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In the last week, my mining shares have plunged by 20%.  With mining shares, you live and die by the sword.  They mirror the moves of the underlying commodities, but do it with leverage.  Chances are, if you are investing in mining shares, you are experiencing similar frustration.  If this bothers you, take a deep breath because the volatility will be more extreme as the bull market plods ahead.  When gold has moves of $100 A DAY, up and down, try and imagine what will happen to your mining shares.

First of all, I want to make a distinction between physical gold and silver – and mining shares.  Gold is NOT an investment, it is money, it is to be accumulated and NOT sold on rises or dips.  It is your last line of defense against a fiat currency, the dollar, that is absolutely headed DOWN.  Not straight down, as there will be rallies along the way and we may be about to experience one such event now, caused not by the strong economic fundamentals in our economy, but by a serious fall of the euro.  The euro represents 57.6% of the weighting on the USDX and when it falls, the dollar rises, period!

There is little to argue about when it comes to the finances of Socialist Europe.  Greece, Ireland, Portugal, Spain, Italy and even France are in no better shape than the states of Illinois, California, New Jersey and New York.  They all belong in the graveyard of Death by Overspending.  When money flees the euro, a large chunk of it will end up in short-term US T-Bills.  That buoys the dollar.  For a while.  That is usually a negative to gold and silver.

Mining shares are an investment and they are risky as well as potentially rewarding. As such, they can be sold during major corrections and repurchased after the market turns around and rebounds.  Do not take that avenue with your physical metals.

There are two important things that you should keep in mind when you invest in anything.  The most important thing is SLEEP.  Can you sleep well at night when your portfolio is falling?  There is no set number or percentage attached to this.  It depends on your net worth, your age and your ability to handle risk and volatility.  If you are having trouble sleeping as your gold and silver shares are imploding, you probably have too much invested in the sector.  You have several choices here – sell; hedge, or stop looking at the computer every 10 minutes and relax.  That is easier said than done.  I know, because I can’t stop looking at the computer every 10 minutes.  But what distinguishes me from most people who own precious metals is I have ultra strong conviction and have a clear understanding of where we are headed.  My timing may be off, a bit, but the end game is already decided.  And even with such a disposition, it upsets me to see hundreds of thousands of dollars in “paper” wealth vanish in a few days.

The second important thing to understand is what makes people buy and sell an investment, any investment, not just gold and silver.  It can be summed up in two words: fear and greed.  On the one hand, you don’t want to sell (even if you should) because your investment might keep rising.  And you are also pulled in the opposite direction with an urge to sell because you don’t want to lose the gains that you have accumulated on the way up.

The next thing you should know is that NO ONE can give you, with absolute certainty, the answers that you are looking for.  Ain’t that a shame!  The more you research, the more you will discover strong arguments for both the bullish and the bearish scenario.

If you are expecting me to tell you what gold and silver will do in the next few days, weeks or even months, you will be disappointed.  I am looking for someone to tell me and the more I look, the more I understand that I am on my own.  And so are you.

But, what I can do is touch on the stronger arguments on both sides of the question and you can decide what you want to do.  And the question is – are gold and silver going up or down this week?  Here is some ammunition for you as you try and figure out what is next for the metals.

Does this chart look like the bull market is over?  Get real, this is a dream chart and gold is still well above its 200-day moving average.  (Chart courtesy of ZealLLC.com)

How about silver?  This is another great chart from ZealLLC.com

The next chart is a pretty good indicator of which way gold should move.  Gold is overpriced and poised for a fall when it approaches 1.15/1.20 on the left scale.  Looking at this chart, gold is not in a danger Zone at this time.  The 1.0 to 1.10 range is normal.  How about silver?

What the bears have to say:

A friend of mine, who runs a large precious metals trading department for a NYC hedge fund is cautious now and says “I’m a buyer at $1250.  He does not expect gold to fall below that number and is not suggesting it will fall to that number either.  He is in a short-term “wait and see” mode now.

Larry Edelson, whose advice I respect, is adamant that the bull market in gold is alive and well and he expects gold to top $2000 by the end of the year, but he called the current pullback and is still uneasy and believes that gold can still fall further.  There is support at $1340 and so far it has not been breached, but if it is, gold certainly could fall into the $1200 range. But it will be short-term, not the end of the bull market.

David Nichols’ (Fractal Gold Report) analysis calls for a likely deeper pullback, one that could take gold down to around $1000, but by this fall the bull market will be in full swing up and new highs, above $2000 will be reached by the end of the year.  Nichols says “It was another poor showing for gold this week, and the evidence is really piling up that the Month 64 top is already behind us.  However, the good news for gold bulls is we have not seen a massive blow-off end-spike that is associated with the end of speculative bull markets, which implies that this is still coming down the road. So those dreams of $2000+ gold are likely still alive, but on a different time-frame than most are anticipating. If it’s going to happen, it will have to develop after a lengthy post-Month 64 retracement period, and gold will have to rebound at the $960 – $980 energy zone.

So in my opinion it’s time to start shifting our focus to the downside, as we’re coming into a lengthy period — again, at least 6 months, and more likely 8 months — where the predominant energy force in the gold market will be downwards.”

His view is much like Edleson’s but a bit more severe in the near-term, but he bases it on a different set of technical analysis.

Porter Stansberry says,  “ironically, the worsening crisis in Europe will give our own dollar a bit of a reprieve this year. In a crisis, investors will prefer the liquidity of short-term Treasuries to any other asset, including gold and silver. Look at the precious metals markets [last] week…

The euro (FXE) fell almost 2% Wednesday. Silver (SLV) fell 7%. Gold (GLD) fell 4%. What went up? The U.S. dollar (UUP) rose 2%. Don’t forget… in 2008, the dollar rallied tremendously. Gold and silver fell sharply. In a short-term panic, investors are still buying dollars, not gold or silver.”

