Email sent pre-market to NFTRH subscribers...

This morning in 'pre', gold and silver were decimated down toward our targets and thus I was compelled to raise the risk vs. reward to bullish.  Conveniently, an upward reversal has happened today in the precious metals.  But this morning, things 'appeared' bleak.

I followed my own update and did some significant buying just after the market opened with HUI down again.  As for subscribers, I feel they got some pretty good input in a timely manner. 

The Update:

NFTRH subscriber 'GC' is an experienced resource sector/gold stock investor who noted the following as part of an email to me in response to my statement that "Every instinct I have flashes 'B/S' to me during this end of tax selling, low volume week."

"I could not agree more - exactly how I've felt all morning.  Also low volume weeks are usually when they like to help smack down Au Ag prices.

My personal stance:  I would like the 350 HUI opportunity, but am fairly well-loaded up at current low prices (risk has already been reduced quite a bit at these lower prices) because I think chances are slim.  And if we do get 350, I'll add more."

GC has come to a point where buying value and a favorable risk vs. reward outweigh the hysterics of current market action.  Yet, she concedes the lower probability of HUI 350 coming about.  Who would have ever thought HUI would have come to 150 in 2008, even as gold was out performing economically correlated commodities and preparing for renewed upside?  In 2008 I was buying support levels much of the way down, most strongly at 250, which I thought had a good chance to be the low.  Wrong.  I puked (in my mouth only) and used the rest of my risk capital at around 150.

It is not easy to be a bottom feeder, value investor or contrarian because you do what you do pretty much feeling alone.  There is no reinforcement from the crowd.  So while I highlight the 350 measurement on HUI (should 480 be lost with a breakdown that holds - as opposed to a holiday week shakedown), the risk vs. reward tells us that quality gold producers and exploration are being irrationally sold (as in 2008) while gold and silver each approach our downside targets (see below). 

I will never tell you what to do like some trading services might.  I will never issue analysis from on high in tones that make it appear as if I have a direct line to the market gods themselves.  I can only tell you about risk vs. reward.  Risk was high when everyone was bullish.  The risk profile is the opposite now that everyone is bearish, frightened and on the run.  All of this during a time that is generally fundamentally healthy for the gold mining sector.

***

My cash level on the speculation portfolio is 63%.  That does not indicate an all-in stance by any means.  But two points to consider; a) I learned a lesson over the years, and that is that the more cash you have during gut wrenching downside opportunity phases, the better you feel and b) the 'spec' portfolio is my IRA, which some may recall was converted to a Roth this year.  I have got to budget a heaping helping of cash to pay Uncle Sam post conversion.  The last thing I want to do is be wrong, be too far 'in' and have to take the tax cash out of other areas.  So, accounting for the funds that this portfolio is going to send to the IRS in 2012 the cash level in the speculative portfolio is actually more along the lines of 27% currently.

I had not mentioned this until now because it has not been particularly relevant until now and I have wanted to project to you a healthy 'higher risk' cash position to highlight a 'safety first' stance.  Now that the risk vs. reward has declined, I offer these details.

***

A newer subscriber asks about the significance of the gold-silver ratio; what is gleaned from it and why it works.

The 'GSR' acts like a credit spread, only with two metals as opposed to different types of bonds.  When GSR is rising, people are relatively bullish on gold (a 'monetary value' precious metal) vs. silver (a more speculative precious metal).  This is theoretically an early warning signal that asset market liquidity is declining.  You will note how often the US dollar and the GSR rise or decline together.  Generally, the gold stocks get hit along with everything else during a GSR rise (importantly, there are exceptions to this, most recently early last decade during a deflationary backdrop as opposed to one featuring inflation fears). 

The GSR usually rises as gold declines less than silver, not when gold rises more than silver.  But the important point is that when the GSR is rising, when the USD is rising, so too is the fundamental backdrop of the gold mining sector generally rising.  That is the 'real' price of gold on the rise in the form of gold-commodities ratios.  I realize that crude oil (a major mining cost driver) is a little unruly right now and this should be watched.  But generally speaking, gold is currently in a bigger picture out performance mode vs. commodities.

The essence of the theoretical gold stock 'opportunity' play is that you get to buy items (gold stocks) that are getting clobbered as hard or harder than other items, while at the same time their fundamentals improve, as opposed to the vast majority of other assets, which suffer fundamental degradation during these counter cyclical phases.

***

Silver has come close to 26 this morning, which is near the upper end of the projected support zone.  Gold has come close to 1520.  While I think the charts could pull these metals down further (silver target is low to mid 20's) and gold is 1450, on a risk vs. reward basis NFTRH now goes bullish on these precious metals, as noted would be the case in a recent NFTRH (sorry, I am not time advantaged or organized well enough to recall which one). 

Understand that HUI can lose 480 and lose it in dynamic fashion while still being on a false breakdown.  If HUI should hold 480 however, and out perform even as gold and silver hit their targets, so much the better.  We would then have an actionable bull signal instead of the current 'risk vs. reward' bull signal.

I will clip this now meandering update here.  2012 is going to be one hell of an interesting year.  Let's get it right.

Regards,

Gary

http://www.biiwii.blogspot.com
http://www.biiwii.com