Compression.

Long time readers will know that I can’t keep my mouth shut, so allow me to elaborate on my one word commentary. In fact, since a picture is worth a thousand words, here are a thousand more words, pictorially:

As you can see, the S&P 500 traded essentially between 1,310 and 1,325 for 11 straight trading days. That’s a very tight range. On Friday it broke out of that compressed range, and closed up 1.5% at 1,345. So now the inevitable question:

Was that 11 day period like a spring, compressing the market, and Friday’s action was the uncoiling of the spring to the upside? Can we now expect a further run to new highs? Possible, but the Relative Strength Index is now at a very high 73.59, so common sense would tell you that a pull back is inevitable. But how can you have a pull back after a one day spring?

I have no idea, so I will make no further comment.

I will leave it to you to decide.

By the way, here’s the gold chart for the same period:

No sign of compression here; gold crated on Friday while the stock market increased, but even the short term up trend is still in place, so no worries here.

As brevity is the essence of wit, I will sign off and see you next week.

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.

Or not.

Here is a mathematical summary (the average) of our Forum members’ predictions for 2012:

The Price of Gold Will Be:

The DOW will close at:

The consensus appears to be that gold will continue to increase as the year progresses, and the Dow will continue to erode into the middle of the year, and then remain flat for the balance of the year.

You can see each person’s individual predictions by scrolling down on the right hand side of this page, or by going to our 2012 Predictions Page.

Comments? Agree or disagree? Want to understand why someone is predicting what they are predicting? Post your questions or comments on the 2012 Predictions Board on the Buy High Sell Higher Forum.

You can see my predictions on the JDH 2012 Predictions page, but here’s the summary: I’m more optimistic on the price of gold than you are, and I’m more pessimistic on the Dow.

You expect that gold will increase over the year from the $1,600 level to about $1,900 by the end of the year.  I think we will see $1,900 by the middle of the year, and $2,100 by the end of the year.  In fact, a big part of my brain thinks we will see $2,500 at some point this year, so perhaps I should have asked each of you for a maximum prediction during the year.  We could easily see $2,500 in November, and then $1,900 in December.  Picking exact numbers on exact dates is a fool’s game (that each of us are all to willing to play, obviously).

As for the Dow, you think it will close the year at 11,725; I’m thinking more like 9,500.  Ouch.

Of course the truth will depend on government actions.  If the government continues to print money, and if the world doesn’t care, then the Dow could be 14,000 very soon. (Interestingly, Uboat thinks it will be 14,000 on March 31, and ChrisC thinks it will be 14,275 by the end of the year.  Those were the two maximum predictions from the group).  Uboat and ChrisC could very easily both be correct.  If the Eurozone situation is fixed, 14,000 in three months is quite possible, and is even more achievable by the end of the year.

Of course I have no sense of optimism, and I expect that government efforts will ultimately fail.  I may be correct, but my timing may be completely wrong.  Perhaps the balloon will remain inflated for many more years to come, in which case I will look foolish.  Time will tell.

If the market does well, it’s possible that gold will do well.  Or not.  In a liquidity crises everything gets sold, so again, time will tell.

For the record, my prediction of gold at $2,100 at the end of the year is exceeded only by Beginner’s prediction of gold at $2,300 by year end. ChrisC is at the other end of the spectrum, predicting gold at $1,550 at the end of the year, and Croaker is not far behind, predicting gold at $1,590 on December 31, 2012.  Obviously one of us will be spectacularly wrong.

(It will probably be me, so sell all of your gold, now!).

Comments? Agree or disagree? Want to understand why someone is predicting what they are predicting? Post your questions or comments on the 2012 Predictions Board on the Buy High Sell Higher Forum.

Thanks for reading, and predicting; see you next week, with some ideas on how to invest in 2012 (all suggestions welcome on that point as well).

The average prediction for the closing level of the Dow on December 21, 2011 was 10,892. Apparently we were somewhat too pessimistic, since the Dow actually closed at 12,217.56, or 12% higher than we expected. Congratulations go to ChrisC, who predicted a closing level of the Dow at 12,650. Well done. A year in advance, that’s about as close to “bang on” as you can get.

How did I do? Not well. I predicted that the Dow would lose 1,000 points each quarter, so my prediction of 12,000 on March 31, 2011 was within 300 points of perfection. My 10,000 prediction on September 30, 2011 was only off by 900 points from the actual level of 10,913. However my December 31, 2011 prediction of 9,000 was not even close to the actual 12,217 level.

Why was I so far off? Why were we all too pessimistic?

