There may be a short-term top after this, but not before setting more new record prices.

Again and again. That is the pattern of a solid bull market in progress. Yeah, I managed to invest 24% of my cash since the year starts, but my conservative investing approach has let a big sideline cash position at 26% of my total net worth. My cash position has been dwindling percentage-wise lately, mainly due to the increase in my other invested assets, not because I have put my cash into good use.

I don’t chase prices into record high, but let me kindly remind you that in a bull market, what one should do is to follow Kelly’s criterion, and take some measured risks according to the price.

One of the biggest investment mistakes that I kept making is that I don’t listen to myself more often. Instead I subscribed to newsletters such as Jack Chan’s SimplyProfits.org, and continue to hold myself back too much (on cash). There are intuitions & emotions. The successful trader can distinguish the two, and make proper decisions.

There is a time for everything. And I know instinctively that this year would be a big year for me. I hope that you will be on the ride too. There may be 1 more good chance if you & I are lucky, but if not, I’m properly positioned.

If there is any investing secrets of mine, here it is (mainly due to lack of time to trade more often):
1. Pick the right “train”, and hold on to it for your dear life on this scary ride.
2. Eventually IF you’re successful in your pick, everybody would want to get on, and that’s the time you should get off.
3. Repeat the same successful process, but with a different vehicle.

Gold just made a new high at $1217 today. I believe that it can easily go to $1300, and possibly touching $1400 before pulling back. BUT it can also easily fall back to $1080.

The bottomline is that I don’t know whether it will go up or go down tomorrow. But nobody else knows either for sure. However, recognizing your own ignorance is often better than being the best trader in the world to try to catch the lowest point and cash out at the highest point. This strategy is especially powerful in a true bull market like gold.

As I have explained in my post on Kelly’s Criterion for investing, such strategy is very well suited for an asset class that is in a bull market. Simply buy more when it falls, and buy less when it goes up. This strategy goes counter to a traders’ mind, of cutting your losses early, and placing stop orders. And as I have also said in my post that such strategy WILL bring extreme volatility beyond the tolerance of most people. The obvious risk for such strategy is that one must ascertain the validity of such a bull market.

It is clear to me that gold & mining stocks are in a major Elliot wave 3. I don’t know whether this is wave 1 of wave 3 (which I’m leaning towards), or wave 3 of wave3, but either of the up waves should be quite strong.

So the train is leaving the station. Are you on or not?

GDXJ was debut this Wednesday. Both GDX and GDXJ (the junior companies) are offered by Van Eck.

Here are the links to the company site for GDX and GDXJ. The complete weighting of the components are listed below:

GDX is a tracking ETF to GDM index, a mining index determined by Nyse. The component weighting cannot be determined by Van Eck. Unfortunately, the top holding ABX at 14.5% is probably one of the worst choice. ABX recently announced to dehedge its gold forward sale, which was costing ABX some 4 billion dollars. ABX is also rumored to be the accomplice of gold suppression scheme together with JPM & Fed. The other components in GDX that I don’t like are AU at 5.62%, GFI at 4.25%, HMY at 3.24%, all are deriving 100% or significant gold productions in Africa. As the gold prices zoom upward, mining gold in an impoverished (relatively speaking) continent will tend to be problematic. I expect more labor and theft and political problems. Also gold production from Africa is declining as a whole. With the exception of GFI, which has expanded its production to other continents, the other two companies are definitely not my preferred choice (especially HMY). GFI is probably the “cheapest” company among major gold producers that one can buy, since its mine life is still quite long. HMY may have the highest leverage to gold price, due to its very high cost basis. At later stages of gold bull market, HMY could easily come back with a vengeance despite the terrible management. Although one may consider shorting out those components when owning GDX, I hesitate to do that. The other company that derive its production from Africa is RangGold (GOLD) at 4.72%. This has been one of the company that has baffled me, easily outperforming all other components, without me owning it. Definitely one should not short this component out.

Onto the new GDXJ, top components (CDE, SSRI, HL, SVM) are taken by all silver mining companies instead of gold mining companies. That’s 21% of the GDXJ. My ongoing concern about investing in silver companies is that they will couple to the general stock market a lot more than gold mining companies (at least initially). In a deflation, gold/silver ratio will zoom upward, relatively depressing the price of silver. I would have hoped to have less silver components. By the way, junior companies or small-cap stocks also tend to get depressed more in a downwave. Regardless, CDE and HL (and MFN) don’t seem to have good management in shareholders’ interests, raising big amount of capital at the recent zenith of 2008/2009, diluting a big percentage of their stockholders. I suspect that the deals were hammered out with hedge funds in the Wallstreet who have shorted all these companies in the backroom. With a big short ratio, it was simply not possible to cover those short position via open market purchases without driving up the stock prices. And what is the chance of having so many companies silmultaneously raising capital all the the absolute zenith of the stock market?

