, was the announcement that Scotiabank will now deliver gold right to your home. Cool. Of course Sprott Money has been doing that for a year or two, but still, it’s pretty cool.

Other than that, nothing much happened this week, so, let’s review the past.

Last December I asked readers to predict where the market would be at the end of each quarter of 2009. On our 2009 Predictions Page I summarized the consensus estimates for where the market would be at September 30, 2009: On average, readers of this blog believed the Dow would close at 7,949, and the price of gold would close at $1,085.

The actual closing values, on September 30, 2009 were 9,712 for the Dow, and $1,006 for gold, so on average we were too pessimistic on the overall market, and pretty close on the price of gold.

Congratulations are due to Davidslane, winner of the “closest to the pin” contest for the second quarter in a row, who predicted gold at $1,050, which was a bit optimistic, but pretty close. He did predict the Dow at 8,200, which was too pessimistic, but still pretty good, considering that those prediction were made over nine months ago.

The winner on the Dow prediction was Richmanch, who predicted Dow 10,000, which was the highest prediction of any of our predicters. Well done. I’m reminded of the strategy employed on The Price is Right television show to bid high. If the first three contestants bid 850, 900, and 925, the logical next bid is 926, because you then get any price higher than all other bids. I’m not saying that was Richmanch’s strategy, but it worked, and he wins.

Who needs to watch professional forecasters when we have readers who do a better job than the experts?

How did I do? Not well. I predicted gold at $2,200 and the Dow at 7,000, so I was much more pessimistic on the economy than warranted. I assumed that there would be a follow through on the carnage from 2008, with the markets bottoming out around June, with a recovery happening later in the year. Instead, government stimulus efforts have created hope in the minds of investors, which has lead the markets higher all year.

As I have repeated in my weekly commentaries all year, I believe it’s all an illusion. I don’t believe government’s can spend our way out of a recession. Unemployment is high. Deficits are higher. October is often a “turn around” month for the markets, and this October is not off to a great start, so who knows what will happen for the remainder of this month.

But let’s be clear here: my predictions have been completely wrong. I assumed a market crash, and it hasn’t happened. I assumed that the result of massive government spending would be an explosion in the price of gold. Gold has gone up, but it hasn’t been an explosion.

I have been wrong.

I feel like I should make a David Letterman-type apology, but I’m not that funny.

I feel like I should give all of my readers a refund for the subscription price of my newsletter.

And I will.

Whatever you have paid me, I will refund.

Fortunately for me, this service is free. No charge. (And I guess you get what you pay for).

Have I been wrong? Based on the numbers, yes, I’ve been wrong.

But I prefer to believe that my timing has been wrong, but my thoughts have been accurate. I continue to believe that the price of gold will increase, and the markets will suffer yet another correction.

I’ve been wrong for the last year, but I believe that I will ultimately be proven correct. So, I continue to hold gold and silver stocks, and a lot of cash. If gold continues strong, I will make money. If the market crashes, I will use my cash to average down, and profit from the bounce.

Time, as always, will tell.

Feel free to provide your thoughts on predictions on our 2009 Predictions board, send your notes of congratulations to the winners, and see you next week.

Now, to the business at hand. Last December I asked readers to predict where the market would be at the end of each quarter of 2009. On our 2009 Predictions Page I summarized the consensus estimates for where the market would be at June 30, 2009: On average, readers of this blog believed the Dow would close at 8,349, and the price of gold would close at $984.

The actual closing values, on June 30, 2009 were 8,447 for the Dow, and $926.60 for gold, so on average we were too pessimistic on the overall market, and too optimistic on the price of gold.

Congratulations are due to Davidslane, winner of the “closest to the pin” contest, who predict the Dow at 8,600, and gold at $920. Considering that prediction was made over six months ago, getting to within $6 of the price of gold, and within less than 2% of the Dow’s closing level is amazing. Well done.

Honorable mention goes to Designer, who predict gold at $910 and the Dow at 7,900, and Croaker who predicted gold at $950 and the Dow at 8,000. REM‘s Dow prediction of 8,242 was close as well. Who needs to watch professional forecasters when we have readers who do a better job than the experts?

