Dan Caldwell's  Instablog

Green shoots or weeds?  That's the question on everyone's mind these days.  Commercial real estate vacancies are rising, mortgage rates moving up, the car manufacturer's are filing for bankruptcy...the bad news just doesn't let up. 

But - trade what you see, not what you think.  And one indicator I like to use is not flashing a red light, or even a yellow light at this point.  That indicator is the various bear market mutual funds or ETF's. 

The bear market funds momentum still apppears to have strong downside momentum, so for those looking for the same stock shorting opportunities we enjoyed last summer, patience is a virtue.

Disclosure: Long KGC, CDE, CEF, FCX, DSX, holding cash, no short positions

One fundamental driver likely to propel gold and silver higher by the end of the year is the massive amount of fiscal stimulus, now estimated to be over $12 trillion dollars (source Bloomberg). Adding more dollars into the system has the effect of weakening the purchasing power of the dollar, leading to inflation.  The beneficiaries of inflation are gold and silver as alternatives to fiat money creation.

However, it is a good idea to pay attention to an old Wall Street axiom - "Trade what you see, not what you think."  So let's look at some technical indicators.

First, is a chart of inflation expectation as measured by the performance of inflation protected securities (TIPS) relative to the performance on non-inflation protected T-bonds... I've found this chart to a useful tool for timing entry into and out of the gold market.  This chart is saying that investors are more concerned with inflation than they are with deflation.  Heeding the deflation warning signals would have gotten you safetly out of commodities last summer and into cash or treasuries.

The next chart looks at the ratio of gold and silver mining stocks relative to the prices of the metals.  With all the emphasis in recent years on the gold and silver ETF's a lot of new money flowing into the sector has flowed into GLD and SLV rather than into the precious metals mining stocks.  The ratio chart is suggesting that the mining stocks rather than the metals themselves are now poised to offer the best leverage in the sector.  Rising sentiment indicators combined with low/stagnant mining stock prices is what is known in technical circles as positive divergence and I'm seeing positive divergence signals all throughout the sector.

The last signal is the many cup-and-handle formations now approaching pivot point takeoff.  I'm using NEM as a proxy for the many mining stocks.  Some may argue that the pattern is indicative of a double top, but combined with my other technical indicators I think we are looking at multiple cup-and-handle formations throughout the precious metals mining sector.   

Disclosure: Long CEF, CDE, FCX, GDX

No positions in GLD, SLV, or NEM

A member of my group asked this very relevent question the other day. My response to him was that IMO at the present time investing in CEF was the better option, since CEF is audited for its physical holdings, as opposed to the ETFs GLD and SLV which are not audited.  Here's how I arrived at this decision:

Comex Gold was at $930. Add a $30 per coin bullion premium + approximately 3% S/H and insurance from a bullion dealer. This gave me a price of $999/oz. to buy physical gold.

Comex Silver was at $14.04/oz.  Add $1.00 for the premium on silver rounds (coins of the realm premium is even higher). Add another 3% for S/H and insurance to order coins from a bullion dealer.This gave me a bullion price of $15.49 to buy and hold physical silver.

I then plugged my price for gold bullion ($999) and silver bullion ($15.49) into the CEF Premium Calculator along with the live quoted ask price for CEF and the online calculator spit out a negative number, telling me that at that particular moment CEF was selling at a discount to the price of physical bullion.

Disclosure:  I hold a posiiton in CEF and pay attention to the CEF Premium Calculator tool and sell a portion of my CEF holdings when the premium approaches or passes 20% because past experience has taught me that the Fund will probably do a dilutive offering at a lower price in the next day or two.  I like to buy when the premium turns negative to the price of bullion.  (I added to my position last week at $11.26).

Also long CDE, GDX, FCX