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XMFSinchiruna (27.87)

Great Time to Raise Some Cash

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July 25, 2011 – Comments (13)

When the clowns in DC recognize the visceral nature of the impact of their behaviour upon financial markets this week, watch how quickly they will scurry to some sort of settlement on the debt ceiling. Just like that embarrassing budget debacle in April, this game of high-stakes grandstanding has never targeted default; only theater. It makes for dramatic theater when children play with matches inside a fireworks warehouse, and predictably the brokers of an eleventh-hour deal will embrace the ridiculous public impression that they have somehow saved our country from financial ruin by INCREASING our nation's indebtedness further into the black abyss.

Of course, like the kid who fails to recognize that a set of incendiary wicks lies just inches from his frightful game, the scarier scenario for us onlookers is that which the perpetrator has failed to envision. The potential for some form of acute financial backlash exists even before the reported deadline. A foreign creditor fleeing Treasuries could induce some measure of panic within the bond market, and of course one of those inept credit rating agencies could tip a domino with the capacity to send a long string of others into motion.

So, notwithstanding the ever-present risk that acute financial turmoil could be triggered at any time by any number of potential scenarios, I see an elevated risk for a near-term pullback in gold and silver that could present one final buying opportunity before the continuation of this major leg higher. As such, I will be taking the opportunity to take profits in gold and silver stocks as we experience any further strength in gold and silver that appear predicated upon the delayed nature of a debt-ceiling agreement.

But here is the important part! My core position in precious metals always remains untouched throughout the multi-year bull market .... that is because the continuation of the long-term trend is the only forecast in which I remain 100% confident. So, when I speak of profit taking, I speak of rebuilding the modest cash position that I built as the last observable bout of relative strength took form, and which I then redeployed into weakness at substantially more favorable prices.

80% of my precious metals allocation remains safegurded under lock-and-key ... never subject to the sorts of near-term dynamics of which I presently speak. I made some powerful profits this year by raising a 20% cash position on the way up to $50 silver, and then rebuilding those positions on the way down to $32 silver (each time accelerating those activities as the respective bookends were approached). That is the sole portion of my overall pm allocation with which I react to my perception of near-term dynamics. The cash position within my pm allocation presently stands at about 9% (up from a near-zero cash allocation after the last round of buying), but I will likely seek to raise that aggressively toward 15% into any further pre-deal strength this week. There is always a chance I could be wrong in my forecast for a near-term pullback after a deal is reached, but I like my odds of success sufficiently to engage a small portion of my allocation accordingly. Furthermore, the pullback could be both minor and short-lived, so any such engagement of near-term volatility must be conducted with a high degree of maneuverability. I do not have specific target prices in mind for the pullback, but rather will follow my discipline of gradually ramping-up buying activity into weakness just as I have ramped-up my selling activity into recent strength.

In any event, I expect gold and silver to surge powerfully through the second half of 2011, so my bias will remain tipped toward re-gaining exposure, over timing the perfect near-term bottom. Likewise, any number of potential developments over the coming days could alter this near-term outlook in a heartbeat, so Fools are encouraged to remaind very attentive to this market. In the meantime, I happen to view the gold market as susceptible to a near-term sell-off in the wake of a debt-ceiling deal in DC that is perceived as substantial (i.e. with "cuts" of $2T or more). If we get only a stop-gap measure, or one that deemed unsubstantial in the context of our overall debt burden, then Fools may wish to hasten their buying activity accordingly. After all, it won't be long before the onset of QE3 propels gold and silver to brand new chapters in their multi-year ascent.

13 Comments – Post Your Own

#1) On July 25, 2011 at 9:11 AM, XMFSinchiruna (27.87) wrote:

P.S.  When I'm in overall cash-raising mode, that doesn't mean I might not also be making some select purchases where the price is right. Likewise in the other direction, where I may trim some relative outperformers even as I target an overall accumulation of exposure.

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#2) On July 25, 2011 at 9:30 AM, Jbay76 (< 20) wrote:

Sinch,

I've been mulling this over this past weekend and have decided to set up stop-losses on some of my larger holdings so that I can kep the gains and redeploy them to get more shares opf the same company at a better discount.  I actually expected some "blood in the street" as of last Friday and was shocked when the general market indices went up.  Given this past weekends events, or lack thereof, I expect something to happen this week.  And if for some random reason things don't get that bad, then the stop loss doesn't kick in. 

We'll see...we definitely live in interesting times unfortunately...

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#3) On July 25, 2011 at 9:52 AM, silvermind (< 20) wrote:

Sinch,

re: this statement in your 5th paragraph in your post above:  "80% of my precious metals allocation remains safegurded under lock-and-key."  

Are you referring to physical silver and gold or to stocks?

Did you mean "relative underperformers" your comment #1 instead of trimming "relative outperformers"?

Thanks for this very important post.  I am hoping the entertainers you referred to in your opening paragraph don't send the stocks way down by their actions.  

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#4) On July 25, 2011 at 10:19 AM, Gonzhouse (76.10) wrote:

I've been thinking about the same thing. I have PAL, which is up 50%, but my heart is in gold and silver.

The only thing to add to your post is by Judy Collins:

Don't you love farce?

My fault I fear.
I thought that you'd want what I want.
Sorry, my dear.
But where are the clowns?
Quick, send in the clowns.