Most of the rest of the GDXJ components beyond top ten are not familiar to me. And that is the beauty of investing in an ETF, not needing to know every individual company. Assuming that gold bull market continues, GDXJ will eventually outperform GDX, with much higher volatility. I expect the rallies in both will be kind Read the rest of this entry »

Rob Kirby has recently alerted people at financialsense.com for the possibility of missing gold bars at GLD. Here is what he said:

An alert reader I communicate with [who shall remain anonymous] has been documenting the length of the published GLD bar list:

Something TRULY stinks here. No explanation has been offered for the DRAMATIC swings in this list. Where gold is concerned nothing happens by accident.

Such anomaly if it’s true would be totally outrageous. Before going into total panic, obviously one should do the due diligence first. Therefore, I spent a couple of weeks observing the gold bar list at the GLD, which can be downloaded right here from spdrgoldshares.com. I was able to obtain 2 different copies of GLD bar list. One is 855 pages long, and another is 1291 pages long, both of which can be downloaded from my site by clicking on the links.

The first thing that I noticed was that on the 855 page version, it is attributing to Bank of New York, while the 1291 page version, it is stating the rightful new owner as HSBC. This seems to be extreme slopiness on the part of GLD. Yes, HSBC has bought the ETF, but it has been quite awhile (I couldn’t google a link to verify the above, but only recalled reading GLD being bought out by the new owner.) Anyway, I don’t think anybody would make such a mistake in title regarding one’s own assets.

The second thing is obviously that the two versions did confirm what Rob Kirby said about very different length in the bar list itself. I was not able to get the versions with much shorter list. I tried Internet Archive Wayback Machine, and it didn’t have any archives for the bar list link. So I guess any archiving for observation will need to be done by oneself.

Once I begun to actually count the number of gold bars, it became clear to me that the page length has nothing to do with the number of bars. On the 855 page version, there are about 104 bars per page, while on the 1291 page version, there are about 69 bars per page. That makes the total number of bars to come out to be roughly the same or consistent with the number of bars stated in both documents.

Because of the minor differences that I still couldn’t reconcile by manual counting & estimation, I decided to write a short program (which can be downloaded here, requring a Unix system to parse) to actually go thru the entire document and count the number of bars, while also checking for possible duplication entries in the table. By the way, if anyone wants to know how to run this program, just send me an email.

Well, to no one’s surprises, the number of bars, gross weight and actual number of gold ounces are EXACTLY the same as stated in the documents. There is NO missing gold bars! BUT there are some 5000 duplicated bar entries (here is the duplicated list for the 1291 page version)!! I manually checked a few entries (such as 100341 JOHNSON MATTHEY, 813 NAVOI MINING, AA22338 JOHNSON MATTHEY) dumped out from my program, and they are indeed correctly duplicated. Besides, since my program verified the number of bars and ounces exactly, I think programming errors on my part is very low.

Then I googled the internet a little bit more. I found out that the problem of duplicated entries have been found before, and they were caused by not listing the complete bar number in the document. For example, Johnson Matthey before used two letter to encode the year of fabrication before year 2002. Therefore, the duplicated bar entries are only in the text, but not in vault.
Although I still felt that statistically having 5037 duplicated bar numbers out of 88941 bars or 5.7% is abnormally high to me, at least there is some plausible explanation.

From the investigation on the different length of the two GLD documents, I must conclude that the two other versions of 208 and 195 pages are more likely to be human errors. In fact, I believe that the same person Rob Kirby referred to on the Yahoo message board has posted and corrected his own extraction error in this very later post “Re: Barlist Missing 65,497 bars”:

….My earlier numbers reflected an issue with correct extraction…..

In fact, if there is any fraud or theft in GLD, I just don’t think that GLD owner will commit such big blunder of revealing it in a such stupid way. It will have to be more subtle and elaborate than this.

I personally like to read whatever Rob Kirby has to say. But like everything you read on internet, you should always take it with a grain of salt, making sure you have filtered out the dis-information from information. For example, on Kirby’s previous post claiming big physical transactions in gold at the end of September in gold futures market, I simply cannot find this trace of physical delivery in any of the reported futures market. That is not to say that it is not possible, but just that I cannot trust such information with certainty.

