Gold, Cash, and The Plan From Here

by JDH on April 23, 2011

Happy Easter. With only a few days left until the Royal Wedding, I know that you will all be busy buying your new clothes and organizing your early morning viewing party with all of your friends, so let’s get to it.

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:

Stock 1st sale 2nd sale 3rd sale 4th sale
Sale Percentage:
20%
20%
20%
20%
AEM.TO – Agnico-Eagle Mines Ltd.
$63.50
$64
$64.50
$65
CMK.TO – Cline Mining Corporation
$3.75
$4
$4.25
$4.75
FR.TO – First Majestic Silver Corp.
$23
$24
$25
$26
G.TO – Goldcorp Inc.
$53
$54
$55
$56
K.TO – Kinross Gold Corp.
$15.50
$16
$16.50
$17
SVM.TO – Silvercorp Metals Inc.
$14
$14.50
$15
$15.50
SLW.TO – Silver Wheaton Corp.
$42
$43
$44
$45

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.