Wednesday, January 30, 2008

How You Can Be an Arbitrageur

Two posts ago, I mentioned that the asset class that would likely perform well for the next several years would be physical resources. Not resource stocks, but physical resources, in your possession. This post will discuss how to go about doing that.

For the last 3 years, I have been bullish on Silver, and believe strongly in physical bullion ownership. Because global equity markets are falling into bear markets, I feel especially bullish on Silver for the long term. The safest way to participate in this great commodity bull market is by actually buying the metal, and there are several ways of doing this.

In my opinion, the best way to buy silver is in the form of silver coins minted in the 1960's. In Canada and the United States, most coins minted in this era were 80% silver bullion. I personally like purchasing pre-1968 Canadian Silver Dollars. Each one of these coins contains 0.6 ounces of fine silver, and is 80% pure.

Interestingly, any combination of pre-1968 of Canadian Silver coins that add up to 1 dollar will contain 0.6 ounces of silver. For example, 4 silver quarters has the same amount of silver as a silver dollar, or 10 silver dimes has the same amount of silver as a silver dollar.

The advantage with buying silver in this form is that it is divisible, portable, pure, and carries very little premium. This means that they will sell close to the spot price of silver. Other coins, such as Canadian Silver Maples, usually sell for spot plus 3-5%.

An alternative to buying silver coins is buying silver bars. This method is ideal if you wish to purchase large quantities of the grey metal. Generally, bars are denominated in 1, 10, and 100 troy ounces. I prefer to buy from either Engelhard, or JM.

In terms of buying gold, I think Canadian Maples, and bars from the above mentioned brands are a good bet. There are no Canadian Coins with gold content as mentioned above with silver. The Royal Canadian Mint has also minted Palladium and Platinum Maples, which are metals that are in equally strong bull markets.

In addition to precious metals doing well over the next 5-10 years, I feel that base metals, such as copper and nickel, also have a lot of potential. The best way to invest in copper and nickel is also through Canadian Coins.

Prior to 1982, all Canadian Nickels that were minted were pure nickel. With the price of nickel rising over the last several years, these nickels are now worth, in raw materials, close to 12 cents per coin.

Furthermore, most nickels minted after 1981 are 25% nickel and 75% copper. This makes their intrinsic value approximately 5.5 cents per coin. Nickels minted after the year 2000 are generally steel, and are worth far less than 5 cents per coin. For more exact figures, please refer to

I have taken a random sample of 2,000 Canadian nickels, and broken down the proportion of each type in the following pie chart:

In other words, if you were to go to any bank, and ask for $100 worth of nickels, you would receive approximately:

  • 500 Nickel Coins at roughly 12 cents each, which is $63.50 in pure nickel
  • 920 Copper Nickels at roughly 5.5 cents each, which has a melt value of about $51.50
  • 580 Steel Nickels, which can be turned back to bank for their face value of $29.00

After returning the worthless steel nickels to the bank, and getting back $29.00, you would be left with an expenditure of $71.00. However, you have, in exchange for the $71.00 spent, about $115 worth of commodities. This represents a risk free return of 62%.

What is also interesting, is that there are about 100 nickels in a pound, so 500 nickels would be 5 pounds of the commodity. This makes it easy to keep track of how many nickels you have just by weighing them.

Sorting nickels is made easier by using a strong magnet. The pure nickel coins, and the steel coins are both attracted to a magnet. The ones that are not are the copper nickels. From there, the steel and nickel coins must be sorted visually.

Now, you may be wondering if anybody would actually turn around and pay more than a nickel for a nickel. The answer is yes. My local coin store is willing to purchase my nickels, and you can also unload them on Ebay if need be. The seller in that auction was selling pennies, which is also profitable, and a good way to get into copper.

At the end of the day, I believe that holding physical platinum, gold, silver, palladium, copper, and nickel in your portfolio is the safest and potentially the most profitable way to participate in this great bull market.

Sunday, January 27, 2008

The TSX, the Euro, the Yen, and Silver.

For this past week, gold was up $29.00 an ounce, reaching yet another all time high. Also, the TSX basically fell apart on Monday, but, from there, was able to stage an oversold rally.

During these times of extreme volatility, interesting chart formations usually begin to appear, and this week, the TSX put in a candle formation know as the bullish counterattack line. In his book, Japanese Candlestick Charting Techniques, Steve Nison describes this pattern as follows:

This pattern occurs during a decline. The first candlestick of this pattern is long and black. The next session opens sharply lower. At this point, the bears are feeling confident. The bulls then stage their counterattack as they push prices back up to unchanged from the prior close. The prior downtrend has then been bridled.