You could make the argument that we weren’t that far off. On October 3, 2011 the Dow closed at 10,655, the low point for the year, which was 854 points lower than the 11,509 level the Dow reached on September 16, 2011, a mere two weeks earlier. Had the Dow fallen a further 854 points in the remaining three months of the year, I would have been very close. If swings of 854 points in 11 trading days were not an unusual occurrence in 2011, a few more weeks either way makes a big difference.

I’m not trying to justify my lousy prediction. I was wrong. I admit it.

But I can’t help but wonder if there wasn’t some manipulation going on here.

The Dow peaked at 12,810 on April 29, 2011. On October 3, 2011 the Dow closed at 10,655, the low point for the year, a drop from peak to trough of 2,155 points, or almost 17%. That’s a big swing. That’s volatility.

And yet, on from December 31, 2010 to December 31, 2011 the Dow traveled from 11,577 to 12,217, a gain of 640 points, or 5.5%

When was the Dow last at 11,577? November 29, 2011.

That means that the entire gain for the year on the Dow occurred in the month of December. That’s not exactly a nice steady bull market rise. And let’s not forget that that the broader averages, like the S&P 500, ended the year flat, and the Nasdaq was actually down 1.8% on the year. I guess that means it’s easier to “paint the tape” in a 30 stock universe, than in a 500 stock index. Or perhaps in a “flight to safety” the lemmings all go for the big stocks.

Gold

The other area where I tested your predictive powers was the closing price of gold. Gold closed the year at $1,564.80; your average prediction was $1,621, so we were, on average, over-optimistic on the price of gold by 3.5%.

But again, timing is everything. When did gold last trade at $1,621? December 21. So, if 2011 had ended 7 trading days earlier, your average prediction would have been perfect.

Congratulations to JohnB, who predicted a closing price for gold of $1,650. That’s very good, only a deviation of 1.7% from the actual closing price.

As for me? I predicted that gold would hit $2,000 by year end. I was obviously over-optimistic. Or was I?

On August 23, 2011, and again on September 6, gold spiked well over $1,900 per ounce. On September 6 the intra-day high for the year hit $1,923.70. At that time I didn’t think a further gain of $76 over the final four months of the year was that big a stretch. But alas, it’s been down-hill ever since.

However, let’s not forget that gold was still up about 10% in 2011, and that’s the eleventh straight year that gold has risen.

Let me repeat: that’s 11 years in a row that gold has gone up in price. You can’t say the same for the Dow, or any other stock market index. That’s impressive.

So what will we see in 2012? I’ll provide my thoughts next week, but for now, it’s prediction time again.

Your Predictions for 2012

To participate in the 2012 prediction contest, please cut and paste the following section into an e-mail (replacing the XXXs with your predictions):

My name (no-one uses real names here; your Buy High Sell Higher Username is fine, or make up whatever handle you want): XXXX

I predict the Dow will close at the following levels, on the following days:

March 31, 2012 XXX

June 30, 2012 XXX

September 30, 2012 XXX

December 31, 2012 XXX

I predict the price of gold, in US dollars (assuming US dollars still exist) will close at the following levels, on the following days:

March 31, 2012 XXX

June 30, 2012 XXX

September 30, 2012 XXX

December 31, 2012 XXX

Here are my other totally random predictions (optional; such as your stock picks, the Super Bowl winner, whether or not the Mayans will be right, or whatever): XXX

That’s it. The deadline for submissions is January 2, 2012, before the markets open. You can post your predictions on the Buy High Sell Higher Forum, or simply e-mail them to me at predictions2012@buy-high-sell-higher.com. May the best predictor win.

Thanks for reading. Happy New Year. See you next year (and next week).

In a separate blog I have posted my thoughts on GLD vs Gold, so if you are interested in my thoughts on paper gold versus physical gold, please click the link.

This post is about our 2012 predictions contest, for which I offer no prize; you simply get the satisfaction of knowing you were the best predictor of the bunch.

As you will recall, your predictions for 2010 were almost perfect. You can read review your 2011 predictions to see how you are doing; it would appear you were overly pessimistic on your predictions for the Dow (but with the volatility in the markets there’s lots of time left), and your gold prediction is looking remarkably accurate.

