2010 Goes Out With A Bang. What To Expect In 2011...
Look at the following charts of stocks we have invested in in recent months to see how they have performed before we address the crucial question of whether the time has come to take profits or whether we should stay long for further gains that might be spectacular if gold and silver arc away to the upside. The stocks featured are our best performers and we are still long these stocks - there are others which made gains but did not do so well, some where we took profits too early, like Avino Silver & Gold, and some that we were obliged to dump for mostly slight to moderate losses, and a few low priced issues where we had no stop and the price eroded gradually resulting in sizeable losses, such as Harmony Gold, but overall we have made very substantial gains over the past 6 months, as the following charts attest...
Clicking on the name of the stock takes you back to the article in which it was recommended. Note that the percentages shown on the charts are ratios of the current price to the price when bought, not the actual percentage gain.
Anglo-Canadian Uranium URA.V, ANGUF, $0.2996, C$0.31 +229%
Anooraq Resources ANO, ARQ.V, $1.57, C$1.55 +70%
Aquila Resources AQA.TSX, AQARF, C$1.10, $1.10 +318%
Cardero Resources CDY, CDU.TSX, $1.95, C$1.95 +23% (in 10 days)
Cream Minerals CMA.TSX, CRMXF, C$0.25, $0.224 +92%
Crosshair Exploration & Mining CXX.TSX, CXZ, C$2.57, $2.62 +71%
ECU Silver ECU.TSX, ECUXF, C$$1.28, $1.29 +94%
Evolving Gold EVG.V, EVOGF, C$1.17, C$1.18 +30%
Excellon Resources EXN.TSX, EXLLF, C$1.26, $1.25 +55%
Golden Tag Resources GOG.V, GTAGF, C$0.64, $0.6747 +228%
Kooteney Gold KTN.V, KOOYF, C$1.08, $1.25 +177%
Samex Mining SXG.V, SMXMF C$0.78, $0.77 +294%
Southern Arc Minerals SA.V, C$1.65 +206%
Yale Resources YLL.V, C$0.135 +93%
Nearly all of the stocks shown were bought within the past 6 months, and during that time the HUI index has advanced by about 26% and the large stock XAU index has appreciated by 31% so you can readily see why we prefer smaller stocks.
All prices for the close of trading on 30th December 10.
Now we come to the crucial question of whether the time has come to take profits, which we is very tempting given the large profits that we are sat on. In attempting to answer this question we are confronted with a major dilemma arising from the times in which we live. For on the one hand, according to all the normal tools of Technical Analysis the broad stockmarket is grossly overbought after its strong gains of recent months which have been added to by the "Santa Claus" rally which we had expected - and the Santa Claus rally traditionally extends into the first week or so of January after which the risk of the wheel coming off increases significantly. Normally we would expect to see a substantial reaction set in soon. However, these are not normal times. The markets have always been subject to manipulation but now the US markets are almost entirely controlled by very pervasive manipulative forces which have attained massive power during the past 2 years. The reason for this is that the Federal Reserve has an unlimited supply of blank checks - it can manufacture whatever money it wants in pursuit of its masters' objectives - this is what QE is - in effect the Fed has a massive self-generated slush fund. Those objectives center on maintaining and defending the interests of the elites - an unlimited supply of manufactured money is therefore available to backstop the Treasury market and to ringfence Wall St by wading in with huge tranches of money to prop up the stockmarket, which explains why it has continued to rise despite the rotten economy. Of course the manufacture of unlimited quantities of money for these nefarious purposes does not actually increase the countries' productivity, so someone is going to have to pay for all of this and that someone is the broad swath of the American middle and working class who are about to be driven into the wall by brutal and unrelenting inflation as the dollar buckles under the strain. The motto of the elites is "Privatize the profits - socialize the losses". They will eventually lose control of course and when they do the Treasury market, which is the aorta of the US, will collapse, but that may take a year or two yet. In the meantime we should witness a severe decline in the currency and roaring inflation. This is why gold and silver continue to look like the place to be, although after their almost unbroken rise of the past year or so the risk of a heavy correction setting in is rising. Here again we have a paradox, for while gold and silver are becoming increasing vulnerable to a correction after their long steady uptrends, such uptrends typically end with a parabolic acceleration and blowoff phase with greatly increased public interest. This still hasn't happened which is why we suspect that a spectacular near vertical rally may be just around the corner - and we certainly don't want to sell out too early and miss that.
So how do we handle this high-risk, high-opportunity phase that we are now entering? Probably to stay long, but to find a way to hedge or protect profits. This can be achieved in several ways. One is by buying a raft of cheap out of the money Puts - sufficient to protect most of the gains accrued to date in the event of a sudden downdraft, and to buy further tranches of cheap Puts if the market continues higher. Another is to rotate out of stocks as they become extremely overbought and into others in the sector or related sectors not so overbought but also in strong uptrends. The key point is to find a way to protect gains accrued thus far but still be in a position to fully benefit from the possible further big gains ahead that will result from gold and silver and PM stocks going into a parabolic acceleration. We should remember that there is now an acute shortage of physical that is believed to have put big players with massive short positions, such as J P Morgan, in an unenviable position, although they are likely of course to have back door access to the Fed's massive self generated slush fund. If these massively powerful entities are unable to avoid being held to account and they are forced to cover their immense short positions, the result will be a vertical meltup in gold and silver - and you can readily understand why we are reluctant to sell with that in prospect. What they would like to do of course is continue their unlimited naked shorting, but they are understood to be facing legal challenges across a broad front that may put a stop to these activities, and it will certainly be interesting to see what transpires when that day arrives.
To sum up - we are aware of the overbought condition of the broad market and of various stocks in the resource sector, and the risks that come with that, but on balance believe that what is most likely to happen is marked upside acceleration in gold and silver, and in PM stocks, in coming weeks, and perhaps for a month or two, and also in commodities such as copper, that may culminate with vertical spikes and breathtaking gains at which point we will have noted the positions of the exits, with the immense slush fund postponing the broad market reaction that we would otherwise expect to set in. While this may sound like we are "hedging our bets" that is exactly what you should find a way to do. Stay in position to benefit from further large gains, but hedge in a manner that locks in most of your gains to date. Out of the money Puts are preferred to stops, because the Puts mean you don't fall prey to an engineered shakeout. There are times when "hedging your bets" is the right way to go and this is one of them - remember when we bought the silver straddle in mid-Summer and made massive profits on the long side? We don't always do it - the big real profits that we have made (real that is when they are realized) in recent months demonstrated on the charts above did not involve any hedging, because we were sufficiently confident on the long side and it paid off. If we get a massive spike and blowoff top in coming months we will be looking to short it and make even faster gains on the ensuing crash, which, perhaps surprisingly, may yet not mark the end of the Precious Metals bullmarket.