On the one hand, it pains me to watch the economy crumble, because it’s not just the economy that is careening through this depression; it’s people.

Real people, your family members, friends, and neigbors are losing their jobs, and they don’t know what happened. They worked hard for the same company for many years. They started a family, bought a car and a house. And then, seemingly without warning, their job was gone.

At first, it was no big deal. They had always worked, so they assumed that it wouldn’t be that difficult to find another job.

But there was no “other job”.

It’s very difficult to go from earning $25 per hour, with full benefits and four weeks paid vacation, to finding a job as a greeter at Walmart, part time, for $10 per hour.

You slowly realize that you can’t keep your house, or your car, or your lifestyle.

That is the sad reality of Labour Day (or Labor Day for my American friends).

For many, there is no labour.

The August jobs report showed no jobs added in August. Apparently that’s the first time since 1945 that the economy has reported net job growth of zero.

So now what? What will President Obama’s job plan be, to be revealed this Thursday? Sadly for him, he’s not got a lot of options. The Federal Reserve cut overnight interest rates to near zero in December 2008, and that hasn’t improved the job picture. They’ve also bought $2.3 trillion in securities (ie. they’ve essentially printed money), and that hasn’t helped. In fact, the unemployment rate is higher now than when Obama was elected, and that’s not good, for him.

In fact, let’s flash back to last year, the 2010 Labor Day Weekend; here’s what the President had to say:

THE PRESIDENT:  Good morning, everybody.  As we head into Labor Day weekend, I know many people across this country are concerned about what the future holds for themselves, for their families, and for the economy as a whole.

As I’ve said from the start, there’s no quick fix to the worst recession we’ve experienced since the Great Depression.  The hard truth is that it took years to create our current economic problems, and it will take more time than any of us would like to repair the damage.  Millions of our neighbors are living with that painfully every day.

But I want all Americans to remind themselves there are better days ahead.  Even after this economic crisis, our markets remain the most dynamic in the world.  Our workers are still the most productive.  We remain the global leader in innovation, in discovery, in entrepreneurship.

Now, the month I took office, we were losing 750,000 jobs a month.  This morning, new figures show the economy produced 67,000 private sector jobs in August -– the eighth consecutive month of private job growth.  Additionally, the numbers for July were revised upward to 107,000.  ….

Thank you very much.

Q    Mr. President, what are the other incentives that you mentioned Monday, sir?

THE PRESIDENT:  Well, I will be addressing a broader package of ideas next week.  We are confident that we are moving in the right direction, but we want to keep this recovery moving stronger and accelerate the job growth that’s needed so desperately all across the country.

(Emphasis added by JDH).

Wow. Kind of like deja vu all over again, eh?

A year ago the President was boasting about all the jobs the economy created, telling us there were better days ahead. So far, we haven’t seen it.

He was also announcing a “broader package of ideas” that he would be releasing in the week after Labor Day, just like he’s doing again this year. More of the same, I presume?

The sad fact is that the government cannot create permanent jobs. All the government can do is take money from one person (the taxpayer), and give it to someone else (a government employee, or someone who provides services to the government). That’s it.

So what will President Obama propose to create jobs? More of the same. More spending on “infrastructure”, more changes to the tax code. More deficits.

And perhaps more stupid spending on homeland security, like the silly border controls between Vermont and Quebec.

So why, then, am I conflicted?

I’m conflicted because I’m profiting from misery.

The bulk of my portfolio is in precious metals. Stocks like FNV.TO – Franco-Nevada Corp.

As you can see, it’s been a good summer for Franco Nevada, and it closed on Friday very close to a new high.

Clearly the smart money (probably in China, Russia, and other places) realizes that the next few years won’t be great for the U.S., so they are placing their bets on something that can’t be printed: gold.

I have placed my bets in the same place, so I too stand to profit from the turmoil. Perhaps profit is the wrong word; perhaps I’m just protecting myself from the storm ahead.

“Storm” is a good metaphor, I believe, since storms are volatile, and that too should work to our advantage. I have placed my bids on a number of stocks I would like to own, and I’ve placed them in a “ladder”. If the stock is trading at $40 today, I’ve placed an order for a portion of what I want at $38, with further bids at $35 and $30, so if we have a big drop, I deploy cash.

In the same way I have sales orders in on stocks I recently purchased.

