What, If Anything, May Hold Up If (When?) Stocks Tank Again

Judging by the price action across the board today - not too much...

Almost everything is getting kicked in the teeth today.

(Source: BarChart.com)

Crude oil and precious metals are getting taken to the woodshed along with stocks today - no place to hide there.

One bright spot - actually I should say one dim but not dark spot - are the grains. They haven't rallied much this year to date, so there may not be much downside from here.

Grains, by the way, are still one of my favorite secular plays - I just think it's best to avoid them right now. If the Great Depression is a guide, then grains should lead the way out of the Greater Depression as they did last time around.

The Amount of Managed Money Currently Invested in Gold

Now that gold is rangebound, how do you make money trading it? That's easy - treat it like a wooden pony and straddle that thing.

For the details on this trade, in more professional terms as well, check out Brad Zigler's article for Hard Assets Investor:

So what's an investor to do? Well, you can certainly sit tight and wait. But if you do, you'd be passing up an opportunity the market doesn't hand out every day—cheap volatility premiums.

Option traders know all about volatility: It's one of the primary drivers of option costs. When volatility contracts, as tends to happen in range-bound markets, option prices soften. So much so, in fact, that the purchase of option straddles and strangles becomes attractive.

A straddle is a combination of a put and a call on the same asset, each sharing the same expiration date and exercise price. A strangle is similar, but the options' strike prices are different.

You can read Brad's full piece here.

The potential risk here, at least IMHO, is if the next potential wave of deflation finally comes to fruition, taking down everything, gold included.

But if you believe that gold will be rangebound for a bit here, straddles are definitely an interesting potential play.

And here's a VERY interesting chart that Brad posted in his piece - it shows another reason some smart money is wary of gold at these prices - because managed money is heavily in gold right now, which often indicates a shorter term top in price:

Chart courtesy of Hard Assets Investor.

Gold has had a heckuva run, it could easily trade sideways, or even pull back sharply, and still be within the confines of a larger bull market. Nothing goes straight up or down - trade accordingly!

Tax Receipts Down, Government Jobs Up...This Won't End Well

Bernanke - man of

the year. Did he earn it? Or

pushing on a string?

Markets Strong Out of the Gates...But How Much Conviction is Left?

The broader indices continued to climb higher in the first week of trading in 2010. But how much buying power is behind these moves?

Moves straight up usually don't end well.

(Source: Barchart.com)

Since the correct in early November, stocks have climbed just about everyday, without much of a blip of a correction. Meanwhile, upward momentum and volume continue to look anemic, indicating that the rally may finally be running out of gas.

But thus far, warnings of a potential turndown have either been early, or wrong. So which is it?

While I am not a huge chartist in terms of reading into patterns (head and shoulders, etc), I do notice that the chart of the S&P above is tracing out an ascending, contracting triangle. These are usually proceeded by sharp moves either up or down. Obviously a move down would appear to be the more likely scenario, so it will be interesting to see what the S&P does over the next couple of weeks.

It very well could continue to move higher, so I am going to hold off on shorting until we see a definite break in the uptrend. The mistake I make in early November was shorting too early, under the (incorrect) assumption that the uptrend HAD been broken.

So we'll chalk that up to a learning experience, and try to be a little more patient on pulling the trigger.

Tax Receipts Continue to Decline

It's hard to get excited about this "economic turnaround" when tax receipts continue to fall across the board. Tax receipts may be the least manipulated of all economic stats, so are worth paying attention to.

Here's a smattering of tax receipt data from around the nation...and little to none of it is positive. For a fun exercise, type "tax receipts" into Google News, and see what comes up!

• Texas sales tax receipts fell 11.6% year over year
• Kansas is projecting a 5.1% drop in tax receipts this year
• Federal revenues dropped 16.6% from 2008 to 2009

It seems that a lot of the "news" about the economy bottoming is nothing more than pundits projecting the bounces in the DOW and the S&P onto Main Street. In reality, that hasn't happen.

The markets have bounced since last March because that's what markets do. They never travel up or down in straight lines. All we've done thus far is mirrored 1930's stock market retracement - nothing more, nothing less.

From a technical standpoint - wake us up when we've surpassed the usual Fibonacci retracement levels.

From a fundamental standpoint - wake us up when tax receipts start to turn around...because we know there's only one reason for people to pay more taxes, and that's because they are making more money!

Now as to the ethics of taxation in the first place...we'll leave that libertarian rant for another day.

Evans-Pritchard Sees Japanese Hyperinflation

If you think this column is a ball of sunshine, you'll love Ambrose Evans-Pritchard's take on the 2010 financial markets:

The contraction of M3 money in the US and Europe over the last six months will slowly puncture economic recovery as 2010 unfolds, with the time-honoured lag of a year or so. Ben Bernanke will be caught off guard, just as he was in mid-2008 when the Fed drove straight through a red warning light with talk of imminent rate rises – the final error that triggered the implosion of Lehman, AIG, and the Western banking system.

As the great bear rally of 2009 runs into the greater Chinese Wall of excess global capacity, it will become clear that we are in the grip of a 21st Century Depression – more akin to Japan's Lost Decade than the 1840s or 1930s, but nothing like the normal cycles of the post-War era. The surplus regions (China, Japan, Germania, Gulf ) have not increased demand enough to compensate for belt-tightening in the deficit bloc (Anglo-sphere, Club Med, East Europe), and fiscal adrenalin is already fading in Europe. The vast East-West imbalances that caused the credit crisis are no better a year later, and perhaps worse. Household debt as a share of GDP sits near record levels in two-fifths of the world economy. Our long purge has barely begun. That is the elephant in the global tent.

As if this wasn't enough, he also sees quantitative easing in Japan as finally getting "over the hump" in terms of deflation, and achieving what so far has been an elusive goal - hyperinflation!

Finally, Evans-Pritchard also pokes some good fun at Europe's economic prospects.

The Worst Trend of Them All

Take a look at this chart of public vs. private sector employment, and tell me this chart isn't the most damning of them all!

This is the type of "breakout", or rather "breakdown", that you short 100 times out of 100.

(Hat tip to friend and fellow Austrian economic believer Carson for sharing this link).

