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.

Last week everything looked great, with the Dow holding about the 50 day moving average. Wednesday’s big drop put us way below that level, and Friday’s close at 12,104 puts us right back to the same level we were at on April 18. What gives?

If you believe the markets are manipulated, I assume you therefore believe that the Big Boyz are crapping the market to prove the need for QE3. “Look”, they will say, “when QE2 was going everything was great, but now that it’s about to end the market is crashing, so we need to do QE3, stat!”

I would assume that we will see a short term bounce from here, because that’s how it works, but beyond that, who knows.

While the Dow drops, gold remains strong, and is quietly making it’s way to new highs.

Clearly someone is buying (presumably investors who are taking their money out of the Dow, and out of US dollars, and putting it into something more valuable).

As for silver, it’s not looking as good.

The question for silver is this: do we retest the lows and drop below $34, or do we break out of this consolidation range by going above $38? I don’t know, but when one of those two things happens we will have a much better idea of the future.

Gold and silver stocks appear to be in base building formations, so those of you with an appetite for risk could consider increasing your positions.

Me? I’m on the sidelines, watching. My gut tells me that the summer is a weak time, so a further retest of the lows is likely. Another 2008 style crash would present fantastic buying opportunities, so for now I will sit on the sidelines and wait for such an opportunity.

I may miss it, but I can sleep at night, and for now, that’s good enough for me.

Thanks for reading, and see you next week.

Everything looks great. As if by magic, the Dow heads into the long holiday weekend just above the 50 day moving average. The RSI is turning up, and the market is making a series of higher highs (the blue horizontal lines) and higher lows (the red horizontal lines). Presumably we will see 13,000 on the Dow in June, and the bullsh*t market will continue. All is good.

Well, all is not good. The U.S. dollar is continues to fall, and the Big Boyz were not able to hold it above it’s 50 day moving average, but it’s not easy to stop a snowball rolling down hill.

Interestingly, while the Dow looks good, so does gold.

Notice the “crash” that occurred from the top at almost $1,580, intra day, at the beginning of the month, to the bottom of $1,460, intra-day, a week later. That drop of almost 8% looked bad, at the time. However, the 50 day moving average was never violated. In other words, the Big Boyz, having their fun with the paper market, were not able to suppress the market enough to even take out the 50 day moving average. In fact that low held, with the market not dropping as far around May 17, and we’ve not looked back.

Longer term, the bull market is obviously still intact:

The 200 day moving average has held for almost three years; the 50 day moving average has provided great support, and in fact every time the price has dropped to that level it’s indicated a buying opportunity.

What about silver? The picture is somewhat more volatile:

The 50 day moving average was broken, as was the longer term uptrend line, but we are back above the uptrend line, and it’s quite possible that a week or two from now we will be trading on the positive side of the 50 day moving average. Market manipulation only gets you so far; at some point the fundamentals re-assert themselves, and that’s what I believe we are seeing.

Looking at individual stocks, SLW.TO – Silver Wheaton Corp. has an interesting chart:

Obviously the 28, 30 and 32 levels are support levels, despite the recent “crash” from over $44 to under $32. So what’s next?

I don’t know.

We know that the Boys couldn’t get gold under it’s 50 day moving average, but they may well try again.

I assume one final retest of the lows is in order, so my plan is to sit and watch for another week or three yet. If we get one final plunge, that will probably be the time to jump back all in.

Time will tell; enjoy your long weekend, and see you next week.

No?

Me neither. Couldn’t care less. Kate and Bill seem like nice kids, and I wish them well, but I’m not going to disrupt my schedule to watch them get married.

What will disrupt my schedule is my head scratching over this question:

Why are gold and silver making new highs, but gold and silver stocks aren’t?

To the charts, batman:

Silver, with a 3% increase on Thursday, now has a Relative Strength Index reading of 88.38, well into oversold territory. Of course, as the chart shows, back in September/October the RSI remained oversold for about six weeks before easing off, temporarily. We are only three weeks into this current run, so we could see another two or three weeks at this level before the inevitable pullback occurs.