Despite the finding from my personal investigation, I will still not hold GLD, due to problematic custodian structures. In fact, if anyone doesn’t want to buy physical or too much of it, one should simply diversify the physical gold holding in various gold/silver physical ETFs: GLD, GTU, SGOL, CEF, SIVR, SLV, etc. This way in case one of the ETFs in the unlikely scenario of actual theft or confiscation by government, you will still be left with majority of your holdings intact (in paper money at least). It will certainly increase your transaction costs, but at least it’s far better to let an unpredictable future event to hit your financial well being. And I also want to add that nothing can beat physical gold/silver, because in the time of crisis (and heavy demand), there is always an added premium which is not available in the paper market.

Frugal at 1stMillionAt33.com

Gold broke all time record in $US today. It is a confirmation that the bull market is alive.

Some people could argue that this may be a double top. That is definitely possible. However, if gold does get up to more than $1100, then I think that argument is a little weak. Furthermore, based on the recent consolidation of gold prices, it just doesn’t look like it’s a double top formation. A double top usually falls sharply afterwards. Gold consolidation has been quite flat, indicating its continual strength.

In fact, gold has indeed climbed a giant wall of worry. Majority of gold investors have not put in more money because of fear in impending stock market correction.

I have no way to know whether the gold mining index HUI is making a small double top right here. It is certainly possible. But I try not to predict the short term moves too much. After all, it’s not easy to out-smart the markets on a daily basis.

I understand that the great trader Bill at BillCara.com has sold partially out from stock markets & gold/mining. I also know that JC, one of the very few successful traders amid 2008 stock market crash at www.simplyprofits.org have gone out of markets for quite a while. I understand that the person who called the credit market crash in 2007, Bob Hoye (normally at HoweStreet.com), has turned bearish on general stock markets, and especially on silver, for a number of months. But I kept thinking to myself that in this wave 3 up, most people/traders will be missing the bull ride. Ha, ha, myself included!!

The next big milestone if it comes will be a new high in international currency, first in Euro, and then in commodity currencies. I continue to believe that this new high will NOT come until the next big fall in the financial sector happens, which may be next March/April. From that regard, at least, for the international investors, they probably still have time to digest the current volatility in gold market. However, I wonder whether there may be some fireworks first when priced in $US before the year ends. Yeah, I know $US is supposed to rally right here right now. But is this another episode of “markets stay irrationally longer than one can stay solvent”?

Next Friday is an option expiration week. Maybe there is a chance of pullback. Maybe BillCara & Bob Hoye is right. I dare not to go in nor go out of this market. Brave trader I’m not. Patient investor I am, and I need to take actions accordingly.

Best luck,

Frugal at 1stMillionAt33.com

HongKong is going to keep its own gold in the newly built vault. When the party that keeps your “money” (in gold) can be insolvent, there is no guarantee that you will get your “money” back. I don’t know whether this news has anything to do with the two days of the vertical rise in precious metal & mining stocks.

The best way to buy gold is simply buying physical gold, and keep them yourself. Such process can be dangerous and susceptible to theft, but in my opinion, it is far better to have these banking thieves and liars taking possession of your gold. The same is true for silver.

I have looked over the prospectus for GLD, SLV, SIVR. There is also an upcoming SGOL to compete against GLD. All of the prospectus have extremely limited legal rights for your purchased shares in their trust. Most of the time, your legal rights stop at the Trustee. Trustee can deal with Custodian, but not sub-custodians who may keep your gold/silver. It is extremely difficult legally to recover your gold/silver through layers of legal non-protections down to sub-custodians. And guess what, at every level, from Trustee, Custodian, down to Sub-custodians, all of them are big banks which can become insolvent in the event of derivative crisis.

The primary reason to buy gold/silver is to have “insurance” against financial calamity. Leaving your gold/silver to these big banks who have recently gone to the brink of failures defeats the sole purpose of buying gold/silver. You won’t know who may go belly up, shorting nakedly in gold/silver futures, until some bank really fails.

If you believe in Bible, what kind of investment choices should you make? One of the most mysterious chapters in Bible is the Revelation which predicts the end time. The most interesting part I would have to say are the seven seals. When I first read them, some were kind of clear, indicating wars and plagues. Some were not so clear at all, like the third seal (Revelation 6:6):
“A measure of wheat for a penny; and three measures of barley for a penny; and see thou hurt not the oil and the wine.” (King James Version)

My first reaction was what does that mean?? A penny? I learned much later what the penny means in Bible. Some versions use a shilling or (the Roman) denarius which is essentially a silver coin about the size of a dime, or about the wage of one day work (Matthew:20:2) at the time when Bible was written. In the New International Version, this is what it states for the same Revelation passage:
“A quart of wheat for a day’s wages, and three quarts of barley for a day’s wages, and do not damage the oil and the wine!”