For example, on August 23 I purchased some Franco-Nevada warrants (WTS-FRANCO-NEVADA 13MAR12) for $10.69. The next day I placed a sell order for those warrants at $12.50, which would give me a 15% profit. The warrants closed on Friday at $12.18, so my sell order is not filled yet, but conceivably at some point next week I will cash out, and pocket the cash.

Then, at some point in the next few weeks the market will drop, and my buy orders will get filled. Lather, rinse, repeat.

To be clear, you may be wondering why I would sell warrants in a company I believe is a good investment. The answer, quite simply, is that it’s not a profit until you sell, so there comes a time when you have to take some profits off the table. However, the warrants in the example above are not a significant part of my portfolio. I also own the underlying stock, in larger quantities, and I have no intention of selling that position anytime soon.

So that is a summary of my labours this Labor Day Weekend.

I trust you too will also ponder the nature of labour, hopefully while sipping a cooling beverage.

Thanks for reading; see you next week.

Even better, when September goes up, October also goes up. According to CNBC (and they are never wrong, and they are not shills for the government):

There have been six occasions since 1928 when the Standard & Poor’s 500 has gained more than 5 percent in September, and they have been followed by an average gain of 0.7 percent in October, according to S&P research.

And in the 14 instances in the past 30 years when the S&P has a positive September, an October gain has followed nine times, with an average rise of 1.64 percent.

Even better, apparently, since 1945 October has been the market’s best month. We just think it’s a bad month due to some crashes that have happened in October. But, apparently, overall, it’s a great month.

So here’s my new plan:

I’m no longer going to be a pessimist. I am going to ignore facts like: new home sales are at their second lowest level on record, even though we have record low interest rates.

I am going to take all my cash and put it in the market, and hope that the market will gain another 9% in October! Yeah!

Correction: no, I’m not.

I believe the stock market will continue to increase through October, because I believe the markets are, at some level, rigged. I believe that government stimulus money finds it’s way to the markets, via the Fed, or the Treasury Department, or the Plunge Protection Team, or whatever. If I was the U.S. government, and I had elections coming up in the first week of November, I would do everything in my power to keep the markets up until then, because it will be easier to get re-elected. “Hey, people” they will say, “the economy has recovered, your stock portfolios were up 9% in September, the stock market is a leading indicator, that’s a sure sign of recovery!”

Yeah, maybe. Or maybe it’s a sure sign that someone is propping up the market.

I am itching to deploy my cash. I don’t want to be left behind. But I am left with a choice: jump in now and risk the correction, or stay on the sidelines and lose nothing, but miss some upside. I have decided I would rather lose some upside. So I sit, and wait.

Gold

Last week I said it was looking toppy. Today it looks even more toppy.

Gold Looking Toppy Now

The Relative Strength Index (the RSI) has only hit the 83 level twice before in the last three years. It did back in November, 2007 when gold was in the $850 range, and it corrected down to below $800 for a month and a half. Not a big correction.

The last time was in at the end of November, 2009, when gold briefly exceeded $1,200, before correcting down to the $1,050 level over a two month period. These high RSI levels may have another week, or two, or four at these high levels, but it’s not sustainable, so a correction is inevitable.

I have covered the blue chip gold stocks I have remaining (by selling out of the money October call options) to lock in some profit. My other stocks, that are now into the double digit gain territory are being gradually sold to recover my original investment. Once I am no longer playing with my money, I’m willing to let it ride.

That’s the key: take some profits to reduce risk and raise cash, and then risk only some of your profits.

Predictions

Finally, at the end of last year I invited readers to send in their 2010 Predictions for where the Dow and Gold would finish each quarter. How did we do?

On average we predicted that the Dow would be 11,538 on September 30, 2010. It actually closed at 10,807, so the winner was ChrisC with his prediction of 11,250. I predicted 9,000, so I wasn’t close. In my own defense, I predicted 10,000 for June 30 and the Dow was actually 9,774, so I was very close at the end of June. I simply did not anticipate the government propping up of the market that has occurred over the summer and into September. Oh well, live and learn.

As for gold, the average prediction was $1,206 per ounce; the actual was $1,296; closest was JohnB‘s prediction of $1,205. Interestingly most people predicted a lower number than actual. Me? I predicted $1,400 for gold, so at around $1,300 I over-shot by $100. However, I did predict $1,450 for year end, and I’m feeling pretty good about that one.