Diversifying Your Life

Earlier this week, our local Casey Research "phyle" met up to discuss our usual cheery topics, including what to do if the US completely melts down.

Doug Casey recommends having your whole self diversified - ie. citizenship in one country, your business in another, real estate in a third, and even some savings in a forth. So, if it really hits the fan in your homeland, you're not completely screwed!

So our group chatted about the logistics of moving savings, including bullion itself, abroad. If you are interested in pursuing these types of options, here's a good interview conducted by the "Sovereign Man" Simon Black about storing gold in Panama.

Gold storage in Panama is a hot item. Banks have long waiting lists for safety deposit boxes, and as I’ve discussed before, many Panamanian banks are even starting to eliminate this service, reducing the available supply of boxes on the market.

Personally if I had meaningful investment capital, I'd probably be inclined to get some bullion stashed in another country...just in case. But as is, I've got most of my hopes, dreams, and prospects tied up in our small time tracking software company.

What it Means to "Turn Japanese" Economically

Stratfor, a "personal CIA" service of sorts, released some engaging forecasts for regions around the world in 2010. Here's Stratfor CEO George Friedman discussing Japan's economic outlook:

I find his take on Japan very interesting. If the US is indeed "turning Japanese" economically, you would expect to see an increased emphasis on full employment, rather than return on capital, for the economy.

While I'm sure our politicians have the same DNA as their Japanese counterparts, I'm not yet convinced that American citizens do. Are the characteristics Friedman identifies cultural? Or, will we see Americans follow in the footsteps of their Eastern counterparts?

The next couple of elections in this country should be VERY interesting, as we'll see how asleep the citizens of this nation really are. I'm not yet sure if the tea parties and "libertarian roots" are the tip of a larger iceberg, or one-off types of events.

Trading Positions - Looking for Dollar Re-Entry

My January S&P puts are going to expire worthless - as mentioned earlier, I jumped into that trade too early.

I am looking for a re-entry point into a long US dollar position, and I'll probably look at picking up some UUP for my equity accounts as well. I think we'll see a further pullback in the dollar here, before it resumes it's march above it's previous highs from 2008-09.

We've got small, but top notch, company in the short-term long dollar trade. First we saw our hero, Jim Rogers, take a short term position in the buck. And earlier this week, Tom Dyson wrote that a major uptrend is just getting started in this hated asset.

The buck, everyone's least favorite asset, quietly bottomed in November.

(Source: Barchart.com)

Another way of playing the dollar rally would be to short currencies primed for a fall, such as the Euro or the Australian dollar. Both have started to turn down sharply.

Have a great week in the markets! Comments are always welcome and very much appreciated.

Jeff Clark's Thoughts on How to Predict the Price of Gold

Casey's Jeff Clark shares his observations about where the price of gold may be heading in years to come.

Regular readers know that my opinion differs from Clark's in the short term, as I think gold is in for a massive correction. However I do agree that the most likely medium to long term scenario is a moonshot for gold prices. The real question is when.

***

How to Predict the Price of Gold

Jeff Clark, Editor, Casey’s Gold & Resource Report

Long-term readers know that gold moves inversely to the dollar, meaning if the dollar drops, gold tends to rise (and vice versa). This happens with about 80% regularity. But what many gold writers haven’t acknowledged is the leveraged movement our favorite metal has demonstrated this year to the world’s reserve currency.

The U.S. dollar index, a six-currency gauge of the greenback’s value, has dropped 7.8% so far this year (as of December 3). Meanwhile, gold is up 38.7% year-to-date. In other words, for every 1% drop in the dollar index, gold has risen 4.9%. If that approximate percentage holds over time, one can begin to estimate what the gold price might be if you know what the dollar might do.

While the dollar is likely to bounce at some point, making gold correct, the long-term fate of the dollar has already dried in cement. If the dollar were simply to return to its March 2008 low of 71.30 next year – a 4.6% drop from current levels – this would imply a rise in gold of 22.5% and a price of about $1,478 an ounce.

The long-term scenario is more dramatic. If you believe the dollar will lose half its value from current levels, this would imply a gold price around $4,164. If you believe it will lose 75% of its value, gold would reach about $5,642. Doug Casey has called for a $5,000 gold price; if he’s right, guess what that implies for the dollar?

And think about this: these calculations ignore what else might “show up,” such as when price inflation shows up in the economy, the greater public shows up to buy gold, or the Chinese don’t show up at an auction. Could $5,000 gold be too low?

Unless you think the dollar’s problems are solved, its eventual demise is gold’s eventual glory. Prepare, and invest, accordingly.

Jeff Clark is editor of Casey’s Gold and Resource Report, where each month he brings readers some of the best research and investment recommendations in the business.

Trader Vic: The Best Trading Book You've Never Heard Of

A few months back a friend mentioned an obscure trading book to me, citing it as one of the best trading books he's ever read, despite the fact that very few people have ever heard of it. Since this guy is a top notch trader in his own right, I made a mental note to add this book to my reading list.

This weekend I read Trader Vic: Methods of a Wall Street Master cover to cover, and have to agree it's a fantastic read - one that I think our regular readers will definitely enjoy. It's authored by legendary trader Victor Sperandeo, who tells all for 260 pages. Think of the insight contained in each interview in Market Wizards: Interviews with Top Traders, but in even more detail.

Sperandeo categorizes market participants into three basic types:

1. Traders, who focus their activity on the intraday and/or short term trend
2. Speculators, who focus on the intermediate trend, taking market positions and holding them for weeks to months
3. Investors, who deal mainly with the long term trend, and hold their positions from months to years

He identifies himself as primarily a speculator, but one who plays all three trends, which he jokes might make him a "speculative trader who also invests."

What I found so great about this book is that Vic does not hold up any one theory or technique as holding the secret to investment success. On the contrary, he cites this as the flaw of most investment books - so, he set out to write one that would combine technical and fundamental analysis, with a healthy sprinkling of probabilities and risk management.

The key takeaway is that investing/trading is a game of probabilities. Your goal, as a market participant, is to maximize your probability of success on each trade, while simultaneously optimizing your risk/reward on that trade.