Once you understand the units, it is more clear. First of all, silver which was the monetary unit was worth much more in ancient time, compared to our modern time. If we use an hourly (federal) minimum wage of US$6.55, and 8 hours a day, that will be $52.4, or about 3.75 one-ounce (28.35 gram) silver coins (at US$14) or about 23.5 denarius (4.5 gram of silver content). We are earning 24X in silver than ancient workers. So either it means that silver is vastly undervalued, or our wages are so much better valued than ancient workers. I’m guessing it’s probably somewhere in between, especially silver is no longer used as monetary units.

Secondly, the other part is that the wage of one entire day can only buy you very little amount of wheat or barley, barely enough to satisfy one man’s hunger. It is obvious that it means at the minimum that there is a great food inflation, if not inflation in general. However, it’s basically impossible to only have food inflation. Food is the most essential commodity. Food inflation will drive all other inflations.

As I contemplate what Bible means for the current global economic pictures, it is also important to note that United States is a predominantly Christian country. I think those scenarios if it comes unfolding could apply to US more than other countries through a US dollar depreciation.

We are obviously not through the current phase of economic deflation possibly until 2012. However, the next phase of great inflation is probably just around the corner. Keep the goal in sight.

I have been asked by several people (mostly females), my wife and my mother-in-law included, that if gold/silver is a good investment, then diamonds must also be a good investment. And my answer is always an emphatic NO!

Yes, diamonds are very precious in the sense that they are probably one of the most expensive items per weight, much much more expensive than gold indeed. However, the value of an item is always subjective according to the observers. The value of diamonds and the sale of all kinds of jewelry go up in peace and economically prosperous time. However, they tend to go down in economic distress. In fact, in respect to investment, diamonds function more like investment in art works. The value of arts go up in a stock market boom, and they go down when stocks go down. In fact, artwork boom is the last indicator for a stock market making its final top back in 2007.

Why the big difference? The people buying diamonds thinking that they are buying into same class of investment as gold/silver do not understand what money means. One of the most important criteria for gold/silver being used as money historically is because of the divisibility of gold/silver metals. Been able to divide gold/silver into smaller pieces easily and still retain exactly the same value when summing back up is extremely important to function as money. Can you divide your 1 carat diamond into 0.5 carat diamonds and still get the same total for the values of the two pieces of diamonds? NO! Because 1 carat diamond is much more rare than 0.5 carat diamond. The price of rarity is higher in the eyes of beholders. Because of that, diamonds can never function like investment in gold & silver.

So if you like to buy diamonds, fine, just buy them. But don’t kid yourself into thinking that their value will go up along with gold/silver. In fact, the opposite is more likely to be true. Gold usually outperforms in a wild inflation and also deflation. Silver tends to under-perform gold, until the last final stage of gold bull market. Diamonds on the other hand will only perform in an inflationary environment, not in a deflationary environment, simply because diamonds are not money.

One of my colleagues have repeatedly asked me this question. I am quite clearly on the answer, “NO”.

How many people do you know who actually hold GLD? How many people do you know actually buying gold? How many people do you know actually buy mining shares? The answer all too often is close to zero.

A bubble is ALWAYS easily recognizable (unlike the shameful Greenspan who claims that it can only be seen hindsight). The participation rate will be quite high that you are bound to hear about it in news REPEATEDLY, and that it will be always the “topic of the party”. A bubble is a collective ignorance or rather frenzy, and there is always a disconnect to reality.

In fact, gold is looking extremely good technically, forming the bottom of the cup in a cup & handle chart. The next rising up is usually pretty substantial.

At $1000 just a month ago, the gold bull is faithfully shaking off the Indian and Arabic participants. However, the Asian will be piling in due to competitive devaluations of their own currency. Asians have always recognized both gold/silver as the money. They will never hesitate to protect their own wealth in the real money.

So are you onboard?

Unfortunately, for the smaller investors, physical gold is pretty much out of reach. With a minimum order of 20 ounces, that is about $20000. The only current buyers are from institutions and people who have money to put away. These are smart investors buying in, while the middle class is selling out their last portion of gold jewelry for cash. Who will be right?

The run-up in gold on last Friday is good for investors, but probably bad for traders.

Oil is at all time high, while gold has sustained a 15% correction. While it is still possible for gold to come back down to $820 to $850, gold is a good buy for longer term horizon. If one looks at the gold to oil ratio chart, the ratio is currently at an extreme value. Sooner or later the ratio is bound to rise up. If you believe in crude oil going up, then you should believe in gold prices going up more.

Here is the recent chart from stockcharts.com:

A chart from Incredible Charts shows how extreme the current ratio is.

In a credit crunch (which is not over yet) where deflation occurs, the value of money goes up. And I expect that the value of real money (gold) goes up even more.

From the ratio chart, one can probably safely say that in the intermediate term, it’s probably good to either buy gold and/or sell oil.