Here’s the plan for 2012: Cut and paste the following section into an e-mail (replacing the XXXs with your predictions):

My name (no-one uses real names here; your Buy High Sell Higher Username is fine, or make up whatever handle you want): XXXX

I predict the Dow will close at the following levels, on the following days:

March 31, 2012 XXX

June 30, 2012 XXX

September 30, 2012 XXX

December 31, 2012 XXX

I predict the price of gold, in US dollars (assuming US dollars still exist) will close at the following levels, on the following days:

March 31, 2012 XXX

June 30, 2012 XXX

September 30, 2012 XXX

December 31, 2012 XXX

Here are my other totally random predictions (optional; such as your stock picks, the Super Bowl winner, whether or not the Mayans will be right, or whatever): XXX

That’s it. The deadline for submissions is January 2, 2012, before the markets open. You can post your predictions on the Buy High Sell Higher Forum, or simply e-mail them to me at predictions2012@buy-high-sell-higher.com. May the best predictor win. Next week I’ll reveal the 2011 winner, and you can see how I did.

Finally, as noted last week , I have re-opened the ability to register as a member on the Buy High Sell Higher Forum. The Forum generates a fair amount of spam, posted mostly by new members who join, post a spam message (an advertisement of some sort) and then disappear, never to be seen again. So, to combat the spam, I simply de-activated the ability for new members to register. However, as requested, new member registration is active again, perhaps for a limited time, depending on how much spam I get hit with. I’ve tightened up the spam controls, so we’ll see how it goes. This past week we’ve averaged about one new spam message a day, so I suspect I’ll be closing new registration at some point in the new year.

You may also register and post comments below each blog post on this site.

Thanks for reading; Merry Christmas; Happy Holidays; see you next week.

On the surface, the question is relatively simple. The SPDR GLD Trust holds over 40 million ounces of gold, so by buying GLD you are buying paper backed by physical gold. The advantage of paper gold is that it’s very easy to trade. I can buy it this morning and sell it this afternoon. I have no worries about storage, transportation, fabrication or assay fees. It’s easy.

The risk of paper gold is that the gold is not really there when you want to sell it. With physical precious metals, in your possession, you know you’ve got it. You can touch it and see it. Selling it, of course, is more cumbersome, since you have to store it, transport it, insure it, and hope it doesn’t get stolen.

That’s the simple summary of your decision. But is there more to it than that? Is there a moral component to this decision? Let’s take a walk into story time with JDH, shall we?

Let’s say that you were a big government; we’ll call it USA, (but this is entirely hypothetical).

You have spent beyond your means for decades. That was fine, because to spend more, you only needed to print more money. But eventually the world began to realize that paper money had no real value, so the investors of the world gradually started replacing their paper dollars with hard assets. They started buying assets like precious metals, which can’t be printed.

As a result, the price of gold increased, from $300 in the year 2000, to over $1,600 today.

That’s a problem, because if everyone realizes that gold is going up because paper money is worthless, no-one will want paper money; everyone will want gold.

If no-one wants paper money, how will the government be able to print paper to keep spending beyond their means?

The government needs a way to keep the price of precious metals down, so that people don’t realize that paper money has no value. If gold keeps going up every year, it becomes a self-fulfilling prophecy, and more people will buy gold, which makes the price keep going up.

If people convert their dollars to gold, by buying gold, that makes the price of gold go up and the value of dollars go down. That’s bad, if you’re the government.

Governments need to be able to print dollars, but everyone wants gold, because it can’t be printed.

Or can it?

What the government really needs is a way to print gold.

Of course you can’t print gold, but what you could do is issue gold certificates. You start a big gold fund (let’s call it GLD, but again, this is just a hypothetical discussion), and you raise money, and use it to buy gold. In theory, you could issue as many certificates as you want, even if they aren’t backed by gold.

Cool, eh?

You tell everyone that their piece of paper is backed by gold, even if it isn’t. That way you can print as many pieces of paper as you want, and keep on spending. Sweet.

But it gets better. You don’t want people buying physical gold with their dollars, because that drives up the price of gold. Now people who think they want to invest in gold can buy gold pieces of paper, which diverts money from real gold to paper gold.

Brilliant.

If I invented this hypothetical thing called GLD, on my website I’d have a page that says “GLD is great; you can buy gold, without the hassle of having to store it, or insure it, or transport it; you get the best of both worlds; the security of physical, with the convenience of paper.”

So now, people who want gold, instead of buying gold mining shares, which are risky, and instead of buying physical metal, which is cumbersome, can buy GLD.

Of course this means that, relative to physical precious metals, precious metals mining shares will start to drop. Why invest in shares when you can invest in GLD paper?

So we have had the perverse result this year where gold is up 14%, but mining shares are down.

Of course there are risks with mining shares. If you operate in a place like Africa, there’s a chance the government will decide to raise taxes, or just take your mine.