As I said last week, I believe it’s time to start raising cash, in advance of the inevitable pullback, but I’m not in a hurry. My sell orders are in, but on my silver stocks they are above market, so I’ll get filled on blow off up days, but I’m not panicking and selling today.

Gold looks less oversold:

Gold had the same overbought condition for six weeks in September/October, but has only just creeped into the oversold category in the last few days on this run. That may mean that gold will run a bit longer than silver before pulling back.

Why the divergence between gold and silver? I have no idea, but one could speculate that there is more short covering going on in silver, which is driving the price higher. Another explanation may be that, in the real world, real people are allocating more of their money to silver, as compared to gold.

Gold and Silver in the Real World

Speaking of the real world, I had a meeting in Toronto this week, so I dropped by the precious metals desk at Scotiabank in Toronto, the largest precious metals dealer in Canada. I stood and watched. There were buyers, but not a hoard of them. We are certainly not at the panic buying stage yet.

What fascinated me was that the buyers were “average Joe’s”. I saw one guy who could be described as a “business man”. He appeared to buy five coins; not a huge purchase. The other buyers were the kind of people you see on the street every day. A saw a middle aged Asian woman purchase 5 one ounce gold wafers. I saw another young man purchase what appeared to be a 10 ounce gold bar.

As for silver, they were out of certain sizes, primarily smaller bars, but they did have one kilo bars. I’m not a big fan of schlepping around kilo bars, so I didn’t buy.

I did, however, hear one very funny line. One customer took delivery of a silver bar and the clerk, who apparently had to go down to the vault in the basement to get it, told the customer that with the shortage of silver, silver is now “good as gold.”

Anecdotally it appears that other dealers are having similar supply issues, so if you want immediate delivery of physical bullion or coins, you may be out of luck.

Now, to the question of the day: If gold and silver are making new highs, why aren’t gold and silver stocks making new highs?

My comments are somewhat long-winded, so I’ve included them as a separate post, Gold Bullion Up – Gold Stocks Flat – Why The Divergence? I’ve included lots of charts, so enjoy, and then agree or disagree.

My conclusion is that in the short term there are many reasons why the price of gold may increase, while the price of gold mining shares remains flat, or decreases, or increases at a slower rate than gold.

However, these anomalies cannot exist forever. At some point investors take advantage of the arbitrage opportunity, and shift from bullion to shares. Also, if share prices get cheap enough, there will be a wave of mergers and consolidations in the mining industry, as inexpensive companies are snapped up for cents on the dollar.

How am I playing it? In the long term, I’m all in. I strongly believe that when we look back six, or twelve or twenty months from now, we will marvel at the bargains available in bullion and gold and silver mining shares.

However, in the short term, anything can happen. A consolidation, or a big smack down by the Big Boys could happen at any time. The cartel is still short, so an engineered sell off to help them cover their short positions would not be a surprise.

So, over the next few weeks, I will continue to sell into strength. Here’s the table I showed last week, with my game plan:

Obviously this week some of my initial sell targets were reached, so on strength I sold, and increased my cash position this week. My sell orders at these levels are already placed for next week.

I have made my decisions. I will not be influenced by day to day market fluctuations. On strong days my sell orders will be executed, with no need for further involvement from me.

By early in May I expect to be well over 50% in cash, while maintaining a position in “bullion proxies” like PHS.U.TO – Sprott Physical Silver Trust and CEF.A.TO – Central Fund of Canada. These are physical metal holdings, not shares in companies. They are a core holding in the portfolio, and I don’t plan to trade them; I plan to let them sit as long term holds. I have some other junior shares that I will probably hold as well.

That’s the plan; we shall see how it unfolds over the coming weeks.

Thanks for reading, Happy Easter, and see you next week.

First, nice run in gold and silver this week, eh? By “nice run” I mean “new all time highs” in both metals. (Yes, I know, silver is not at an all time nominal dollar high, and neither metal is anywhere near an all time inflation adjusted high, but still, if you look back on the last 20 years, these are historically high prices).

Here’s the silver picture (click to enlarge):

$42.86 looks pretty good, eh? Of course the RSI is at 81.66, so it’s solidly into oversold territory, so a pullback to the uptrend line around $40, or down to the 50 day moving average at $35.36 would not be surprising. In fact, it would probably be healthy.