Don't bother, they're here. 

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#5) On July 25, 2011 at 10:35 AM, TMFAleph1 (94.96) wrote:

Haven't parsed your post in detail, but I certainly agree with the headline statement. In fact, I've been inclined that way for a couple of months (years?) now.

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#6) On July 25, 2011 at 10:44 AM, XMFSinchiruna (27.87) wrote:

silvermind,

Those are one and the same. 100% of my precious metals exposure -- even that relating to bullion exposure -- is achieved exclusively through stocks.

As for the other; I meant it as written.

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#7) On July 25, 2011 at 10:51 AM, MoneyWorksforMe (< 20) wrote:

 TMFSinchiruna

I sold a good portion of both my sandstorm gold and aurico gold stakes this morning. It was hard, considering I love both companies and their future prospects, however I agree with much of your article...If gold and silver didn't look overbought, as well as the two aforementioned stocks, in terms of TA, I would have ignored the debt ceiling nonsense.... 

I think gold comes back to around 1550/oz., and silver 37.50/oz. after this very short term pop....

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#8) On July 25, 2011 at 12:40 PM, pscholte (< 20) wrote:

I have learned many painful lessons from my "timing experience."  (Many investors convince themselves they are not timing the market when they actually are.)  On the surface, it is surely seems smart to try to preserve your gains and to preserve future buying opportunities by going to cash; however, it also plays havoc with returns unless you are disciplined enough to stay a pre-planned course and not jump in and out of cash and equities.  I don't think many are able to do that.  The market goes up for a couple of days and the temptation is to jump back in only to be followed by a steep downturn with the accompanying tempation to bail out.  Or the market swan dives for a day or two and the buying opportunities scream at you; you buy, and then the market continues to dive.  You say, "I am going to stay put," only to have the market finally scare you back to cash...right before a strong growth spurt.  I am staying put...fully invested.

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#9) On July 25, 2011 at 4:02 PM, rofgile (99.30) wrote:

Good blog Sinch.  I feel the same way at the moment, though about non-gold holdings.

 -Rof 

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#10) On July 25, 2011 at 5:51 PM, silvermind (< 20) wrote:

Sinch,

I just read an interesting article regarding Quebec including the Abitibi region you focus on.  Eric Lemieux of Laurentian Securities shared some info on the polictics in Quebec on The Gold Report (TGR below) today which I think also affects AZX. 

Link to article:  http://www.theaureport.com/pub/na/10350

TGR: Laurentian is based in Quebec and your focus is mainly on opportunities in Eastern Canada, from where most of the gold produced in Canada has come. As far as the recent changes in Quebec's tax regulations, what effect do you envision that might have on exploration and the mining industry in general, especially for the junior companies that rely on certain tax benefits?

EL: Obviously, I think there has been an impact. The government has made some questionable changes to mine legislation in line with the "resource nationalism" going on in the world. Governments have been pressed to increase royalties and tariffs on mining operations. The legislation in Quebec has tried to address this and an increase is probably acceptable to a certain measure.

However, one thing that is really frightening in Quebec now is that some municipalities can have a say on claims and project status. That explains in part why Quebec has gone down in the Fraser Institute ranking because of the uncertainty that has been created in some aspects of the mining legislation.

The fact that they're increasing the royalties is perhaps fair in light of the strong commodity prices. There's a bit of give and take and the industry eventually has to give a little. At the same time, I think the government has perhaps been very aggressive about raking in even more profits and caving into special interest groups. What is really dangerous right now in Quebec is this trend of wanting to control the claims and what can be done in terms of development and even exploration.

TGR: Do you think there might be any re-thought or reversal here if they end up seeing opposition from the mining industry?

EL: I think so. The metaphor we use is "Balkanization" of the mining resources, which is very dangerous. Once people are aware of the adverse impact that is having on the economy, I think they will realize that perhaps the government has gone too far, resulting in a readjustment. The pendulum swings from one side to the other, and now that we're really going to one end, hopefully we'll be able to eventually find a balance.
 

I wonder how much effect this new atmosphere will have on AZX?  I will contact the company and get back to you.  

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#11) On July 26, 2011 at 12:54 AM, awallejr (85.51) wrote:

Overall good blog Sinch except I personally don't raise cash through selling, but rather deploy further cash through income (dividends).  As long as the thesis for holding a certain stock remains true I don't sell.  I accumulate. 

This self-inflicted nonsense with the debt ceiling  might very well create a new buying opportunity. Sadly, as is typical, the innocent little guy gets hurt in the end.

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#12) On July 27, 2011 at 9:21 AM, XMFSinchiruna (27.87) wrote:

They're REALLY pushing their luck now. Each hour that ticks by makes a downgrade more likely; and a downgrade alone could send gold soaring past $1,800 in a heartbeat. In the hopefully still unlikely event of outright default, it's hard to say where gold would correct to ... perhaps $2,500 as a new base? Anyway, as usual, I find myself in the strange predicament of wishing for an outcome that is counter to my investment interest.

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#13) On July 28, 2011 at 11:38 PM, awallejr (85.51) wrote:

Yeah well there is the rub.  On the one hand we want our investments to prove profitable, yet on the other hand we don't want it at the expense of the world blowing up.  Best thing is to play some diversification where we profit overall if a "middle ground" happens.

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