In conclusion, patience. It’s very tempting to jump in with both feet now, but it’s just too risky. Buy something if you must, but don’t buy your entire position now. I am 70% cash, and I will remain that way for a month, or two, or three, or however long it takes for the inevitable correction, and then I will buy all the way down. As I’ve said before, Patience – Gold will shine, but a small pullback is probable.

Thanks for reading and contributing to the Forum; see you next week.

Did you ever wonder why they call it hamburger? There’s no “ham” in it?

Did you ever wonder why they call a building where everyone lives really close together an “a-part-ment”?

Did you ever wonder how an economy can lose a million jobs eight months into a recovery? Did you?

To quote Edward Crotty, Chief Investment Officer at Davidson Investment Advisors, speaking about the better than expected U.S. jobs report on Friday:

“The next data points will let us know if it’s truly a peak or a peaking process, but any month we could see a creation of jobs,”

The Dow was up over 2% on the week, and all is well because the economy, only lost 36,000 jobs. Happy days are here again, and any month we could see a creation of jobs.

Am I the only one who is stunned by the fact that we are talking about almost being at the job creation phase? Here’s the way it usually works: a recession ends, and then jobs start to be created. I’m not an economist, but if you look at where the bottoming of output was, it was around eight months ago (which makes sense, since the stock market bottomed exactly one year ago today, on March 6, 2009 where the S&P 500 was at 683; it’s up 67% since then). Normally eight months into a “recovery” the U.S. economy has created about a million new jobs. In the last eight or so months we have lost around a million jobs.

In a normal recovery we should be creating between 100,000 and 150,000 new jobs per month.

This is clearly not a normal recovery.

The latest GDP data showed the U.S. economy growing at an annual rate of 5.9 per cent in the last quarter of 2009. So, normally in the two months after a quarter where the GDP grows by almost 6% you would see at least 200,000 new jobs created. Instead, we’ve lost over 30,000 jobs. Two months of declines have never happened after a quarter of strong GDP growth.

It’s obvious to see why. If the economy is growing, that means more products are being produced, and more services are being consumed, so more workers are needed to produce those products and provide those services, so more workers are hired, so employment increases. Makes sense. But that’s the opposite of what we have just seen.

This is clearly not a normal recovery.

Again, I’m no economist (and I’m thankful for that), but it appears obvious that companies have cut staff, and are making whomever is working work harder. The economy is more productive (higher GDP output, done by fewer people), but higher productivity does not create jobs. It creates profits, which presumably is why the stock market is up, but doesn’t create jobs, which is why unemployment remains high.

(If we were all replaced by machines, GDP would go up, but theoretically we would have 100% unemployment. Would that be bad? Presumably if we could produce everything we want without working for it, that would be great. But I digress).

Here’s another viewpoint: The average business owner realizes that the growth in GDP was not accomplished with real demand, but instead is a result of government “stimulus”. Obviously printing money is not sustainable forever, so businesses are not hiring, or if they are, they only hire temporary or contract workers. At the first sign of weakness, those temporary workers are gone, and there goes the recovery. In these uncertain times the average business also won’t invest in new capital equipment; it’s too risky. If you want to grow you may use your cash to buy a competitor to gain market share, but again, that’s not creating jobs, that’s just eliminating redundancies. Or, as the Wall Street Journal puts it, a lack of capital spending will end the productivity surge.

Cut staff. Be more productive. Merge. Acquire. Profit goes up. Don’t bother hiring or investing. Cut more staff. Be even more productive. Lather. Rinse. Repeat.

And did I mention wage deflation? High unemployment drives down wages. Which leaves less money to spend, which doesn’t stimulate demand and jobs. The good news is that wage deflation leads to general deflation, or at least very moderate inflation. Unit labor costs — a key inflationary gauge — fell sharply in the third and fourth quarters, according to the Bureau of Labor Statistics. For all of 2009, unit labor costs fell 1.7%, the most since the records were first kept in 1948.

Message: for the next few months, worry about deflation, not inflation. (Don’t worry, hyper inflation will get here eventually; it’s inevitable given the massive government spending, but it’s not imminent).

The conventional wisdom is that inflation is good for the price of gold (since it’s a store of value), but deflation is bad for gold (since if prices are dropping, you don’t need protection against inflation). That would not appear to be true, based on past history. For example, during the deflationary period from 1920 to 1933 operational wealth would have increased 2½ times if you held gold. Here’s a good summary of gold and deflation theories.