The gold picture looks even better:

Gold’s break out (the vertical brown line) really only happened in the last two weeks, and it is nowhere near as oversold as silver is. So what does all this mean?

My guess is that silver’s massive upward ride is due for a pause, and gold’s somewhat laggardly performance is due for a pick up. Silver has outperformed gold for many months, but as silver gets oversold, the time will come for a breather. That time may be now. So, for that reason, I believe it’s time to start taking profits.

In addition, let’s not forget about the historical Sell in May and Go Away philosophy, that works more often than not. As we approach the end of April, moving to cash is not a bad idea. With that said, here’s my plan:

I am placing numerous sell orders, at various levels. As the prices increase, I will be selling. Here’s the chart:

So, for example, for AEM.TO – Agnico-Eagle Mines Ltd., which closed on Friday at $62.72, if I own 1,000 shares, I will put in sell orders for 200 shares at $63.50, 200 shares at $64, 200 shares at $64.50, and 200 shares at $65. As the price increases, I will sell more shares. If the price doesn’t increase, I hold. Last Monday Agnico-Eagle did trade over $63.60, so if I had had these orders in last week, I would have sold 20% of my holdings.

Of course it’s not possible to sell exactly 20% of your holdings, unless you hold a nice round number of shares. When I place these orders I will play with the numbers, so the first tranche may only be 15%, and the final tranche may be larger.

The point is that my goal, over the next few weeks, is to liquidate 20% x 4 or 80% of my holdings.

Yes, I can hear you all asking to yourself, “JDH, what are you thinking? You’ve been spouting off for weeks how gold and silver will be going up, and now that they are you are selling?”

Yup.

Why? Because nothing goes up in a straight line. I have profits, and I want to take them.

For example, my cost base on my shares in CMK.TO – Cline Mining Corporation is $2.16 per share. Cline closed on Friday at $3.64. There is more upside, but I’m sitting on a profit, and I would like to convert some of that profit to cash, which I can redeploy if there is a summer slide.

Note that I am not selling everything. I will sell up to 80% of my holdings, but only if I get the price I want. Even if I do get the price I want, I will still have 20% of my shares as a long term position. If I don’t get the price I want, I hold.

Also note the absence of two stocks that are NOT on the above list: PHS.U.TO – Sprott Physical Silver Trust and CEF.A.TO – Central Fund of Canada. These are physical metal holdings, not shares in companies. They are a core holding in the portfolio, and I don’t plan to trade them; I plan to let them sit as long term holds. I have some other junior shares that I will probably hold as well.

So, even if prices take off in the coming weeks, I will not get down to 80% cash; my goal is somewhere in the 50% to 60% cash range going in to the summer, with the hopes that I can redeploy the cash if there is a correction. If there isn’t a correction, I’m sitting on cash, and profits, which is a safe approach.

That’s the plan; we shall see how it unfolds over the coming weeks.

NOTE: If you want some “food for thought”, be sure to read the Martin Armstrong discussion over on the Buy High Sell Higher Forum.

Thanks for reading, and see you next week.

(And what I said in Silver – Why It’s Better Than Gold is also correct, if I do say so myself).

This week we had the pleasure of viewing a new high in gold, and in silver. Beautiful.

Speaking of silver, over on the Buy High Sell Higher Forum MetalMeister asked the question: when will we get $50 silver? He’s guessing Memorial Day. That would be great, but that might be a bit quick; a pullback prior to that would probably be in order. Of course, if you just take the chart and draw a line, the answer is in fact somewhere around the 4th of July (click chart to enlarge):

So what do you do?

At the moment, you hold. You wait. You ride the trend. On big up days taking some profits probably isn’t a bad idea. The bigger question, of course, is when do stop holding and start selling?

To answer that question, I refer you to an article on Gold Seasonals to Flex Muscle in Coming Weeks written by Andrew Hamilton. I have no idea who he is, but his reasoning makes sense. Essentially, he’s saying that at the moment, gold is not over-bought, so it should keep rising.

I agree.

