Back in August, China started publicly endorsing gold and silver as an investment on state sponsored television.

Western financial media, but in particular a lot usually made fun of, the gold bugs, were quick to pick up the story and flood every precious metals section on every financial news website with the news from China. Even I wrote a piece on it. I don't consider myself a gold bug, but having taken a look at the fundamentals of gold and silver, I am as convinced as any gold bug that there is huge upside potential for gold and silver.

At the end of April, the financial media was screaming "sell in May and go away". Just before June they were warning us of the "summer doldrums". In both cases the financial media has emphasized "seasonal weakness" based on historical data. And they are doing it again. September is supposed to be a weak month, again, based on historical performance. Before making any financial decisions based on those warnings, it would be wise to look at what exactly constitutes historical performance.

Historical performance, as influential at it might sound to some who listen to the warnings of the financial media and some bloggers, is nothing but a historical average of all the data that is available. If media tells us that September is a historically weak month for the stock markets then this means nothing more that based on the data that we have to date, the average September has been weak. It doesn't mean that every September has been weak. Based on historical data, the average return in September over the last 100 years has been a negative 0.96%. Of all the 100 Septembers from 1908 to 2008, 68 have brought a negative return. But what about the 42 that haven't? Are you willing to disregard the 42 cases in which September has been a gaining month just because the "odds" are against you?

From Dr. Zhou Xiaochuan, Governor of the People’s Bank of China, writing in The Alchemist (issue 36, 2004):

Gold is a commodity that combines the attributes of a currency, financial commodity and general commodity. Despite the declining function of gold as currency in the world, the activeness and development of investment activities with gold as the target indicates that gold still has a strong financial nature and remains an indispensable investment tool. In major financial centers in the world, the gold market, together with the money market, securities market and FX market, constitutes the main part of the financial market.

Whether or not the price of gold, as many have been arguing here and elsewhere, is being manipulated or not, interestingly enough, doesn't matter. Gold is told to be an excellent preserver of wealth, especially in rough times like these. I agree with that but I don't think the manipulation hypothesis should be given as much focus as it's been given so far, simply because there is nothing wrong with central and commercial banks occasionally pushing the price lower.

Why? Well, the central banks, led by the Federal Reserve, have been printing huge amounts of new 'money' and as soon as it gains velocity, inflation will propel gold to new highs. One way to preserve wealth is to buy gold and the best time to do it is before inflation kicks into high gear. Let's assume that the manipulation hypothesis holds true and the price of gold is being artificially suppressed. As an individual who is trying to buy gold I could not wish for a better setup, I would be glad to be able to buy gold at a suppressed price.

It is well established that gold and the US dollar are inversely correlated. This rule of thumb is not often broken and traders who hold their free funds in foreign currencies can benefit from that. The dollar has been trending down for months now and last week we saw some gains in the dollar index. Gold, consequently, was down. What if you could benefit from the fall in gold and from the rise in the dollar (compared to other major currencies) at the same time? Well, for non-US traders it's actually quite simple.

I am not a resident of the US, therefore, I don't keep a large amount of my portfolio in dollars to limit my losses from a possible fall in the dollar compared to the euro (which the Estonian kroon is pegged to). When I see a possible trade, I first buy dollars and then buy the stocks. For me and other traders who use the same strategy, the combination of a rising dollar and falling gold prices is very lucrative, because it allows us to benefit from a rise in one asset and a fall in a currency at the same time.

In my previous article, I gave an overview of the current situation in the uranium market and why I think it's headed for a new, long term bull run.

Now is the time to take a look at some specific stocks.

As of May 15th 2009, the price of uranium (U₃O₈) was $51 per pound, down 62.5% from an all-time high of $136 in 2007 (see chart, click to enlarge). From a low point in September 2008, however, uranium has managed to rise around 28%. It appears that the price of uranium has bottomed out and is headed into another bull market phase. This, however, has little or nothing to do with Obama's stimulus plan or Bernanke's magic dollars. It all comes down to the basics of free market capitalism - supply and demand.

Since my last bullish call on silver, the precious metal has indeed gone up but something else has caught my eye, which I feel that the people who are keeping an eye on silver (and gold) should know about, if they don't know it already.

Both gold and silver are nearing a resistance line and it looks like a strong selling point unless the US dollar lends a helping hand by continuing its decent. I admit that I am not an expert on currencies, hence I don't have a strong enough conviction on which to make a prediction as to what will happen to the dollar. The basics support a further drop in the dollar, but as the previous months have shown us, a fundamental weakness in the dollar might not be enough to materialize into actual losses.

It used to be that the price of silver followed the price of gold with a beta of around 1. Since last September, however, that correlation has broken down. In March 2008, silver topped at roughly $21.2, and by late October last year, it was down 60% (2nd chart). Meanwhile, gold topped at just over $1,000 and its maximum drawdown thus far has been about 28% (3rd chart). In the first quarter of 2009, as investors were looking for ways to secure their hard cash, they turned their sight to gold and it managed to pick out new highs while silver, the whipboy, was still down about 30%.

click to enlarge

The Federal Reserve Open Market Committee made no changes to their plans to buy Treasuries, which sent Treasuries tumbling and pushed yields to their highest this year. Here's an excerpt from the FOMC statement:

As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn.

Swedbank (SWDBY.PK), one of the biggest banks in the Baltic countries, suffered its first loss in the current recession amounting to a total of 3.4 billion SEK ($414 M) compared to a profit of 2.9 B SEK ($360M) a year ago and a profit of 1.9 B SEK ($234) in Q4 of 2008. (Note: the dollar amounts were calculated using the latest rates. The Swedish krona has fallen considerably during the recession).

From 2009 Q1 results, page 3:

As Tyler Durden handily pointed out to the financial news reader, who is sick and tired of going through lengthy government documents, the criteria for the stress tests were not very stressful.

Two things strike out from the article - first is that the staff was said to be more than 150, which means that it was probably less than 200. Figuring out the survival chances of America's financial system is not something you do with only 150-200 people. It requires far more than that.