Now that I’ve gotten the bad news out of the way, let’s take a look at the other side of the argument.

Adrian Douglas is a regular contributor at the LeMetropole Café.  He just served commentary titled, “Strong Indications of Gold & Silver Shortages.”  He wrote,Since reaching new highs at the end of 2010 gold and silver have been sold off, and the selling has been particularly intense in the last few days. The news on the economy is almost exclusively bullish for the precious metals. From the price action one might be falsely led to believe that investment demand for the precious metals is waning. On the contrary the data analysis I will show in this article reveals strong indications of growing shortages and furthermore that the gold and silver markets are approaching ‘tipping points’ that will lead to an acceleration of price appreciation.”

Dan Norcini is one of the most successful traders in the metals arena.  I quote him almost every day in my daily.  He is Jim Sinclair’s main man and has a column in JSMineset every day.  I take his views seriously.  Here is what he wrote on Saturday.

The weekly Commitment of Traders Report released yesterday (Friday) has a detail that I believe merits bringing to your attention.

Managed Money, which is basically the hedge funds, is now down to the lowest level of net long positions held since July 2009. They are now down nearly 86,000 net longs from the point at which gold made its recent record high. It should be noted that the COT report only covers through the Tuesday of the current week and therefore does not catch any developments in the markets that occur Wednesday through the close of trading on Friday. On Tuesday, gold closed at $1384. By Friday it has dropped over $30 from that level as additional fund long liquidation was underway. The point is that the net long position of these hedge funds has undoubtedly dropped to an even lower level.

In spite of the relatively low level of fund long side exposure, gold is sitting a mere $70 off its all time high. That bodes well for gold moving forward as any “froth” that might have been in the gold market from the hedge fund community has been to a great extent wrung out.

The general public, the small specs, who generally tend to buy at tops and sell at bottoms, is still relatively high on long side exposure but I suspect a larger number of them have been flushed out in Friday’s steep drop. They do not generally have pockets deep enough to sustain drops of large magnitude and are most often the recipients of “courtesy calls” from the margin clerks.

The other reportables, which includes the CTA’s and large local and private traders are a bit extended to the long side yet so we will have to see whether or not the shorts can try to further flush this camp. They have generally been averaging a net long side exposure of near 40,000 contracts. As of Tuesday they were near 57,000 which was also probably further reduced in the subsequent price action of Thursday and Friday. We might need to see this camp bleed down a bit more before feeling confident enough that the liquidation from their quarter has been exhausted.

All in all, while the COT report is not bullish, it certainly cannot be considered bearish and might even be called a tad friendly particularly based on the now greatly reduced long side exposure of managed money accounts, which are the real drivers of today’s commodity markets. When this camp begins to return to the gold market in size is when we will see the next leg higher commence.

By the way, the last time that the Managed Money was at this level of net long side exposure, the price of gold was trading at $922.

Norcini is definitely NOT in the bear’s camp.  Neither is Ted Butler, who is confident that most of the “longs” have already been flushed out of their positions in the silver pits and he points to the severe shortages of physical silver, a point also called to your attention recently in remarks I published by James Turk and John Embry.  They are in the industry and run funds that hold physical metals and when they say they are having trouble sourcing gold and silver, then the shortages are real and not imaginary.

What would Richard Russell and Jim Sinclair say about this pullback?  I think Russell would say “Don’t sell your gold, buy more on the dips.  It’s about OUNCES not about price.  Get as many ounces as you can.  The real hazard you are facing is a fall of the dollar.”  Sinclair would say “Dig a hole in the back yard, climb in and place a large rock on top and don’t come out for a while.  Gold will hit $1650 and beyond soon.”

Are you still confused?  You should be – there are no easy answers, short-term, and no guarantees.  Your emotions of fear and greed will tug you one way and the other so you should consider all sides of the issue and try and make a rational, non-emotional decision and live with it.  But do NOT sell any physicals.  It would be smart to buy more as the price falls.

Here is what I am going to do.  I am going to purchase shares of DGZ (gold double-short fund) and ZLS (silver double-short fund) with stop loss protection and resist my urge to sell off my mining shares.  If they tumble, so be it, at least I will be making money on the double-short funds and I am certain that before long, they will come roaring back and make new substantial highs before the year is over.  I have lived through many of these pullbacks in the past 10 years, several were severe, and at the end of the correction my portfolio always comes back and makes new all-time highs.  As long as the bull market is in force, and it is, then this hold and wait strategy will work.  The risk is being outside of the market, on the sidelines when things turn abruptly around.  Plus, I am not eager to pay capital gains taxes on any stocks that I sell now.

My best advice is move forward in time 11 months and ask yourself “where do I think gold and silver will be by the end of the year?”  If your answer is “much higher than they are now,” do nothing – or check out the double-short funds with your stock broker.  My answer to this question is gold above $2000 and silver over $45.  And if I am correct, my mining shares will be at another all-time high, maybe double where they are today.

Remember, even the “bears” that I mentioned, all believe this correction is not the end of the bull market and they all expect gold to hit $2000 by year’s end.  Lesson over!

A heads up: I will be spending a lot of time with our East Coast representative here in Minneapolis on Monday, Tuesday and Wednesday.  We will also drive up to Fargo and check out a new and very secure storage facility where Andy and I store our precious metals.  I have that much faith in the owners, who I have known and done business with for over 20 years, so, I won’t have as much time to write my daily blogs for the next three days, but I will publish something for those of you who need the “daily fix.”
Sincerely,

David Schectman

Miles Franklin