How did I do? Not well. I predicted gold at $1,800 and the Dow at 6,000, so I was much more pessimistic on the economy than warranted. I assumed that there would be a follow through on the carnage from 2008, with the markets bottoming out around now, with a recovery happening later in the year. Instead, government stimulus efforts have created hope in the minds of investors, which has lead the markets higher in the second quarter.

Personally, I believe it’s all an illusion. Deficits are at record levels, consumers are falling behind on their credit card payments, and the real estate market is no where near a recovery. The Dow is down over 5% year to date, so I was correct on the direction, just wrong on the magnitude. Gold started the year around $880, so again, I got the direction correct, just not the magnitude.

Was I wrong, or just early? Obviously I was wrong; the markets did better than I expected. However, I also believe I was early. Crashes happen, then there are corrections, then further weakness occurs. The crash happened in 1929, but the market didn’t bottom until 1933, and a true bull market did not return for many years thereafter. The crash of 2008 has, so far, not been followed by a crash of 2009, and it was unrealistic of me to expect that quick a result. A more likely scenario is continued weakness this year, with perhaps a big correction in the fall, or early next year.

There can also be little doubt that the government’s actions have reduced the damage from the weakened economy. 52 banks have failed in the U.S. this year, representing almost 3,000 branches. That’s a greater number of failures than at this point in the Great Depression, but because, to date, the FDIC has covered all deposits, no depositors have lost money. They aren’t feeling the pain. But what happens if another 50 banks fail in the second half of the year? Does the FDIC have unlimited money to keep covering deposits? Or will the time come when the money runs out?

Can stimulus spending last forever? Will interest rate remain near zero forever? How long can the country last with 10% unemployment? If the rate of personal bankruptcy growth continues to accelerate, does anyone truly believe that the recession is over?

I therefore reach the conclusion that I am simply early in my predictions of doomsday, not wrong. I will therefore continue to hold cash and wait for further weakness to add to my positions. For the first six months of this year, holding cash and gold and silver stocks, my portfolio is up over 4%. That’s not spectacular, but it’s better than the general market, and it’s done with minimal risk, so I will stick to my strategy.

Time will tell if I have missed the boat, or if I was right to stay on shore.

Thanks for reading, happy Fourth of July, see you next week.

Before I share my thoughts, thanks to all who e-mailed their predictions, which are now presented on the Buy High Sell Higher 2009 Predictions page. Here is a mathematical summary of what you, my dear readers, have predicted for 2009:

The Price of Gold Will Be:

The DOW will close at:

Obviously you believe that gold will be up in the first quarter, fade going into the summer, and then increase as the year goes on. You are predicting up for the Dow in the first quarter, a drop in the second and third quarter, and a partial recovery going into the end of the year.

Your predictions appear to fall into two camps: some of you believe that Obama will be a great president, and things will improve in 2009 (although most of you are predicting a drop in the second quarter). Others believe the opposite: we have already started down the slippery slope of a new Depression.

The real question….

I think the discussion of the economy, and the potential success of the Obama presidency, misses the point. The real question is this: if there are more tough times ahead, are those tough times already “baked into the cake“? Has the stock market already discounted the tough times ahead?

It is my considered opinion that 2009 will be a very tough year. Yes, 2008 was bad; banks failed, and 2008 was the start of a massive government bailout. However, I believe there is much more bad news to come, including:

• Many news reports suggest that up to 200,000 retail stores could close in 2009. If each store has ten employees, that could be 2 million jobs lost. That’s a huge number. And, presumably, a reduction in retail stores means sales also decrease, causing even greater job loss amongst all of the suppliers to those stores.
• We had the sub-prime crisis in 2008; we have not yet had the “credit card crisis”. For at least the last ten years the economy has been driven by purchases on credit, many of which were made with credit cards. As people lose their jobs and see their income’s decrease, and as they lose the ability to refinance their homes to repay credit card debt, it’s inevitable that an increasing amount of credit card debt will go into default. That will further hurt the banking industry, and will probably require another “bailout”.
• I don’t believe the real estate market has bottomed yet. Falling prices reduce homeowner’s perceived wealth, so they buy less, and that further weakens the economy.
• As consumption decreases, many stores in shopping malls will close and remain empty, drastically reducing commercial rents.
• Obama has hinted that the unemployment rate could reach 9%; a 10% or higher rate is also possible.
• As the economy falters, government tax revenue declines, which will lead to a dramatic reduction in government services.
• The massive government bailout of 2008 will continue in 2009. Government spending today = inflation and higher taxes tomorrow, and that’s not good for anyone.