Of greater interest are his comments on gold seasonality. He accurately deduces that gold rises in the September through May period, and then consolidates in May, June and July. Why? Primarily because the Indian wedding season is the Fall, Christmas in the west is in winter, and Asian festivals carry through spring. There’s not much happening in summer, so gold goes sideways.

Of course, as Mr. Hamilton correctly points out, seasonality is just a guide. A massive shock to the system can change that. A major terrorist event, or stock market crash, in the summer would impact the price of gold, regardless of seasonalities.

So here’s the plan:

Gold and silver had a great week. They both now have high Relative Strength Index levels. For example, here’s silver:

The RSI for silver at 82.27 is very high, but as you can see, from the red circled area, it’s been this high before, and it can stay at these lofty levels for well over a month, so now is probably not the time to sell. The end of April, or into May, may be the time.

Gold is not as over-extended:

Gold had the same period of exuberance back in October, 2010, just like silver, but gold’s RSI is “only” up to 71.2, not yet at the 80+ level it achieved for weeks back in October. Gold is high, but that doesn’t mean it’s going to crash next week.

As for the stocks themselves, SLW.TO – Silver Wheaton Corp. made a new 52 week high on Friday. If that was the “break out”, we could see close to $50 before this run is over in a few weeks.

Of course with silver over $40, that wasn’t the only stock making new highs. Other picks, that I discussed last week, also made new highs, including:

PHS.U.TO – Sprott Physical Silver Trust

SSO.TO – Silver Standard Resources, Inc.

SVM.TO – Silvercorp Metals Inc.

FVI.TO – Fortuna Silver Mines Inc.

So, in short, I’m happy.

I’ll let things ride this week, and perhaps next, but as we approach the end of April I think I will sell 10% to 20% of my holdings each week, so that by the end of way I’m down to 50% invested. I will then have fulfilled the instructions to Sell in May and Go Away, and I will have cash to redeploy in the late summer.

Of course, my plans could change.

That’s my report for the week. Thanks for reading; feel free to post your thoughts on the Buy High Sell Higher Forum, and see you next week.

- Patience is a high virtue. (Chaucer, The Canterbury Tales, often followed by the come back “but virtue can hurt you.”)

- Maxima enim..patientia virtus (Latin, Patience is the greatest virtue)

- Patience est une grant vertu. (French, Patience is a great value)

In case you missed the theme after reading the title and the four quotes above, our topic today, class, is patience is a virtue. Allow me to elaborate.

But first, one more quote, if I may:

- Every object in a state of uniform motion tends to remain in that state of motion unless an external force is applied to it. (Newton’s First Law of Motion). Or, more simply stated, an object in motion tends to stay in motion.

Huh? What is this, a blog about the stock market, or a discussion of patience, virtue, Latin, and French? What’s next, a discussion of Galileo’s concept of inertia? (Pretty much the same as Newton’s First Law of Motion, but Galileo did get there first, but I digress).

The answer is yes, this is about all of those things. Allow me to demonstrate with a picture of an object in motion (click to enlarge):

This is a seven year chart of SLW.TO – Silver Wheaton Corp. If you had paid under $2.50 in 2005, and had showed patience, you would now own a stock worth almost $43. Of course the value in the summer of 2005 had only increased slightly to the value at the bottom of the crash in 2008. That’s a lot of time for only a little gain. But again, if you showed patience, you would have been amply rewarded.

Here’s the one year chart of SLW.TO – Silver Wheaton Corp. (click on all charts to enlarge them):

What I find interesting about this chart is the number of “corrections” or “pullbacks” that have occurred. I can count at least five minor corrections in the last year, and one major one (from early December to late January, that dropped the price by more than 30%).

But again, if you showed patience, what was worth $17 a year ago is worth $43 today. That’s a 150% gain. Not bad for showing patience. Of course if you had sold at the peaks and repurchased at the bottom you could have made a lot more than 300%, but that’s not easy. Case in point; here’s a six month chart of SLW.TO – Silver Wheaton Corp.:

I have circled the six obvious red candlesticks we have observed in the last six months. The candlestick is red, or “filled”, because the closing price was less than the opening price. Long filled candlesticks show extreme selling pressure, because the closing price is a lot lower than the opening price.