If you multiply the number of ounces in GLD’s vaults by the price of gold, you get about: $64,820,248,017

That’s $64 billion dollars of the shiny stuff.

So that means there’s $64 billion of gold sitting in the vaults, right?

Yes, sort of.

Three problems:

First, the custodians of GLD – SPDR Gold Trust Shares are JP Morgan and HSBC. Yup, the same guys who have allegedly been manipulating the market for years now. Do you really want the alleged manipulators holding the combination to the safe? Can you really trust them not to do something un-toward?

Second, it does not appear that the physical metal is ensured. A competitor, CEF.A.TO – Central Fund of Canada, carries insurance on it’s gold. That makes sense. What if my vault gets hit by an asteroid, or crushed in an earthquake? Insurance seems like a prudent precaution to take.

Third, GLD leases out it’s gold. I’ll let you do your own research on that concept, since it’s very difficult to find any concrete information on that subject. (Post your comments below if you can add more to the discussion).

If there are lease arrangements in place, you have significant counter-party risk.

And that’s really the point. Precious metals are, ultimately, an insurance policy. If the dollar crashes, you want to have some of your wealth in something that won’t lose it’s value. I personally recommend holding tangible assets like a shovel, to use for gardening, and some land, to garden on. Gold and silver are another asset class; they aren’t as practical as a shovel, but they should help retain some of your wealth. If the world as we know it ends, do I want to have a fight with whomever I`ve leased my gold out to? Nope. I want it physically in my possession.

So, to conclude, if you are looking for ways to protect your future, I recommend:

1. Avoid debt, so you don`t owe anyone anything;
2. Have practical assets that you can use in an emergency (land, a shovel, some seeds, some food, a house, etc.)
3. Physical gold and silver to use as a medium of exchange, and to preserve wealth
4. And then, once you have all of the above, consider some paper assets, like mining shares, gold certificates, etc. They are easier to sell, but might not be there when you need them, so they aren`t the foundation of your wealth preservation plan. That`s why they are fourth on the list, not first.

When it comes to paper gold, I do own CEF.A.TO – Central Fund of Canada, and I don`t own GLD – SPDR Gold Trust Shares, for the reasons mentioned.

Of course the final decisions are up to you.

First, as I have done for the last three years, I am happy to give each of you the opportunity to make your predictions on where gold, and the Dow, will end 2012. Next Saturday, Christmas Eve, I’ll post the e-mail address where you can send your predictions, which will be due by January 2, 2012. More next week.

By the way, your predictions for 2010 were almost perfect. You can read review your 2011 predictions to see how you are doing; it would appear you were overly pessimistic on your predictions for the Dow (but with the volatility in the markets there’s lots of time left), and your gold prediction is looking remarkably accurate.

Second, as requested by a few of you, I have re-opened the ability to register as a member on the Buy High Sell Higher Forum. The Forum generates a fair amount of spam, posted mostly by new members who join, post a spam message (an advertisement of some sort) and then disappear, never to be seen again. So, to combat the spam, I simply de-activated the ability for new members to register. However, as requested, new member registration is active again, perhaps for a limited time, depending on how much spam I get hit with. I’ve tightened up the spam controls, so we’ll see how it goes.

You may also register and post comments below each blog post on this site.

Now, to the week that was.

Or, in this case, wasn’t.

The Dow was down, as were most other markets.

Gold got hammered. Gold traded at almost $1,720 on Monday, and almost touched $1,560 on Thursday, for a drop of over 9% in four days. And yes, with the close on Friday at $1,601, the 200 day moving average was broken for the first time since early 2009, almost three years ago. What does this imply?

It could be that the bull market in gold is over. All good things come to an end, and this may be it. It was a 10 year run, and now it’s time to sell and move to the safety of U.S. dollars, which is still the world’s reserve currency, simply because it’s the best of a bad lot.

But I doubt it.

I suspect that the Big Boyz are crashing the market to give themselves one more great opportunity to cover their shorts, which presumably happened this week.

I also suspect that in the stock market there was lots of tax loss selling going on, and why not? If you have losers, take the losses and redeploy your money into something else. If you own Gold Stock A, and it’s down, why not sell, take the loss, and put the money into Gold Stock B, which is selling at a bargain price? It makes sense.

I did not do any buying, or selling, this week. I don’t know if the sell off in gold is over, although I suspect that if it isn’t, it’s probably close.

So, as time permits, I’ll review the stink bid list and place some orders, and see what develops.

Beyond that, I haven’t a clue, so I’ll stop talking, until 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.