I could go on and on, but I think I’ve made my point: we are not out of the woods yet. However, that’s not the issue. The issue is: will it matter? Is all of this bad news already baked into the cake?

The stock market is a leading indicator; investors buy stocks for their future earning potential. It could be argued that everyone knows 2009 will be a bad year, which is why the stock markets fell 40% in 2008. The stock market is a leading indicator, and it’s predicting bad times ahead.

I have done a lot of research, reading, thinking and pondering, and based on the evidence I see, I am sad to report that I fall into the pessimistic camp: I believe we will look back on 2009 as the year that the Greater Depression came into the world’s consciousness.

As for the new President, I have never met the man. I’m a Canadian, so I did not vote for him, nor did I vote against him. He has great charisma, and he does have the potential to be a transformational figure. He may be the one person who finally begins the process to bring an end to the racial inequality that exists throughout the world. He may end corruption and waste in government.

He may. I hope he does.

Unfortunately, I am a cynic. I am of the view that the government, regardless of how well intentioned they may be, only has limited power to “fix” the economy. A government generally doesn’t invent new products or technology, or improve efficiency, or do anything to truly create wealth, and that’s why I don’t believe the world will be a perfect place in 2009.

Temporary Deflation

We are currently experiencing a temporary deflation. Technically, a deflation is best defined as a decrease in the money supply. The government is printing money like crazy, but when you add up stock market and real estate market losses in 2008, there is little doubt that the supply of monetary wealth fell in 2008. The impact of this deflation is well known to all of us: falling prices.

In 2008 we saw prices fall for real estate, stocks, and commodities such as oil. “Deleveraging”, the word of the year in 2008, saw hedge funds and everyone else sell whatever they could, further depressing prices.

However, once the sellers have sold all they have, once the deleveraging is complete, we will be faced with a massive increase in the money supply, thanks to the bailout. That increase in the money supply thanks to government spending will have one result: inflation.

Let me be clear: I am not aware of any other time in human history where massive increases in government spending did not lead to a decline in the value of the currency, and massive inflation. (If I’m wrong, post your facts on the Forum, please).

To protect wealth, there will be only one logical place to put your money: gold.

And that’s my basic premise behind my thoughts for 2009:

The economy has not yet bottomed. Real estate will continue to fall. Retail stores will close. The automotive sector, and virtually every other sector, will continue to feel pain. Jobs will be lost. The government will try to spend their way out of it. The U.S. dollar will fall. Inflation, eventually, later in 2009, will rise. We will be looking for a safe haven. And that safe haven will be hard assets like gold, silver, and perhaps even uranium, lithium, and the like.

After a great 2006, I lost a lot of money in 2007 and 2008. I don’t intend to go three in a row. I will stick with gold stocks, and I will maintain cash and some downside protection with bets on further market weakness.

2008 was a bad year, not because I lost money, but because I lost money stupidly. I was stupid, because I have my own set of investment rules, and I didn’t follow them. I have a 20% stop loss rule. If a stock falls 20% from it’s peak, I sell it. By doing that, it’s theoretically impossible to lose more than 20% on a holding. Since I was down 40% in 2008, I obviously didn’t follow that rule.

(Mathematically that’s not entirely correct. Losses of 19% on a number of stocks can obviously add up to more than 20% over the course of the year, which is essentially what happened to me this year).

I also erred by not taking profits when they were there, a mistake I don’t plan to repeat in 2009, if and when there are profits.

So, in conclusion, my prediction is for a down year economically in 2009, but an up year for gold and silver, which is where I plan to park my money. I will keep a closer eye on things this year. If a stock is up and if it’s RSI goes over 70, I plan to take some profits, since nothing goes up forever. 2009 will continue to be volatile, so selling now may simply free up cash for another day.

There is, of course, a very good chance that I will be completely wrong. A look at the gold chart for the three year period ending December 31, 2008 clearly shows we are still in a downtrend. It is therefore reasonable to expect a pullback in gold early in January, so covered writing on stocks we like, or selling a portion of our holdings to raise cash is probably prudent. However, I believe a higher gold price is baked in the cake for 2009, so that’s how I’m playing it.