For much of the book, Sperandeo shares, chapter by chapter, the considerations he uses when placing his positions. He holds Dow Theory in very high regards, using it as a strong guide (but never an absolute indicator). He also uses basic technical analysis, saying its greatest value is that it "provides a method of measuring the tendency of the market to react in a particular way under similar conditions throughout history."

He does not rely on complex technical analysis though, and instead pokes fun at the die hard practitioners. Fellow fans of Elliott Wave Analysis may be a little disappointed that Vic does not regard it as particularly useful.

However Vic has no shortage of additional insights to share that compliment his use of basic technical analysis. He discusses how he identifies a change of trend, which he believes is "the fastest and most risk-free way to make money in the markets." He shows you how to draw and trendline and make use of moving averages and oscillators - again for framing your trading decisions, and not as an absolute guarantee of success.

As most astute traders seem to be, Sperandeo has deep rooted libertarian views. He is not a fan of Keynesian Economics (to put it lightly), and properly lambastes this school of thought for the fraud that it is...ending by basically saying that this is all going to end very badly.

Last but certainly not least, the second portion of the book is dedicated to helping you get your mental and emotional house in order. Vic says that out of 38 people he trained in the 1980s, only 5 made money and went on to pursue their own careers as traders?

Why such a low success rate? He cites the difference between success and failure in trading as "neither intelligence or knowledge to trade, but the will to execute knowledge."

In other words, the unsuccessful traders were not so because they lacked knowledge - it was because they couldn't keep their heads about them and stay disciplined in the heat of the moment!

This discussion of personal discipline and beliefs is very valuable, and similar in flavor as what Van Tharp advises and schools traders on.

In summary, whether you are primarily a trader, specular, or investor, Trader Vic: Methods of a Wall Street Master is a fun and enlightening read. I'd highly recommend you add it to your reading list.

What Does Trader Vic See Ahead for 2010?

The one thought that kept floating through my head while reading Trader Vic was: "Man, I'd love to hear what this guy is thinking today!"

Well, as luck would have it, our friends over at Hard Assets Investor just caught up with Trader Vic last week!

Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): Which commodities do you think are going to do well next year?

Victor Sperandeo, "Trader Vic" (Sperandeo): Well, I'm on record across the world as saying that gold is the best investment in the world for the next two to three years. It's fundamentally obvious, but when you're printing huge amounts of paper vs. something that is considered money, the paper will depreciate and the hard assets will go up. So gold and silver will do well—silver a little less so—but gold certainly.

Even when it was about $830-$850/oz, I basically said, "I don't see any scenario where it can come down." But I wouldn't say that it can't correct at any given moment. When the Fed decides to raise interest rates, at that point, gold will sell off. It will be a steep correction.

But it's also a buying opportunity, because if they raise rates, it would only be to try to stabilize the dollar. But it wouldn't affect the kinds of huge deficits and the printing of money that's going on for the next 10 years. It's unsustainable. So gold, that's my most favorite, if you will.

Read the rest of HAI's interview with Trader Vic here.

The Latest At-Home Party Craze: Gold Selling

So is the gold market getting overheated, or not? The opinions on both sides sure are polarized.

Some, like our pal Trader Vic, insist this isn't a gold bubble. I was listening to the Financial Sense Newshour yesterday, and they agreed, saying we're not even close to the mania stage yet.

On the other hand, our local rag, the Sacramento Bee, reports that "the latest at-home party craze is gold selling."

Move over, Tupperware, candles and kitchenware.

The latest at-home party craze is gold selling.

Whether spurred by cash-strapped consumers or the alluring jump in gold prices, the concept is enticingly simple: Bring your tangled chains, broken bracelets, outdated earrings or a hoop that's lost its mate. Even dental fillings or an ex-boyfriend's heart-shaped pendant. Your stash of unwanted gold is tested, weighed and traded on the spot. For cash.

And with gold briefly sweeping past the $1,200-an-ounce mark in recent weeks, it's becoming an even more tantalizing invitation. Here and across the country, it seems, old gold is turning into green.

If not a bubble, then we're at least overdue for the current correction, which we're about $100 into so far. And surprise, surprise - look at the gold bull that predicted this correction a few weeks back...our hero, Jim Rogers...

Correction: We're Not Trading Against Jim Rogers After All

On Sunday, I mused that one of my deepest concerns about being bullish on the US Dollar is that I'm on the opposite side of the trade from Jim Rogers, who thinks the buck is doomed.

Not so, pointed out astute reader Sibbie via email, citing a recent Rogers interview in BusinessWeek:

Q: How much of the runup is being driven by U.S. deficits and the weakening dollar?

Jim Rogers: A huge amount is about not just U.S. deficits, but all deficits. Deficits are going berserk nearly everywhere. Throughout history, printing money has led to weaker currencies and higher prices for real assets. And there are many, many pessimists about the dollar, including me. So many pessimists that I suspect there's a rally coming. I have no idea why there should be, but things do usually rally when you have this many bears at the same time. I've actually accumulated a few more dollars. I mean, it's not a significant position, but I do own more dollars than I did a month ago. And we'll probably also have a gold correction because there's so many bulls on gold.

Nice find, Sibbie, thank you!

You can read the rest of Jim Rogers' interview with Maria "Money Honey 1.0" Bartiromo here.

Positions Update - Still Really Short the S&P, Had to Roll the Dollar Contract

On Friday I had to roll my dollar contract, and then realized I didn't have enough margin to buy back in...oops! So I'm still holding the S&P shorts and puts, and am waiting for a re-entry point on the long dollar side.

We had a nice week of gains on the dollar, and we may be due for a short-term pullback, so I'll wait patiently, and hope for the S&P breakdown that we've been waiting for.

What's reassuring is that nobody seems to be a believer that this is the start of a dollar rally. That's just the way we like it.

A strong week for the dollar - looks like the bottom may finally be in place.

(Source: Barchart.com)

The S&P continues to defy gravity - but its time may be limited, if the dollar has indeed put a bottom in.

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $18,304.68

Cashed out: $20,000.00
Total value: $38,304.68
2009 Returns: Ugh, too depressing to calculate right now...

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000

Jim Rogers is Buying...US Dollars???