So what’s my theory?

This is clearly not a normal recovery.

However, gold does well in deflationary periods, so if you want a guess, I’d be betting on gold (click for a larger image).

It would appear that the short term correction that started at the beginning of December has ended, and $1,000 gold may be not be seen again, perhaps forever.

Longer term, golds uptrend since the start of 2009 remains intact, which is also good for medium term price support.

There still remains a very real risk of a general market correction. In fact, it’s almost a certainty at some point. When? I have no idea. So, this week, I gradually added to my gold holdings on dips, and I continue to leave my stink bids in place to buy more on any weakness. If the price is going up, it makes sense to be invested. However, I am still maintaining a large cash position, as protection against market weakness.

Time will tell. And I will continue to post quick updates on Twitter, including links to any interesting articles that cross my desk.

Thanks, and have a good week.

I do, however, have the opportunity to meet with a wide cross section of people, and this week I had in my office a lady who operated a hair cutting operation, what used to be known as a “barber shop”, but is now referred to as a “salon”. The company is targeted at a mostly male clientele, with the sales pitch being “no waiting”. They have lots of barbers (“stylists” I guess is the correct term), so you can walk in, get your hair cut, and be gone; no waiting.

I said that that sounded appealing, but there is one obvious flaw in that business plan. The flaw is that men don’t like change.

I myself went to the same barber shop for about the first 25 or 30 years of my life; it was the same barber shop my father went to. I moved out of town, found another barber, whom I stayed with for a year or two until my wife told me it was time to find a real barber, so she took me to her “stylist”. I was somewhat freaked out going to a “girls” hair salon, but as those of you who are married to women will understand, the simplest strategy is to always do whatever your wife wants, and I did. Daniel is now my stylist.

Daniel’s “salon” is a two minute walk from my office, and I now have a standing appointment, every third Tuesday at 2:00 pm, when he is least busy, for a hair cut. I’m in and out in half an hour; it works for me.

The irony is that my wife no longer goes to Daniel. She found someone else closer to home.

Women are fickle. They change stylists every six months.

Men are lazy. We stay with the same guy forever. I’m sure if I still lived within an hour of the town I grew up in, I’d still be going to the same barber. My father still lives there, and he still goes to the same barber. I think next year he will be celebrating about his 40th year at the same barber shop.

As for me, it would take a huge paradigm shift for me to switch barbers. Daniel would have to go out of business for me to have the inclination to source out a new stylist.

Does that make me lazy? Resistant to change? Stubborn?

Yup.

Remind you of anyone? (Other than yourself)?

It reminds me of the markets.

(See; aren’t you glad you kept reading; it turns out there is a point to my long winded and nonsensical stories).

Two weeks ago gold was substantially higher, as the U.S. government was nationalizing the mortgage industry, and the U.S. Treasury was lending $188 billion per day to keep the U.S. financial system afloat.

This week, as it appeared that a bailout package was imminent, the pressure on gold eased, and gold was lower as the week progressed.

One Week Chart of Gold

As you can clearly see on the last five bars of this chart, gold remained locked in a range of roughly $875 to $910 all week.

Remarkable.

This lack of a buying frenzy in gold is remarkable, because people are actually still buying U.S. dollars. The government has bailed out Fannie, and Freddie, and AIG, and a bunch of other guys, and is printing $188 billion per day, and is about to implement, I assume, a $1 trillion bailout package, all of which totals a substantial portion of GDP.

The U.S. dollar is now essentially worthless.

Within the next few weeks I fully expect to read about the nationalization of the automotive industry, and billions in loans and grants to the construction industry, and presumably ever other industry in America.

Wall Street may not be buying gold, but, to steal a phrase from every politician, Main Street certainly is. Earlier in September the U.S. Mint ran out of American Eagle gold coins. Now the press reports that:

Yesterday the US Mint ‘temporarily’ suspended sales of one-ounce American Buffalo Gold Coins, confirming that “demand has exceeded supply.”

Investors seeking a safe haven in Gold Coins can expect to pay more than 5% above world prices at even the largest North American dealers.

Kitco.com of Toronto has been forced to stop selling “until further notice” one- and 10-ounce Gold Bars, and a range of unavailable silver products.