As we start 2009, thanks to all of you for reading and contributing. I created this site to give me a place to write down my thoughts on investing. It’s an added bonus that I get to hear your comments as well, for which I thank you.

You can read everyone’s predictions on the Buy High Sell Higher 2009 Predictions page, including JDH’s 2009 Predictions, and you can post your thoughts on the Buy High Sell Higher Forum 2009 Predictions Board.

Thanks for your thoughts and comments, and a special thanks to those of you who took the time to put your reputation on the line and post your predictions for 2009:

davidslane, richmanch, punter, croaker, uboat, designer, beginner, and REM. Your input is most welcome.

Thanks and Good Luck to All, and Happy New Year.

Actually, I have a life. And a wife. And two sons. My sons, for the record, were quite happy with the snowfall we have received here in south western Ontario in the the pre-Christmas period, and they spent Christmas Eve Day building snow forts. My wife is less enamored with the snow, since she gets to drive the tractor with the front end loader, moving the snow around. I clean up the walkways and steps with the snow blower or shovel. So that’s my life: writing commentaries, and watching the family have fun in the snow. (I also own and run a company with 50 employees, but it’s a company that has nothing to do with investing, mining, gold or anything I talk about here, so it’s not really relevant to the story).

What is relevant is that, over the past two years, I have seldom been correct. My portfolio was up huge in 2006, almost doubling, but then I gave back those gains in 2007 and 2008. Which of course begs the question: why do you continue to show up and read this stuff? (And my web stats show many hundreds of thousands of visits, so many of you are reading, and a number of you contribute regularly on the Forum , for which I thank you).

In my own defense, virtually no-one was correct about 2008. I don’t recall anyone at the start of the year advising the selling of all stocks and commodities, and going entirely to cash under the mattress, which in hindsight was the correct strategy for 2008. I do recall many experts predicting tough times in 2008, and they were right. Unfortunately, their advice didn’t translate into great profits for any of us.

Many advisers said to buy gold stocks, and in fact, up to the end of October, stocks like K.TO – Kinross Gold Corp. were down around 30% on the year. Amazingly, however, between Halloween and Christmas, Kinross is up around 22%, so the end of the year has been good for gold stocks. When you do the math, Kinross is now up 12% on the year, which given the devastation on the markets, is a good year.

Senior gold stocks compare favorably to other measures, like the Dow and S&P 500 indices, both down over 35% on the year.

I continue to believe in gold, even though my portfolio has suffered in 2008. I don’t worry about a down month, or even a down year. No-one can catch exact tops and bottoms. I prefer to look back over a multi-year period to judge true success, and I believe that when we look back to today from the end of 2009, and 2010, and 2011, we will see that now was a great gold buying opportunity.

So what specifically do I see for 2009? Will 2009 be the first year since 2006 when I will finally get it right? I’m not going to answer that question today; that will be for next week’s first ever annual forecast issue, where I will throw some darts at a dart board to predict the future.

While I work on my predictions, I want you to work on yours. Please go to the Buy High Sell Higher 2009 Predictions page to download a blank predictions document in either Word or html format. Save it on your computer, edit it, and then e-mail it back to me at the Buy High Sell Higher 2009 Predictions Mailbox. This e-mail address will remain active until December 31, then I’ll delete it. On January 3 I will post your predictions on the Buy High Sell Higher 2009 Predictions page.

Everyone who submits a coherent prediction gets their own page in the Predictions section. The predictions will remain there forever (or until I take them down). I think it will be instructive to look back over time and see how accurate we are.

Depending on how many of you respond, I may try to summarize the results to determine the consensus of the group. Many of you have already responded, for which I thank you.

While I won’t lay out my entire thought process today, I do very strongly believe that 2009 will be a much more thrifty year than we have seen in the last two decades, as eloquently described by Gary Shilling in this video:

I agree with Mr. Shilling. I believe as individuals many of us now realize that our jobs may be jeopardy, and therefore 2009 will be a year where we try to pay down debt and save money. That’s a great strategy for us as individuals, but that thrift will be bad for the economy in the short term. The economy has grown over the last two decades due in no small part to the expansion of credit. We borrow to buy, and that creates jobs. Unfortunately we are now “borrowed out”; no-one will lend us any more money, either as individuals or as a country. Without borrowing supported purchasing, the economy will have no choice but to continue to contract in 2009.