On Sunday, I mused that one of my deepest concerns about being bullish on the US Dollar is that I'm on the opposite side of the trade from Jim Rogers, who thinks the buck is doomed.

Not so, pointed out astute reader Sibbie via email, citing a recent Rogers interview in BusinessWeek:

Q: How much of the runup is being driven by U.S. deficits and the weakening dollar?

Jim Rogers: A huge amount is about not just U.S. deficits, but all deficits. Deficits are going berserk nearly everywhere. Throughout history, printing money has led to weaker currencies and higher prices for real assets. And there are many, many pessimists about the dollar, including me. So many pessimists that I suspect there's a rally coming. I have no idea why there should be, but things do usually rally when you have this many bears at the same time. I've actually accumulated a few more dollars. I mean, it's not a significant position, but I do own more dollars than I did a month ago. And we'll probably also have a gold correction because there's so many bulls on gold.

Nice find, Sibbie, thank you!

You can read the rest of Jim Rogers' interview with Maria "Money Honey 1.0" Bartiromo here.

Just to clarify my position - I also believe we're heading for higher inflation...just a little later than many pundits think, because we have some massive deflationary forces to work through in the short term. Here's my take on inflation/deflation in the near term.

Related reading: Jim Rogers' latest thoughts on Commodities, Treasuries, and the Economy

UK Department Store to Sell Gold Bars "Over the Counter" - Oh My

This gold bull market is starting to get a little overheated...

The Telegraph reports that famed UK luxury department store Harrods, starting today, will be able to purchase the "ultimate luxury accessory" - gold bars.

Chris Hall, head of Harrods Gold Bullion, said: "The financial environment has kindled a new demand for physical gold among private investors in Britain. For many people this is a new and unfamiliar asset class that demands absolute trust. Until now London has had no well-recognised name serving this market."

So they've actually appointed a head of gold bullion? What's next - gold ATM machines?

Hat tip to our friend and frequent guest author David Galland for posting this link in his excellent daily Casey Research newsletter.

Related reading: Using the Wall Street Journal to Gauge Investor Sentiment

Dennis Gartman on Gold, Nat Gas, Currencies, and More!

Great Dennis Gartman interview over on The Globe Investor. Here are a couple of quick hits, and you can find the full interview here.

Gartman's thoughts on:

• Gold: Someone or something is leaning on gold at $980-$1000 and I’ll let that seller be sated before I venture back to the long side. So will I sell gold short? No.

• Natural gas: The best way to play natural gas is not to play at all.

• Stocks to own: I want to own the movers and makers of “stuff.” Grains; water; base metals… that sort of thing

Thanks to our friends at The Daily Crux for linking to this post.

Further reading: Gartman says "Warren Buffett is an Idiot"

Why Silver and Gold "In the Ground" is Tremendously Undervalued Right Now

Regular readers are often looking for ways to play gold and silver...after all, we figure with this historic printing of money, we've at least got a real shot at wild inflation.

The safest way to play gold and silver is to buy the bullion itself. If the world melts down, you'll be the envy of all.

Admittedly I've been too lazy to do this myself...probably shame on me...but honestly I don't have much actual capital lying around to protect anyway...I'm not exactly a rich old dude.

So then I figure - well, how can I get rich off the impending sh*t storm on the horizon? Why not throw some speculative capital at mining stocks, which can do some real moon shots if things take off (and provide plenty of cardiac moments along the way!)

Well now may be as good a time as any to buy some of these junior miners. In my opinion nobody covers juniors like the Casey guys...and in this guest piece, Louis James tells us that the gold and silver these guys have "in the ground" is actually selling for really cheap right now.

And FYI, I subscribe to the International Speculator publication myself, so can vouch for Louis' chops.

Read on to learn more...

***

Beware of Zombies Wearing Lipstick
By Louis James, Senior Editor, International Speculator

Before last fall’s crash, our economic views here at Casey Research were regarded by many in the mainstream as being extreme and alarmist. Unfortunately, they were also another thing: correct.

Predictably, having been proven right hasn’t changed anything; Wall Street still pooh-poohs us as being part of the lunatic fringe. But that’s okay; while the Suits are wondering if they can back-date their stock options far enough if the economy doesn’t recover, we are poised to profit whether it does or doesn’t.

Personally, I think the U.S. economy has decayed from dead-man-walking status to that of a zombie in the grave. The jury is still out on whether or not the zombie will rise and stumble on for another year or two. That introduces a lot of uncertainty into the markets now, with everyone unsure of what will happen next.

The reality is, beneath all the bravado, that no one is ever sure of what will happen next. And the fools who proclaim certainty should be treated kindly, not left unsupervised around sharp objects, and never trusted with money.

But there is one thing we’re very confident of: if the zombie rises, it won’t be real life we see.

In other words, there is no credible scenario in which the efforts of the U.S. and other world governments to cure the global economic crisis will succeed, not before the mistakes from the past are liquidated. With increasing doses of the same bad medicine that caused the illness in the first place, how could it? You can’t make bad medicine work better by prescribing more – but if you believe the patient just needs a stronger dose, you’ll keep trying. And there can only be one result: dead zombie.

Before the zombie gives up the ghost, however, it may show signs of rosy life – but it will just be lipstick, not the healthy flow of living blood. Though an imitation of a thriving economy is all it will be, it could be a very impressive likeness.

Abandoning my gruesome metaphor, I’d say we are approaching a fork in the economic road. Both paths before us lead to continued liquidation of decades of bad economic decision-making, differing only in how long it takes to get there. The short path drops sharply downward from here, with the decline perhaps triggered by another round of depressing economic news. This is what happens if the various stimulus and rescue plans simply don’t work, deflating the Obama Rally.

The longer path takes us through a reflationary boom for the record books. In this scenario, the stimuli “work,” a last hurrah for the old economic order. And in the end, the artificially simulated (not stimulated) good times will have created an even more gargantuan level of ill-advised consumption, unnecessary construction, and massive misallocation of capital – all charged to an already maxed-out MasterCard.

What Happens Next?

The near term is the hardest to predict, but there are good reasons to assign additional weight to the probability of an imminent correction.

If the U.S. and global economies take the short path, another market meltdown will hammer everything again, even assets that “should” do well in that context, like gold. Any correction in gold would be temporary and create spectacular buying opportunities.