As you can see, on Thursday we had a long red candlestick, indicating that perhaps we had reached a near term top, and the bears were in control. I therefore decided that on Friday morning I would start selling my shares, or at least do a covered write to protect my gains.

And yet, when I checked the market mid morning on Friday, I saw that SLW.TO – Silver Wheaton Corp. and most of the other silver stocks were up. I therefore decided to hold off on selling for the time being.

Patience, grasshopper.

I’m not a day trader, or even a “week trader” or “month trader”. I know from past experience that I can’t pick the tops and bottoms. Even if I do sell at a top, it’s highly unlikely that I will buy back in at the bottom. I’ll either miss it, or forget, and the stock will recover to higher than what I sold it for, so when I buy back in I’m no further ahead.

So even though we could easily drop from here, how far could we drop in a bull market? Perhaps back to the 50 day moving average, currently just under $37? That’s a $6 drop, but even a drop of that magnitude would only put us back to where we were in mid-February. In my mind that would simply be another buying opportunity.

My point is this: if the long term trend is up, showing patience and letting the trend carry you along is the correct strategy.

Don’t believe me? Here’s the last eight years of action in silver:

The chart goes from well under $5 to over $37 today. That’s a nice long term trend. Obviously corrections have happened over days and weeks and months, but since the bottom of the crash in 2008 silver is up almost four times. That’s a powerful long term trend.

So, unless you believe that the trend is over, show patience, and hold.

I have many more thoughts, but time is our enemy, so for now I’ll stop, but I reserve the right to make some additional posts during the week.

That’s for reading, and see you next week (or sooner).

The S&P 500 Index, on the week, was up a grand total of one point. Not one percent. One point. That’s about as flat as it gets. So let’s take a longer term perspective (say the last 20 years):

You could argue that the market ran from 306 up to 1,534, before pulling back to the 61.8% Fibonacci retracement level. The market then returned to that peak, corrected, and then resumed it’s upward leg.

If you believe that last paragraph, that means that we are still in the same bull market we were in from 1991 to 2000. In other words the market ran up, and then consolidated for ten years, before resuming it’s upward run. If you believe that, then you are expecting the market to make new highs at some point in the next year, or two, or three. The long consolidation period has ended, and the upward momentum has resumed.

In other words, all is good, and we have nothing to worry about.

Of course the beauty of this is you can make the charts look like whatever you want. Here’s another example.

In this chart we have the standard Elliott Wave three up two down formation. As you can see, we just finished the final up-leg, so now we can expect the market to correct back down to 1,200 (the peak of wave 3), or perhaps down to 1,100 (the Fibonacci 38.2% level), or 1,000 (the 50% level), or 934 (the 61.8% level).

Of course, as we know, Ellilott Wave theory says that Wave 3 cannot be the shortest up wave. So far, so good. But, if the market continues on up, and hits around 1,422, then that means that Wave 5 is bigger that Wave 3, which means it wasn’t Wave 5, so the count is wrong, so we have to start over.

So the market might go up, or it might go down. We might see new highs, or we might see 934. It will be one or the other. Or something else. You never know.

My opinion? You can make the chart predict whatever you want it to predict. Obviously at the moment the market is going up, but what it will do tomorrow is anyone’s guess.

Of course the Labor Market numbers (or Labour Market, as we say in Canada) aren’t great. On the surface it looks good, because in February 192,000 jobs were created in the U.S. But as Rick Santelli, and others, have reported, the real story is that the labor force is shrinking. The labor force participation rate is down to 64.2%.

You can read the labor department charts here, and they show that the civilian population increased by 147,000 people, but the labor force (people looking for work, or working) only increased by 60,000. How is that possible? Yes, there are many possible explanations, but it’s also possible that the books are being cooked. Without these wacky labor force adjustments, the unemployment rate would be much higher, which would make the economy look much worse, and the stock market may not be on such a tear.

Oh well, for now the trend is up, so let’s go with it.

That’s the market; let’s close with a quick not on one individual stock that I have liked for a long time: SLW.TO – Silver Wheaton Corp., which this week declared it’s inaugural dividend. The dividend is small, and really somewhat meaningless, but it is evidence that Silver Wheaton has graduated to the big time.