Go to your local coin dealer, or bank, and try to buy a one ounce gold or silver coin. They are sold out. The smart money is already accumulating physical gold.

And yet, Wall Street left gold in a narrow trading range this week.

It’s almost as though this mythical man expects the bailout to succeed, the US to stop printing money, and all to be right with the world. Sometimes we just refuse to change. We believe in the phrase “sound as a dollar”, and refuse to accept any alternative. The government will save us. Long live the government. We don’t like change, and we don’t want to accept the fact that the dollar is now worthless, and gold is our only logical alternative.

Kind of reminds me of the guy who stays with the same barber for 25 straight years.

My friends, the times are changing.

The herd sees what you and I see. They see a bank failing every day. They see the government printing money. But they stand there and watch, because they don’t fully comprehend what’s happening. They assume that tomorrow will be just like yesterday. I went to that barber last year, and I will again next year.

But, alas, that barber won’t be there tomorrow. The bank will have failed. The government will not have been able to print enough money to keep the economy afloat. Eventually everyone will realize that there is only one asset that cannot be printed by government, and is not at the same time someone else’s liability.

Gold.

Two Year Gold Chart

It is amazing that, since May, when gold broke the $1,000 barrier, gold has been in a downtrend.

We are resistant to change. We are lazy. We are stubborn. We honestly believe that the government can save us, that all will be right with the world, that gold is a barbarous relic.

It’s not, and it’s time we get with the program.

It is very possible, even likely, that the U.S. government will announce a bailout program, and the markets will rally. That will signal the last chance to get out alive, and to get into gold. Our foreign friends have already stopped buying American money, and without their support there is no where for the American dollar to go but down.

I suspect there will be one more gold buying window in the weeks ahead, before we see $1,000 again, but I have decided not to wait. On Friday, I started accumulating.

This week I bought more of the big golds, including ABX.TO – Barrick Gold Corp., AEM.TO – Agnico-Eagle Mines Ltd., K.TO – Kinross Gold Corp. and G.TO – Goldcorp Inc. In fact, those four stocks now represent 25% of my portfolio. I will put stink bids in at lower levels to try to grab a few more shares, because the argument could be made that we will still see lower prices. For example:

Goldcorp Chart

As this Goldcorp chart shows, a retracement to $30 is entirely possible, so that’s where I’ll place my stink bid for a few more shares.

Goldcorp One Year Chart

I could wait, but as this one year Goldcorp chart shows, we are nearing an important inflection point. The stock can’t be in a downtrend and an uptrend forever; something’s got to give, and I’m betting it will be to the upside. I also expect that at some point in the next few weeks the 50 Day Moving Average will cross over the 200 Day Moving Average, indicating an accelerating uptrend, and we know what happened last time that happened. (Hint: look at the chart last November, the start of a sustained up move).

I could wait, but I’m not going to get cute and try to pick the absolute bottom. I’m in, and now I will sit back and watch.

Also, on Friday, just for fun, I bought some RIM.TO – Research in Motion Ltd. I’m a Blackberry user, and I know I’m not alone.  Are we all going to stop using our Blackberry’s because the economy is in a mess?

Probably not.  In fact, that might make us use them more, as we constantly check for news and stock updates.

Research in Motion Chart

Call me crazy, but $75 looks cheap compared to the $150 per share we were at less than four months ago, and with the RSI down at 25, I think this is a good bet (although I’m only gambling with a small number of dollars; I’m not crazy).

Finally, although I am buying the Big Boys, my biggest winners this week were the small stocks. Best on the week was AMM.TO – Almaden Minerals Ltd., up 18.8%, and FVI.V – Fortuna Silver Mines Inc., up 18.4%. The rush to safety will drive the big caps higher, but if you want a ten bagger, it’s going to be one of the little guys, so as they hit turbulence I will continue to increase my holdings.

So, is now the time to buy gold, or should we wait for “The Big Puke” to totally decimate everything? Would silver be a better bet? Have we forgotten uranium, which indicates that’s where we should be? Or should we be avoiding stocks altogether, and rushing towards bullion?

Tell me what you think. To help, I’ve added a new board on the forum, where you can post your comments on my weekly commentary. If you think I’m crazy, feel free to say so, but give your reasons so we all can learn.

Also, feel free to click on the “share this” link at the top of this page, and at the end of this post, if you think others would benefit from my ramblings.

Thanks for reading, and see you next week.