Gold Stock Bull

It is so refreshing to hear someone speaking the plain truth about the trouble with inflationary policies, artificially low interest rates, federal reserve bailouts and the confiscation of wealth via devaluing the dollar. If you aren’t aware of Ron Paul, he is the only Presidential candidate calling for a return to the gold standard, not to mention abolishing the Fed, the IRS and U.S. policing of the world. He recently set a record by raising $4.2 million dollars in one day. His message is extremely popular and his support has been growing exponentially. Ron Paul to Bernanke: “How in the world can we expect to solve the problems of inflation (increase in the supply of money) with more inflation?”

The only thing the Fed has ever done to solve these problems is to ease. And we fully expect the Fed to keep trying to fight inflation with more inflation. The “stuck between and rock and hard place” analogy is incredibly apt, but all signs point to increased inflation, further weakness in the dollar and much higher prices for gold, silver and energy.

But that being said, I took some profits off the table on Friday and expect to see a mini-rally in the dollar and some weakness in gold over the next few weeks. This will most likely be a much-needed breather and consolidation in order to form a base for the next big move, but we could see a small correction taking gold back to $800 next week. As many readers know, my strategy is to maintain a core position in precious metals and energy stocks and rarely touch that position. It represents over half of my portfolio and will take the punches and keep riding up over time. The remainder of my money is allocated to more speculative trading strategy, investing is smaller companies and attempting to time the market and add to positions on dips. I think we will see one of those dips in the next week or two, so it might be worthwhile to have some powder dry. Consequently, new traders looking to establish positions will likely find a better entry point in the next few weeks. But I don’t expect the consolidation/correction to last long and would not be surprised to see gold above $900 and perhaps pushing towards $1,000 by the end of the year.

Outside of gold and energy, we recently reduced our exposure to emerging market ETFs and shorted the U.S. market in Housing and Financials. And while we might be a little premature in discussing the ProShares UltraShort FTSE/Xinhua China 25 ETF (FXP), we fully plan to take advantage of both sides of the China boom and expect the U.S. market decline to trigger a significant sell-off in China in the near future.

The gig is up. The Fed’s repeated intervention is having a diminishing effect and the media’s consistent denial is becoming less and less believable. The economy is in very bad shape and by any honest assessment already in recession. Understating inflation to produce the facade of economic growth only delays and exacerbates the inevitable. The dollar is toast and is showing no sign of stabilizing as Chinese officials continue talk of diversifying their reserves away from dollars. Investing in tangible assets such and gold and silver will protect your wealth, but even mining companies will likely be hit by a downturn in the economy, at least temporarily. So it is worthwhile to diversify your contrarian investment strategy and consider shorting the overall market.

I am not an expert on the housing and financial sectors. My focus and expertise is within precious metals and alternative energy. But it doesn’t take a genius to see the writing on the wall and so I decided to short both the housing and financial sectors via a relatively new and attractive investment option known as the ProShares UltraShorts. The two ETFs are SRS (UltraShort Real Estate) and SKF (UltraShort Financials). The “ultra” part of the ETF refers to funds attempt to track twice the inverse of the daily performance of various indices. If the Dow Jones Financials Index goes down 5% (like today), the UltraShort ETF goes up 10% and likewise with the Dow Jones Real Estate Index.

These new ETFs provide a better way to short the market because they don’t carry the unlimited risk or dividend costs inherent in shorting stocks or ETFs. They also don’t carry the added risk or time restraints of put options. Another advantage of the UltraShort ETFs is that they are not subject to IRA trading restrictions, which often forbid shorting.

These two funds were up 8% and 10% today alone, as I was able to capitalize on what I see at the beginning of turbulent times for the markets. “Turbulent” is putting is lightly, as one of America’s prized corporations and the largest car-maker in the world reported a third-quarter loss of $39 billion. Let’s write that out longhand to underscore the point: GM lost $39,000,000,000 in the last three months alone!

But why stop there? The country’s biggest mortgage finance companies and Washington Mutual Inc warned the housing downturn would extend well into next year. New York Attorney General Andrew Cuomo said his office was sending subpoenas to government sponsored mortgage finance companies Fannie Mae and Freddie Mac as part of a probe of the home loan industry. Their stocks tumbled 10% and 8.6%, respectively. Hello SKF. This seems like a no-brainer to me. Declining stocks outnumbered advancing ones by a ratio of about 10 to 1 on the NYSE and by about 4 to 1 on Nasdaq. Oil prices are flirting with $100 as war propagandists are employing scare tactics once again and urging the Bush administration to attack Iran. Has Iraq really taught us nothing?