The breakout in early 2010 has led to a double since then, which is great news, and on Friday Silver Wheaton made a new all time high, which is also good news. The RSI is looking toppy, so I would expect a short pullback at some point in the next few weeks, at which point I’ll buy more. For now, it looks like an obvious long term hold.

As for gold, to quote Peter Brimelow, what exactly is gold telling us? All indications are that since it was making new highs this week, it also wants to move higher.

So, to include, in the short term the market will either go up or down, depending on which Elliott Wave count you want to believe, but in the medium to long term there’s little doubt that precious metal shares are on the upswing, so that’s where we want to be.

Thanks for reading, and thanks for your comments over on the Buy High Sell Higher Forum. Your comments on why gold stocks have lagged the price of the metal were quite illuminating, so thanks to all for your contributions. For the record, yes, I agree, the ETFs and hedge funds have put a damper on share prices, but that damper can’t last forever.

Thanks, and see you next week.

Here’s a chart of gold (for larger versions of all charts, click on them):

It would appear that gold consolidated between October and the end of January, and has spent most of the month of February on the rise.

Here’s a chart of a senior gold stock, AEM.TO – Agnico-Eagle Mines Ltd.:

Here’s the same chart, but as a point & figure or P&F chart:

Obviously the news is not good, with a double bottom breakdown, and a downside price target of $63.

So why is it that gold seems to be recovering, but gold stocks aren’t? Agnico-Eagle isn’t the only one; here’s the chart of K.TO – Kinross Gold Corp.:

And yet, other charts look fine, like this one of G.TO – Goldcorp Inc.:

Why the difference? I have no idea.

Here’s the chart of silver:

Looks pretty, good, eh? New highs, and lots of strength. Not surprisingly, the silver stocks are looking good as well, like SLW.TO – Silver Wheaton Corp.:

So what does all of this mean?

Again, I have no idea, but if you want a guess, it looks like silver is looking a lot better than gold at the moment.  However, here’s another perspective on gold:

As a point and figure chart, gold has ended it’s bearish correction, and now has a bullish upside target of $1,620.

So there you have it.  As a non-expert, my expert analysis is quite simple: gold and silver will either go up or down, as will the underlying stocks.

So how will I play it?

I will ride the stocks that for whatever unknown reason are doing well, like CEF.A.TO – Central Fund of Canada, which has just had a triple top breakout:

or if you prefer a more conventional view of the chart, making the triple top breakout more obvious:

Stocks like Central Fund I hold, or perhaps even increase my holdings.  For the others that are looking weak, I’m not giving up; I’ll simply do covered writing against them to give me some downside protection.

For example, as I tweeted this week, I did covered writes on G.TO – Goldcorp Inc. and SLW.TO – Silver Wheaton Corp. this week, to lock in some gains and to protect against the downside.

Yes, I know, Silver Wheaton has been strong, and will go higher, but after the large run I covered half of my holdings with March options, which expire in about three weeks.  Unless Silver Wheaton goes on a huge run, I will bank some or all of the premiums.  I put in an order to buy back the options I sold at half the price I sold them for, so on a day of weakness I cash out.

That’s the plan, anyway.

So, my question for you: why are some gold stocks doing well, and others doing poorly?  Is it a fluke, and therefore an arbitrage opportunity (ie. buy the weak ones, since they have the best chance to catch up, and sell the strong ones, since they’ve already had their run), or should the weak ones be avoided because they are, well, weak?

I’ll let you decide, either by posting comments here, or over on the Buy High Sell Higher Forum.

Thanks for reading; see you next week.

The obvious reason is that when you go to Google and do a search for “The Dines Letter” this blog ranks second only to Mr. Dines’ website itself.

The almost-as-obvious reason is that James Dines is a polarizing figure. He has a large number of supporters who believe he is the greatest thing since sliced bread, and there are also a large number of people who don’t think highly of him at all.

As for me, I’m somewhere in the middle.