And that, of course, is the paradox of thrift. Thrift is good for us as individuals, but perhaps not great for the economy as a whole.

Could I be wrong? Could massive government spending replace the reduction in consumer spending?

Perhaps, but that’s something we can ponder as we write up our 2009 forecasts, so go to the Buy High Sell Higher 2009 Predictions page to submit your predictions for 2009.

Thanks for reading over these last two years; next week I’ll lay out why I think 2009 will be a great investing year, provided you have your money in the right areas.

See you next week.

I gave you my thoughts last week (I’m a pessimist); now it’s your turn to predict the future.

I have posted a blank predictions document; save it on your computer, edit it, and then e-mail it back to me at the Buy High Sell Higher 2009 Predictions Mailbox. This e-mail address will remain active until December 31, then I’ll delete it. On January 3 I will post your predictions on the Buy High Sell Higher 2009 Predictions page. (Go to the Buy High Sell Higher 2009 Predictions page to download your copy in either Word or html format).

Everyone who submits a coherent prediction gets their own page in the Predictions section. The predictions will remain there forever (or until I take them down). I think it will be instructive to look back over time and see how accurate we are.

Depending on how many of you respond, I may try to summarize the results to determine the consensus of the group.

I am of the view that none of us has even the faintest clue what’s going to happen in 2009, since none of us had the faintest clue a year ago when asked what 2008 would be like. I don’t recall anyone predicting a massive market crash, and the failure of the entire U.S. investment banking industry, and the almost failure of the North American automotive industry, but that’s what happened.

I therefore don’t believe that anything particularly useful will be served by all of us predicting the future, just as nothing much was accomplished by all of my predictions since starting this blog at the end of 2006.

However, it appears that my corner of southern Ontario will be snowed in from now until after Christmas, and many parts of North America are also experiencing lousy weather, so typing up some predictions will give us all something to do.

I’ll be asking for your predictions on the market, but feel free to predict anything else at all, just for fun. (Here’s a good one: I predict the phrase “global warming” will gradually disappear in 2009, since it seems to be getting colder where I live).

One of the areas for prediction will be the price of gold in 2009 (I’ll ask you to predict the quarterly closing prices). I am on record as believing that gold will rise in 2009, probably by a significant amount. However, it will not increase in a straight line.

As this three year gold chart shows, it can be argued that the major uptrend started in the summer of 2006, and continued even through the declines of the summer of 2008. It also appears obvious that gold has been in a downtrend (see the red line) since the peak in March 2008. Until gold breaks decisively above $900 (say to $950), or below the base at $700, the ultimate trend will not be known. My current game plan is to assume that gold will fluctuate in the current range of $750 to $900 for a while longer.

Looking at a one year gold chart, a more narrow trading range may be between the 50 day and 200 day moving average, or somewhere between $776 and $863. An obvious buy sign will arrive when the 50 day moving average crosses over the 200 day moving average and trades higher (ie. the 50 day moving average higher than the 200 day moving average), which hasn’t happened since the start of this run at the end of 2006 (see first chart).

Here’s the one year gold chart:

Even more interesting about this chart is the purple horizontal line I drew from the current price to the price one year ago. We closed on Friday at $830; a year ago gold was around $800, so despite the market turbulence, gold is actually trading higher today than it was a year ago. For comparative purposes, the DOW is down 35% in the last twelve months, the S&P 500 is down 39.5%, and the Nasdaq is down 40.65%. Those stats prove that gold has in fact been a good store of value over the last year, and I believe it will continue to be in 2009.

Practically, I will continue my practice of doing out of the money covered writes on my core gold holdings after an upswing, and then closing them out on down days. This strategy didn’t work well during the big upswing in December (I covered too soon), but as we are probably nearing a short term peak, I suspect it will work well over the next week or three.

I will provide more detailed thoughts in two weeks when I post my predictions for 2009 (so you will all know to do the opposite of whatever I suggest).

For know, there are foot high snow drifts on my driveway (and that’s after my good wife spent 90 minutes freezing to death on the tractor yesterday so I could get my car in the driveway when I returned home from work) so duty calls.

I suspect the activity on the Forum will be slow this week as we all take a well deserved break for the holidays; let’s recharge our batteries and get ready for next year. And don’t forget to go to the Buy High Sell Higher 2009 Predictions page to submit your predictions for 2009.

Merry Christmas.