If it’s the long path, a delayed Shopping Season may set in (normally, it’s “Sell in May and go away”), and with the market so jittery, it could be a vicious one this year. With a lot of money still on the sidelines that “wants” to be reinvested, and people desperate to believe things will get better, the Obama Rally could go on for another month or so, but it seems likely to us that it won’t last much more than that, even if the resulting correction is followed by the longer path’s reflationary boom.

Long path or short path, either seems to lead downward in the near term (if only for a few months, initially, in the case of the longer path). Yet, no one can say that precious metals won’t be surging higher as you read this, or next Monday, or next week… I have no crystal ball with which to read the future – but barring an immediate and major breakout in gold, I’m inclined to expect a short-term weakness in the junior mining sector, followed by continued recovery and growth among the quality companies with solid fundamentals.

Why should anyone continue to own these volatile shares if a short-term correction seems likely? Aside from possibly missing a sudden and decisive jump in gold (and silver) prices, consider that most companies’ assets are selling cheaper.

Take a look at this chart showing the spot price of gold and the dollars per ounce in the ground the market has been willing to pay among junior miners and explorers.

Note that the left and right axes are scaled differently. This magnifies the effect, to better show the widening gap between the two over the last two years, but it’s real.

Here’s the same divergence for silver:

This silver chart supports our bullish call on silver last month. The per-ounce price of gold in the ground has not kept up with spot gold, but it is close to being back to its level before the credit crisis started heating up in 2007. Silver in the ground, on the other hand, is still close to the bottom hit last fall.

Short version: whether or not there’s a correction just ahead, a jittery market has both gold and silver in the ground on sale, and that’s an opportunity.

Owning physical gold and silver is a must in these uncertain times. But the real money-makers are select, high-quality junior mining stocks with sound fundamentals, enough cash on hand, and high-grade deposits that can propel the share price to the moon when the company hits paydirt. We call them “Toronto’s Secret Gold Investments”… click here to take a look.

Why Trend Following is Your Only Hope for Investment Survival

Buy and hold. Stocks for the long run. Diversify. These investment mantras were gospel during the great bull market of the 80s and 90s.

Drinking this Kool-Aid will get you slaughtered today.

There is no freaking way I would "buy and hold" anything right now. Too dangerous. Buy and hold hasn't worked over the past ten years, and it's unlikely to work for the next ten. We're in a secular bear market, and these things take time...usually 15 to 20 years...to run their course.

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View the full INDEX:.SPX-E chart at Wikinvest

Buying and holding the S&P was a crappy trade over the last 10 years.

No doubt, we are in uncharted financial waters right now. Anyone who says they 100% know what's going to happen next is lying, or dilusional.

We've got historic deleveraging taking place, as unprecedented debt levels are slowly paid down. In the meantime, we've got the US government, among others, running the printing presses at full steam, and tossing boatloads of money down rat holes like Government Motors and socialized medicine.

The foundation of the system has been permanently rocked, and stability, or even just the illusion of it, won't be back anytime soon.

With the Fed's printing press (an irresitable force of hyperinflation) battling massive deleveraging (an immovable deflationary object), the crux of any investment thesis today starts with "inflation, or deflation?"

There's no shortage of arguments on both sides, many made by folks much smarter than I. For awhile, I was reading them until my head spun...first I'd read a very well thought out argument on why hyperinflation will win out...then I'd read a perfect counterargument for the deflation case.

So I thought - what the heck can a guy like me do, if these smart dudes can't reach the same conclusion themselves?

Then it hit me - trend following.

If gold and commodities go up - get in those vehicles, because the market is screaming "inflation"! Gold at $1100 could go much, much higher...real, real fast.

On the other hand, gold still has not decisively broken through $1000. It could very well retest it's lows below $700. So if it breaks down below, say, $900 - that's the market telling us that inflation is not in the cards...at least not yet.

Early this week, gold stocks hit a 3-week low...so I sold all of them. And I'll stay out until they once again "break out" to the upside. That's the only way I can see to play these insane markets - buy the breakouts, and follow your stops. It's OK to have a hypothesis, but don't wed yourself to it. If the market says you're wrong...then you probably are!

My friend Brian Hunt (editor-in-chief of The Daily Crux, an excellent investment website) made a great point to me on Friday about investing in China. Nobody knows what's going to happen in China. Some think it's a trainwreck waiting to happen. Others think China will be just fine, still the growth story of the 21st century.

So what's an investor to do? Watch the price of copper, he says. As long as copper's doing fine, that means China's doing fine. Let Dr. Copper show you the way.

To facilitate my trend following strategy, I've pared my investment assets down significantly. I used to own 40-50+ different stocks, a few currencies, a few commodities...if something looked good in one of my many newsletters, I bought it!

Then I learned during the Great Deleveraging of '08 that diversification does not prevent bad things from happening. Overnight, the correlation of almost all assets went to 1, and everything dropped 40% in a matter of 6 months!

Because I believe the inflation/deflation question is the only important one, I only need a few asset classes to play it. That makes trend following much, much easier for an armchair investor like myself - get into positions and back out quickly - no problem.

Remember the market is the judge and jury combined, the final arbiter of your investment decisions. So let's listen to what it's telling us in the turbulent years ahead...after all, the trend is our friend! And this friend may be our only lifeline to investment survival right now.

In Case You Missed It...This Week's 5 Most Popular Posts...

1. How Herbert Hoover Put the "Great" in Great Depression
2. Richard Russell: We're Nearing Gold's Mania Stage
3. Marc Faber on American Economic Policy
4. Jim Rogers' favorite country (surprise: not China!)
5. Chinese students laugh Tim Geithner out of town

Positions Update

Last week in this spot, I mused:

"Nice week but I have to admit – I’m starting to get quite cautious that some of these trends have played out"

It looks like the caution I expressed last week was warranted...commodities got hit hard across the board this week.

I exited all positions on Monday morning, after seeing the rough start to the week - that was enough to chase me out of all positions. On Thursday, I did reinitiate an Australian dollar position, after reading how the Reserve Bank of Australia was working very hard to keep their currency down in the month of May.