On the positive side, I do believe Mr. Dines is adept at identifying new trends. He constantly pats himself on the back for being the “Original Gold Bug” (he even wrote a book about it), and the Original Silver, Internet, Uranium and Rare Earth Bug. And yes, I agree, he was early to the party in each of those “manias”, and he no doubt made his subscribers lots of money.

I don’t want to quibble, but Mr. Dines was not the first advisor to recommend gold, or anything else. There are lots of other prognosticators who share similar views. However, it is true, Mr. Dines does have an impressive track record of identifying trends early.

My complaint is not with his handling of the start of a trend; my objections are with how he handles the end of a trend. You only make a profit when you sell, and “sell” recommendations are few and far between in The Dines Letter. Long-time readers of this blog will remember my epic evisceration of Mr. Dines on this topic in my post back on July 26, 2008 (and for the record, all posts are forever available in the archives):

I can’t pass up the opportunity to quote James Dines from yesterday’s The Dines Letter. He spends most of the letter explaining that markets go up and down, so even if markets go down for a few years that’s no reason to sell. Here’s the classic quote:

“Our recommendation of PNP.TO – Pinetree Capital Ltd. at 0.795 cents (Cdn) subsequently rose 1,931% to $16.15 (Cdn) nearly two-thousand percent in only 17 months, such that a $10,000 investment would have risen to $203,145.”

Unfortunately he didn’t finish the thought, which should have gone something like:

“Ever since that peak I have had a Buy recommendation on Pinetree. I even moved it from my speculative list to my “good grade, moderate risk” portfolio. As of today it is trading at $1.82 (Cdn), so if you had followed my advice and bought it at $16.15, you would have lost 89%, such that an investment of $200,000 at that time would be worth $22,538 today.”

Even better, there’s a letter to the editor in this edition from some guy who spends the first 20 lines of his letter praising Mr. Dines, but then asks why one would continue to hold a stock that adds no value to the companies it invests in (Pinetree is basically just a venture capital firm), has no technical indicators to recommend buying, and has no truly great assets.

Dines then spends have a page explaining that yes, some companies go down, but if their investments start paying off, it will go up. He ends with the classic “You have lost nothing if you own the stock and the price fluctuates.”

Yeah, I guess that’s true. But if you had sold a few dollars ago, the money could have been redeployed and earning you money. It’s called opportunity cost, and it is real.

Oh well, I haven’t owned Pinetree for a long time, so it’s all academic to me at this point.

It’s not a profit until you sell, and if Dines had recommended selling after a 2,000% rise he would be hailed as a genius. Holding a stock all the way back down isn’t that impressive.

My thoughts back in 2008 are the same as my thoughts today. Buying PNP.TO – Pinetree Capital Ltd. around 80 cents in November, 2005 was a brilliant recommendation. As the chart shows, Pinetree had broken out of a consolidation phase, and was on the move:

Pinetree continued to run, all the way to around $16 by the start of 2007, but that was it, and from there it was all downhill, to the bottom, two years later, below where Mr. Dines had recommended it. Knowing when to buy is important; knowing when to sell is also critical.

Now, in fairness, Mr. Dines does state repeatedly that you have to decide for yourself when to sell. He recommends taking a portion of your profits at pre-determined limits. For example, you may decide that with each 10% increase in the share price, you will sell 10% of your shares to lock in your profit. That’s fine, and that’s a prudent approach. However, that also means that you are giving up some of the profit, so it’s not fair to look back and say “I made 2,000%” if most or all of the shares were sold long before that time.

So what does he say of interest in his 2011 Annual Forecast Issue? A lot of the same stuff he has said in previous issues. Not surprisingly he likes gold, silver, uranium and rare earths. He also spends some time on “big picture” trends, like this one:

As we study the situation, our Flashforward is clear that there is a new form of “capitalism” ahead. In “The Coming New Social Order” we envision, when some nations come to their senses, mines will be sold but owners will keep an interest in subsequent production. In other words, sell a silver mine, but a percentage of future production payable in silver from that mine would be part of the price paid.

Hey, Jim, have you ever heard of SLW.TO – Silver Wheaton Corp.? Here’s a quote, from the Silver Wheaton website:

Established in 2004, Silver Wheaton has quickly positioned itself as the largest metals streaming company in the world. The company currently has fourteen silver purchase agreements and two precious metals agreements where, in exchange for an upfront payment, it has the right to purchase all or a portion of the silver production, at a low fixed cost, from high-quality mines located in politically stable regions.