Gold, silver and energy are rocketing to all-time highs, but you may want to consider diversifying your contrarian plays by taking positions in one or more UltraShorts. We expect the Real Estate and Financial sectors to be the hardest hit in the coming meltdown. It is our opinion that the troubles are just starting for these sectors and there will be at least another 6-12 months of significant downside.

For a full list of ProShares Short and UltraShort ETFs, click here.

Disclosure: Author owns shares of both SKF and SRS

There are some great articles comparing gold versus silver as investments. One of the best is Adam Hamilton’s recent article entitled Silver Lagging Gold.

“So much becomes clear when silver is considered from a speculator’s perspective. Early on in gold uplegs, greed is low and speculators are skeptical that the gold upleg is for real. Without much greed or excitement, they aren’t interested in silver. But the longer that gold powers higher, the more speculators start to think the upleg is real and sustainable. So gradually at first they start buying silver. By the second half of the gold upleg the small silver market really explodes on the flood of bids and greed ultimately fuels a parabola. But once all the speculators are in, profit-taking selling overwhelms bids and silver collapses.”

Silver broke resistance today and powered through the $15 mark. At the time of this writing, silver is trading at $15.75 in Hong Kong, with the trend line pointing straight up. Gold is also parabolic in early HK trade, adding $7 in the last ten minutes! Good times for precious metals investors, especially those who kept positions instead of selling when several “experts” were calling gold overbought around $760. Back on October 23rd, our technical analysis concluded that the upleg had plenty of room left to run and we wrote:

“as quick and steep as the latest run in gold has been, there is no indication that a correction is coming. A short consolidation might ensue, but if history is any indication, this upleg will take gold to $850 and then towards $1,000 in the coming months. The upside potential significantly outweighs the downside risk at this moment. Those trying to time the market might want to wait for gold to dip back to the $730’s, but they risk missing out on a run towards $850. Our strategy will be to maintain our core positions and look to add on a breakout above $790 or dip to $730.”

We maintained those core positions and have been rewarded handsomely. We also added to our positions as gold confirmed the breakout above $790. Hope you have been along for the ride!

But getting back to the gold vs. silver debate, Mr. Hamilton’s article left me with the impression that silver has been lagging gold. This may be true over the long-term, but looking at the performance of each metal since the breakout in mid-August, we can see that silver has outperformed during 2 of the 3 months and overall is up 34%, while gold is up 26%. That 8-point difference is worth your attention. Where is the lag?

And not only has silver outperformed gold over this recent 3-month upleg, but the outperformance appears to be accelerating. During September, silver’s performance beat gold by just 1 point. During October, gold outperformed. But during the first week of November, silver is up nearly twice as much as gold (9.7% vs. 5.1%). We expect silver to continue outperforming gold throughout the remainder of this upleg and throughout the remainder of the bull market. Our favorite silver play is Silver Wheaton, a company we have covered in detail here. But another silver stock that has lagged in the recent upleg and looks undervalued at the moment is Coeur d’Alene Mines (CDE). The stock was up 13.5% today, but it still has some catching up to do.

Speaking of which, we view silver’s recent awakening as a sign that the current upleg is tiring and is well past the halfway point. Having lasted approximately 10 weeks thus far, we are anticipating another 2-3 weeks of strong upward price movement before any correction/consolidation begins. We have calculated a price target of $865 for gold and $17.50 for silver before the market takes a significant breather. Sound overly optimistic? Well, gold just added another $3 to reach $830 since I started the last paragraph. The trend is your friend.

In conclusion, silver has outperformed gold during the latest upleg and can be expected to outperform gold during the overall bull market in commodities. Silver stocks should be a part of the portfolio of any serious precious metals investor. However, as Mr. Hamilton pointed out in his article, silver is much more volatile than gold and as fast and furious as it may shoot past gold, it has a history of coming crashing back down just as fast. You have to be ready to cash out and leave less savvy investors, late to the show as always, holding the bag.

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