Current Account Value: $31,483.93

Cashed out: $20,000.00

Total value: $51,483.93

Weekly return: -6.8%

2009 YTD return: -38.0%

Prior year's results:

2008: -8%

2007: 175%

2006: 60%

2005: 805%

Initial stake: $2,000.00

Signs of Gold Approaching the "Mania" Stage

Investment manias share some key traits in common. When they get going, they REALLY get going (a la NASDAQ 1999). People believe that "this time it's different" (housing bubble anyone?).

And - they are certainly equal opportunity. From tulips, to spices...from houses, to tech stocks...manias are always looking for the next asset class to party with.

So when gearing your investments - one sure thing you can do is throw out the sweethearts of yesterday. US stocks, tech stocks, housing - they've all had their day in the sun recently. Unlikely to repeat anytime soon.

Our beat is commodities because we think, even with their recent resurgence, that this party is only just getting started. Hard assets were ignored for too long, and they're going to come back in a big way.

Gold has been mounting a steady comeback since 2001, posting 9 consecutive years to appreciation versus the US dollar. But wait until this rager really starts to swing into gear - once the mainstream investment world gets its hooks into gold, us "early adopters" will see our gold investments doing moonshots.

And there are already signs that Wall Street, and even Main Street, are starting to catch onto gold. Read on for Jeff Clark's take regarding gold's sudden mainstream appeal...

***

Tupperware and ATMs– Gold Goes Mainstream

By Jeff Clark, Editor, BIG GOLD

Are we there yet? Are we there yet? We gold bugs are like little kids on a trip to the zoo; we just can’t wait to get there. “There” being the elusive point in time when the gold mania (no, make that Gold Mania) hits and everyone and their cat will want to invest in the yellow metal. Which of course will propel its price to dizzying heights. $1,500… $2,000… $5,000 an ounce – the sky’s the limit. At least that’s how the theory goes.

But it’s not just a theory anymore: in the past year, we’ve been seeing unmistakable signs that gold indeed may be going mainstream.

For example, we have always said that when the Mania phase of this gold bull market really got underway, mobs would break down the doors of pawn shops and coin dealers in order to get their fill of the yellow metal.

While most pawn shops’ doors are still intact, that trend seems to have already begun. In August 2008, the U.S. Mint temporarily suspended sales of the one-ounce American Gold Eagle and in September of the American Buffalo coin, because it couldn’t keep up with customer demand.

In December, bullion dealers from Johannesburg to New York City were starting to run out of gold coins when investors caught in the economic downturn scrambled to get into safe-haven assets. The sudden “gold rush” was so extreme that large coin dealers posted disclaimers on their websites that their customers should expect delivery times of a month or more.

According to the World Gold Council, in the first quarter of 2009, “the biggest source of growth in demand for gold was investment. Identifiable investment demand reached 595.9 tonnes in Q1, up 248% from 171.3 tonnes in Q1 2008.”

At the same time, there is a counter-trend in motion: cash-strapped Americans are selling their scrap gold like there’s no tomorrow. All over the country, housewives throw Tupperware-style parties to sell their gold jewelry by the ounce, often at a steep discount to market price. And businesses like cash4gold.com – which, by the way, we do not recommend – are popping up like mushrooms after a summer rain.

But even Joe the Plumber may soon be enticed to turn from seller to buyer. Even if he never sets foot into a coin store, he’ll be able to get his share of gold – in easily affordable, and portable, slices. And he won’t have to look any further than his nearest airport, bus or railway station.

A German company has come up with a brand-new marketing concept for the yellow metal: shop for gold while you wait.

Asset management company TG-Gold-Super-Markt is planning to set up 500 ATMs at strategic locations all over Germany. The machines will distribute one-gram (0.0353 oz) mini-bars of gold, about the size and thickness of a child’s fingernail. The tiny gold pieces will cost 31 euros – around US$44 – which includes a hefty 30% markup to spot.

Thomas Geissler, chief executive of TG-Gold-Super-Markt, told Reuters that this new way of selling bullion “is an appetizer for a strategic investment in precious metals. Gold is an asset everyone should have, between 5 and 15 of your liquid assets in physical gold.”

Even though Geissler admitted that “In absolute numbers, the demand for physical gold is still tiny,” he sees a very bright future for the yellow metal. “[In] relative terms, the growth is explosive,” he noted, “inquiries have been doubling every six months.”

Are gold ATMs the go-to “gold mine” of the future? While we wouldn’t necessarily bet on it, Geissler is. And the fact that he thinks it a lucrative enough business to set them up is no doubt encouraging. It’s moves like these that we think we’ll see more of as gold becomes increasingly popular. The countdown for the moon shot is on.

As you may know, the BIG GOLD editors go even further than Thomas Geissler: we recommend that you hold up to 33% of your overall portfolio in physical gold, 33% in cash, and 33% in select investments. One of those investments may be one you’ve never heard of before. Yet it has given our subscribers 54% returns in 2008 – at the same time the common stock market was plummeting. Read our brand-new report here

How Do Gold Stocks Perform in Deflationary Depressions?

Let's take a stroll down Great Depression memory lane to find out what would happen if, in fact, we do slip into a deflationary depression. Would our gold stocks get trashed?

It's important to consider all the possible scenarios that could unfold...since it seems like we're heading for, or already in, a depression, we now need to figure out if it will be inflationary, or deflationary. And then, which investments will perform well in each environment...with the perfect scenario being one that would perform well no matter which way the money scales tip.

Do gold stocks fit the bill? Read on to find out!

***

Gold Stocks in a Depression

By Jeff Clark, Editor, BIG GOLD

What if deflation wins?

While we think the odds are strongly stacked against it, particularly given the government’s furious pace of money printing, the prudent investor understands – and respects – the time-tested adage, “Nothing is guaranteed.” So while our chips sit squarely on the spot marked “inflation,” what will happen to gold stocks if we’re wrong?

The Great Depression Speaks

The most notable example of what happens to gold stocks in a prolonged deflationary environment is the Great Depression. However, the United States was on a gold standard at the time, so miners had a guaranteed selling price – which was a good thing for them, because their operating costs were plummeting. So the comparability isn’t perfect, but let’s see what we can learn.