Forecast 2010 production, based upon the company’s current agreements, is 22.0 million ounces of silver and 28,000 ounces of gold, for total production of 23.5 million silver equivalent ounces. By 2013, annual production is anticipated to increase significantly to approximately 40 million silver equivalent ounces. No ongoing capital expenditures are required to generate this growth and Silver Wheaton does not hedge its silver production.

So, in other words, Silver Wheaton invests in mines and receives payment, in silver, out of future production. So, Mr. Dines is predicting a brave new world that actually started in 2004. Nothing like getting out in front of the parade, eh?

Does this mean that Silver Wheaton will become a Dines Letter recommendation at some point in the future? Stay tuned…..

Another section in the 2011 Annual Forecast Letter is a “Manifesto of What was Learned From Uranium’s ’08 Crash”. His main point is that you have to ride out the highs and the lows, because no-one ever sells at the top, or buys at the bottom.

That’s true, but here’s a caveat that Mr. Dines needs to explain to his readers more explicitly: the time from the top to the bottom back up to the top again can be many, many years. You can see the Pintetree example above, or you can look at a stock like PDN.TO – Paladin Resources Limited .

From a low of below $1 in mid 2005, Paladin hit $10 in mid 2007. That was a great win. But, if you kept an “iron hand on the tiller”, and didn’t sell, you watched in drop all the way back to the $1.50 range in the crash of October 2008. Yes, it’s true, Paladin is now half of the way back, closing at $5.33 on Friday, but if you had bought at the peak three years ago you have still lost half of your money.

And that, in summary, is my main “beef” with Mr. Dines. He is great at identifying trends, and he is great at buying low, but he won’t tell you when to sell. With him, you must assume a stock will stay on his lists virtually forever. Perhaps I’m exaggerating, but of the 48 stocks currently on his recommended lists, 31 have been held since before the October 2008 crash. If you take out five of his Rare Earth picks from 2009 and 2010, the list is 31 out of 43 stocks, or 72%.

I guess if 72% of his picks are multi-year holds, there’s no need to read The Dines Letter every three weeks, and there is no need to subscribe to his Interim Warning Bulletin, because nothing much will change. And you know what? That’s fine.

The goal of any investment advisor is to make money for his clients. Over the years Mr. Dines has made a lot of money for his subscribers. Like most advisors he missed the 2008 crash, and that cost his subscribers a lot of money, but that’s the way it goes, unfortunately. No-one is right all the time, or even close to all of the time.

If you want to follow Mr. Dines’s advice, my advice to you is this:

First, read his letters, and understand the “big picture” he is painting. He is good at spotting big trends. Your job is to decide if you agree with his assessment of the trend.

Second, ignore all of the hyperbole and self-glossing he does. He has a big ego (as do most of us); just ignore the ego part.

Third, when you buy a stock, pick your sell points. Most investor’s goal is to make as much money as possible. That’s the wrong goal. The goal should be to get to a risk free position as soon as possible. So, if you “get lucky” and a stock doubles, and if you think the stock still has room to grow, sell half of your position and take your original investment off the table. You then have no risk, and still get to share in the upside. Each time it doubles, sell another half of your position. Then, when the inevitable crash happens, you are playing with house money, so the loss is not as damaging.

I’ll leave the comments section on this post open for you to comment, and of course you can comment on the Dines section on the Buy High Sell Higher Forum as well.

The Week Ahead

I’ve said enough for today, although I could write a few thousand more words on the correction we are enduring in the precious metals markets at the moment. I believe it’s temporary, so I’ve been buying this week. Apparently punter, over on the Forum, agrees with that approach:

We should see the super cycle re-issue a bellow in the new year. I’m loading up on every metal and mining stock there is and strapping a rocket to my ass because I see the Chinese coming down the street with a blowtorch to light my ass on fire.

Probably not the words I would have used, but the metaphor is apt; get ready for a rocket ride!

Thanks for reading, and see you next week.