The Royal Canadian Mint, owned and operated by the government of Canada, is issuing a $250 million Initial Public Offering of Exchange Traded Receipts backed by it’s gold reserves. Here’s the deal:

Most securities traded on a stock exchange give you ownership of a company. I could start a company, raise money, and buy gold with that money. If you bought shares in my company, you would own the company.

This Royal Canadian Mint ETR is different, because the purchaser owns the actual gold, rather than shares in the entity that owns the gold. ETR holders (subject to some restrictions) will apparently be able to redeem their ETRs for physical gold products produced by the Mint, like gold bars or coins, or equivalent cash.

It would appear that on the closing date of the initial offering the net proceeds will be used to buy physical gold, to be stored at the Mint. Each ETR will have an issue price of $20 Canadian, and on the closing date they will calculate how much gold backs each ETR.

So, if gold is trading at $1,750 per ounce, and if the U.S. and Canadian dollars are trading at par, and if we ignore commissions and expenses, each ETR would be worth .011 ounces of gold. Or, stated another way, you could convert 87 units into one ounce of gold.

There will be an annual service fee of 0.35 per cent that will reduce the value of the ETRs, and presumably there will be fabrication and other charges if you want to convert your ETR’s into physical gold. (If you are looking for a job, they’re hiring).

So, with those caveats, what we now have, in effect, a quasi-government currency backed 100% by physical gold. Think of the implications:

If I own a business selling something (let’s say trucks), instead of selling my trucks for dollars, I could sell them for Royal Canadian Mint Exchange Traded Receipts. These Mint ETRs, or METRs, could become a unit of currency. So instead of selling the truck for $50,000, I could sell it for 2,500 METRs.

Cool, eh?

I like the name METRs, too. In Canada we use the metric system, and our unit of measure, instead of feet and yards, is the meter, so it’s a word that already means “stable unit of measurement” for us, so it would be easy to adopt.

For investment purposes, I would no longer think in terms of dollars. I could invest my savings in METRs, and since they are traded on the TSX I can hold them in my brokerage account, or RRSP, or RESP, or TFSA, or wherever I want.

Of course there are some problems with METRs as a unit of currency.

First, the METRs are only available to Canadians, so it’s unlikely they will be adopted world-wide.

Second, the initial offering is for $250 million, which is a tiny amount, and obviously to small to serve as the basis for a currency, but it’s a start.

How do METRs compare to other physical trusts?

Of course METRs are not the first physical trusts holding precious metals. For example, the Sprott Physical Gold Trust holds nothing but physical bullion (and a small amount of cash), and you can convert your units into physical gold. In fact, in the first six months of 2011, a total of 44,000 units were redeemed for one bar of gold bullion. You can read about it in their quarterly report.

And where does Sprott store their physical bars?

At the Royal Canadian Mint!

And what management fee does Sprott charge? Page 3 of their quarterly report says it’s .35%

So what’s the difference between Sprott’s product and the METRs?

Not much, obviously. They both invest in physical metal only, stored at the Royal Canadian Mint in Ottawa, and they both charge a .35% management fee. There are three obvious differences:

First, Sprott’s funds already exist, and are widely traded.

Second, Sprott’s physical gold trust has a net asset value of over $2,156 million, which is almost nine times larger than the proposed initial value of $250 million for the METRs.

Third, in addition to gold, with Sprott you can also buy PHS.U.TO – Sprott Physical Silver Trust and get silver. The Sprott Physical Silver Trust, which I own, has a net asset value of $763 million, so even it is three times larger than the proposed METRs.

So could Sprott’s physical trusts become a unit of currency?

Perhaps, except a unit of currency is generally issued by the government. Even though Sprott’s gold and silver are stored at the government, and they charge the same expense ratios as the government, Sprott isn’t the government.

As an investor I obviously like Sprott’s track record more than I like the governments, but he’s not the government, which makes it less likely that Sprott units will become a unit of currency.

Here’s my point: I view METRs as the “thin edge of the wedge”. This is the first time a government in North America (or perhaps the world for all I know) since the end of the gold standard has issued pieces of paper that can be traded for actual gold. That, be definition, is a gold standard.

And that’s good news.

I hope that investors will buy METRs, and Sprott’s products, and other comparable products, because as they grow in popularity we inch every closer to a true gold standard.

We don’t need the government to back our dollars with gold. We just need some type of paper to be backed by gold an viola, we have a gold standard.

Thanks for reading, all comments welcome, either below or on the Buy High Sell Higher Forum, and see you next week.