When the stock market crashed in 1929, gold stocks were part of the general wreckage (sound familiar?). The market then rallied and recovered almost 50% of its losses by April 1930, with gold shares again tagging along. It’s what happened next that gives us our first clue about deflation’s effect.

When the bear market resumed in the summer of 1930, all securities sold off again – except gold stocks. Gold shares stayed basically flat until early 1931, when they boarded the elevator and headed for the penthouse.

Let’s look at how shares of Homestake Mining, the largest gold miner in the U.S. at the time, and Dome Mines, Canada’s senior producer, performed during the Great Depression.

And the chart doesn’t show that you could have bought both stocks at half their 1929 price five years earlier, which would have led to gains of around 1,000%. And get this: both companies paid healthy and rising dividends as the depression wore on; Homestake’s dividend went from $7 to $15 per share, and Dome’s from $1 to $1.80.

Yes, volatility was high in the gold stocks throughout the depression, with occasional wild price swings, but after the 1929 crash most of the volatility was to the upside.

The bottom line is that the two largest gold producers – during a time of soup lines and falling standards of living – handed investors five and six times their money in four years.

From Homestake’s chart, you get a clear picture of what the stock did compared to the market as a whole:

You’ll notice the large spike down in both Homestake and the Dow during the 1929 crash... but then look at Homestake’s recovery immediately afterward, returning close to its old high. This is eerily similar to our recent pattern: our stocks sold off violently last October but have since doubled or more from their bottoms.

You’ll then notice that Homestake took almost two years to exceed its old high, but once it broke out, it was off to the races. The stock doubled four times in five years during a seven-year run to its peak after the ’29 crash.

The conclusion? If history is any guide, gold stocks can hold their own against deflation. And they could profit tremendously if the demand for gold as a safe haven continues to grow.

Gold vs. Deflation

On April 5, 1933, President Roosevelt issued an executive order forcing delivery (confiscation) of gold owned by private citizens to the government in exchange for compensation at the fixed price of $20.67/oz. And less than nine months later, he raised the gold price to $35, effectively diluting the dollar in every wallet 41% overnight and swindling everyone who had turned in his gold.

We don’t know exactly what an untethered gold price would have done during the depression, but given its distinction in history as a store of value, it’s likely to retain its purchasing power in a deflationary setting regardless of its nominal price. In other words, while the price of gold might not rise, or could even fall, your best protection is still gold.

But with this said, the overriding concern is that in a fiat system, any deflation will be met with an inflationary overreaction (as we’re seeing). And the worse the deflation, the more extreme the overreaction will be.

It’s for this reason that the editors of BIG GOLD urge you to own physical gold, in your possession and under your control, given its reliability as a store of value in both inflationary and deflationary environments. If you have less than our recommended one-third of your investable assets in some form of gold, check around for places to buy gold coins and bars at good premiums.

The Silver Lining

For those with an inclination toward silver, our research points to clear signs that silver is increasingly being viewed as a store of value and not just as an industrial metal.

Here’s a comparison of silver’s performance vs. base metals over the past six months (10-1-08 through 3-31-09), which includes last fall’s meltdown:

Silver +6.7%
Copper -36%
Lead -18%
Aluminum -35%
Nickel -25%
Zinc -13%
GFMS Index* -54%

[*Based on the average equally weighted settlement price for aluminum, copper, lead, nickel, tin, and zinc.]

If silver were viewed solely as an industrial metal, the price would be off sharply.

This doesn’t mean we think silver or silver stocks can’t go temporarily lower from here, but rather that the demand for silver as a store of value metal will be growing.

Bottom line: Whether we’re served debilitating deflation or insidious inflation, holding gold (and silver), along with an appropriate allocation of precious metals stocks, offers us both a fort for protection and a canon for profit.

Buying physical gold and silver as safe-harbor assets is for many investors a no-brainer at this point. But only a few have heard of another prudent gold investment – one that has gone up more than 50% in 2008, at the exact same time when the overall stock market bombed. You don’t want to miss out on owning this “48 Karat Gold” stock… click here to learn more.

Richard Russell: We're Nearing Gold's Mania Phase

Legendary investor and investment writer Richard Russell believes we're nearing the speculative, or mania, phase in gold:

Every major primary bull market that I have studied or lived through ends up with a wildly speculative third phase. This is the phase where the public and the crowd rushes head-long into the market. We saw this last in the years around 2000 when people bought any kind of tech stock. "I don't care what it is, if it's tech, just get me in!"

My belief is that we're now nearing the beginning of the third speculative phase of the great gold bull market...

Read his full piece in today's Daily Crux...

Maybe the upcoming advent of gold dispensing ATM's was enough to tip Russell over the top.

How high will gold go?  It's anyone's guess in a mania...remember tech stocks in 1999?  Casey's Jeff Clark outlines his reasoning why he believes gold will go to $2,000...and then much higher...in this guest article.

How to Buy Physical Gold

How can you buy physical gold?  It's a question that's coming up more and more these days...as demand for gold bullion is going through the roof.

Jeff Clark points out a few resources that you should take a look at, if you're looking to purchase some physical gold.  And it's probably a great time to buy it - it's anyone's guess how much longer we'll see gold under $1,000.

***

Where to Find the Best Deals in Physical Gold
By Jeff Clark, Editor for Casey Research

When gold breached the $1,000/oz mark this February, the mass media were full of reports of unprecedented coin demand and long wait times for bullion buyers. You couldn't open the paper without seeing a piece about the gold rush.

Although the press has now set gold aside for hotter stories, I can tell you demand for gold coins continues at unprecedented levels worldwide, and production is still struggling to keep up. Take a look at these recent reports:

***Sales of the Austrian Philharmonic gold coin soared 544% in the first two months of 2009 (vs. the same period the year before), with production at the country’s mint running quadruple its usual volume.

***The demand for Krugerrands is at its highest level since 1986. The South African refinery recently doubled production of blank gold coins to 20,000 ounces per week.

***China, now the fastest-growing market for gold, saw 2008 sales (measured in dollars) rise by 50% over the year before – and total sales in January 2009 were one billion yuan (US$146 million), 30% more than all of last year.

***The U.S. Mint sold 193,500 one-ounce gold Eagles in the first seven weeks of 2009 – equaling the number shipped in all of 2007 and about matching the first half of 2008.

***Russia's Sberbank says it has “never seen such strong demand for investment coins.”
With this incredible interest in gold, it's worth going over where to go for the best deals in bullion… and what the stated wait times and premiums are. Here are the dealers that have consistently treated their clients (and our readership) well over the years:

Kitco (Kitco.com; 1-877-775-4826). All bullion products are available at Kitco and can be shipped within 24-48 hours of a paid order. Premiums are slightly higher than our other dealers recommended below, but what's particularly attractive at Kitco is that you can get silver for less than 1% over spot... Its pool account is currently charging only 14 cents over spot (premium fluctuates daily), which is a great way to build your silver holdings while waiting for physical premiums to come down.

The Coin Agent (thecoinagent.com; 1-888-494-8889, or email thecoinagent@gmail.com). Wayne Lemonier currently offers immediate delivery on paid orders for all gold coins except the Eagle, which takes two weeks.

Premiums for gold coins are 6% over spot for Maple Leafs, 6.5% for Philharmonics and Krugerrands, and 7% for Eagles (one of the lowest in the industry).

Silver bars are at the lowest premium we know of: A 10-ounce silver bar costs $1.75 per ounce over spot, and 100-ounce bars are only $1.50 per ounce over spot. American silver Eagles are spot + $4.50, and silver Canadian Maples are spot + $4. Shipping and handling for silver is $20 per 100 ounces.

Border Gold (bordergold.com; 888-312-2288, ext. 7). Both gold and silver Maple Leafs are readily available and can ship the day an order is paid. Border told us premiums are slightly higher this year than last because the Royal Canadian Mint raised its prices.

Premiums on gold Maple Leafs are only 5.5%, one of the lowest in the industry. Shipping and insurance is $25 for one or two coins. A one-ounce gold bar is spot + $25; 5-ounce and 10-ounce bars are available in limited quantities at spot + $22 per ounce.

The one-ounce silver Maple Leaf is $4 over spot for up to 99 coins and then $3.25 per coin. Both 10- and 100-ounce silver bars cost $2.50 above spot, with the 100-ounce silver taking a week to deliver.

ASI (assetstrategies.com; 1-800-831-0007). Gold Maple Leafs, Philharmonics, and Krugerrands can be shipped immediately upon a paid order, with American Eagles currently taking about three weeks.

One-ounce gold coins are 7.5% to 8% over spot; Eagles are 8.5% to 9%. One- and 10-ounce gold bars can be had at 6%. One-ounce silver Eagles are $4.30 over spot. A 100-ounce silver bar is $2.20 per ounce, and a one-ounce bar is spot + $2.50. Costs for junk silver vary but average about $2.20 per ounce over spot.

Some of our readers ask… why don't we recommend any of the larger dealers?

Availability and premium are the primary considerations in selecting a bullion dealer. Some of the larger houses may match the prices of our recommended dealers; however, there’s an intangible issue: the hard sell.

Many of the big dealers push high-margin numismatic coins. So while you may get good prices and delivery on your bullion coin, beware the salesman who begins talking up rare coins. You won’t experience this with our smaller dealers, and it’s this no-hassle service that gets our business. If you start to hear, “Hey, my friend, I have a great deal right now on a rare Swiss coin...,” you might want to reconsider where you shop.

Gold is the safe-haven investment in times of crisis, and more and more investors worldwide realize this. But even though gold has risen more than 140% in the last five years, there is something that can give you even higher returns: we call it Toronto’s Secret Gold Investment.

Gold Dispensing ATM's: Coming Soon (Seriously)

From Reuters:

A German asset management company plans to set up 500 "Gold-to-Go" ATMs in Germany, Switzerland and Austria this year. A gold-dispensing automatic teller machine (ATM) was on display at Frankfurt's main railway station for a one-day marketing test yesterday. A one-gram piece of gold, the size of a child's little fingernail and about as thin, cost US$42.25--a 30% premium to the spot market price.

Hey - on our way out to the bar...I'm tapped, need to make a quick stop at the old A-T-M...

What is the Breakout in Gold Stocks Signaling?

Our buddy Brian Hunt pointed out in yesterday's DailyWealth that gold stocks are breaking out. 

GDX, the ETF for gold stocks, has more than doubled off it's late October lows, and is not perched at its high water mark since August 2008.

Gold stocks are on the move

So should we sell in May and go away?  Or is the trend our friend?  So many cliches to choose from - only one can be right!

I think you're nuts to close any gold related positions right now.  Gold stocks appear to be leading the price of bullion, which is often a bullish sign.  Remember that the paper market for gold is easily manipulated - follow the phyical market.

Those of you who did just that back in December - when the paper price of gold were bottom, get gold buyers were snapping up the barbarous relic in record numbers - are probably sitting pretty right now.

Now remember that gold stocks are leveraged on the price of gold.  If the price of gold doubles, gold stocks will do more than double - they will go to the moon.  That's because they're doubling their sales price, while costs remain more or less the same (assuming oil does not rise in parallel).

So what if you want to get really, really stinking rich?  One way to play it - with a small speculative portion of your portfolio, of course - is by investing in junior gold producers.  They are some of the most volatile stocks in the world, but if gold skyrockets, these juniors are going to do some absolute moonshots.

One junior that is extremely worth of your consideration is AuEx Ventures.  Last fall, our local Casey Research group hosted Ron Parratt, CEO of AuEx - I was so impressed that I bought some shares the next day, which I still own.  Here's a full write up about AuEx if you're interested in learning more.

If you're looking for some guidance in navigating the potentially profitable but trecherous waters of junior gold miners, I'd recommend you take a look at International Speculator, a reserach service provided by Doug Casey's guys.  I've subscribed to it over a year now.  

The thesis is that if gold hits a real mania stage, the juniors will be the ones doing real moonshots, because they are highly leveraged to the price of gold for a number of reasons - maybe first and foremost, because the large gold producers are not doing much of their own exploration any more, they buy up juniors with promising finds.  So if things get out of hand, as Casey's guys are predicting, they believe the junior market will turn into something like the tech bubble in '99.