Here is a weekly chart that actually shows this pattern:

Obviously, it takes a tremendous amount of volatility for the TSX to gap down 500 points, and then turn around and make up those losses. I find that trading stocks is difficult during these times, because there is always the possibility of being blown out of a position when there is a huge gap when the market opens.

This is why I have turned my focus to the foreign exchange market. I have started trading Forex again, and will continue to do so, because of the following advantages:

1) Guaranteed Stops- risk management is very easy
2) Open 24 hours a day- that means very few gaps, and can trade after work
3) Free Leverage- no monthly margin costs
4) Can go short or long with a click of a mouse.
5) Reasonable transactions fees

Furthermore, I can still make my bets of the direction of the TSX through the Forex Market. The Euro/Yen cross follows the TSX very closely. Here is a daily chart comparing the two:

In other words, if I feel that the TSX will fall, I would go long the Yen and short the Euro. If I thought a rally was in the cards, I would short the Yen, and go long the Euro. You can also play out your gold predictions by using the Euro/USD cross or the Aussie/USD cross.

I should say though that Forex trading is risky, and most people who trade it will eventually lose all of their money. The TSX will rise and fall, and gold will rise and fall, but gold, at least, is a bull market, so that means I would only spend 10% of your funds trying to trade the ups and downs, and 90% of your funds in a core position, that you do not touch.

The trend for silver is also up. There will be days when it drops 5% in a day, and it could even happen next week, but I have no idea. The main point is that it is in a bull market, that means you do what the well known precious metals expert Bob Chapman says, and that is to get long and stay long. Here is monthly chart of silver:

There will be a special post released on this blog on Wednesday. Thanks for visiting.

Sunday, January 20, 2008

Charts of the TSX, Oil Stocks, Gold ,and Silver.

Just like every other stock market, the TSX Composite Index was pummeled this last week. I mentioned last weekend that the TSX was being compressed into an area clearly defined by support and resistance. This compressed energy exploded to the downside, which was an event accurately predicted in this blog. Here is a daily chart outlining the damage:

I think that for next week, there is a strong probability of a relief rally. That is generally what happens when the TSX is oversold, and as an added piece of evidence, the index is at potential support. Furthermore, this recent wave down is the same length as the first wave down which commenced at the beginning of November.

I also think that oil stocks could be due for a rally. Here is a chart of the same ETF I mentioned last weekend. These ETFs are so much fun to analyze, since they seem to show human emotion to a greater degree than regular ETFs, due to their 200% exposure:

However, despite a high chance of a bounce this next week or two, one must not ignore the serious chart damage that occurred in this correction. In my opinion, this correction was deeper than usual, and it could be a harbinger of things to come. The following chart is a weekly chart of the TSX. It goes back more than 8 years:

I spent quite a bit of time annotating this chart, so I'll leave it to you to figure it out. I will say that the TSX has always found support at around the 50 week moving average. This did not happen during this recent correction. The indicator at the bottom measures how far the TSX is trading from moving average support on a percentage basis, and is divided into bear and bull zones.

If global equity markets are in fact going into a bear market, then that means that it is a good time to explore alternate asset classes besides stocks. For 2008, the asset class that I think will do the best is physical resources. Not resources stocks, but the actual resources, in your possession.

I have been long term bullish on gold and silver, since I started this blog back in June 2007. Gold has risen more than $250.00 an ounce from that time. And it has a lot further to go. Gold is also finally starting to heat up in terms of the Canadian Dollar. This means that gold's rise is not just a US Dollar story. Silver is also now starting to out-pace gold, which is another sign of a healthy precious metals market:

Thursday, January 17, 2008

New ETFs Launched

On the previous post, I showed a chart of an ETF that does twice the daily performance of the Canadian energy sector. This ETF was a Horizon Beta Pro ETF and, yesterday, this same organization introduced 4 new ETFs.

These 4 ETFs, rather than allowing you to gain exposure to Energy Stocks, allow you to gain exposure to the actual commodities. Here are the ticker symbols:

• Horizons BetaPro NYMEX® Natural Gas Bull Plus: HNU
• Horizons BetaPro NYMEX® Natural Gas Bear Plus: HND
• Horizons BetaPro NYMEX® Crude Oil Bull Plus: HOU
• Horizons BetaPro NYMEX® Crude Oil Bear Plus: HOD

According to their official website:

Similar to the existing HBP ETFs, the Bull Plus ETFs offer twice the daily performance
and the Bear Plus ETFs twice the inverse daily performance of the underlying benchmark. All
four new HBP ETFs will trade in Canadian dollars and, through currency hedging, will offer
investors exposure to commodity returns expressed in US dollars.

The fact that these ETFs have double exposure makes them more attractive than the current Oil ETF, USO, in my opinion. Furthermore, the fact that these ETFs offer currency hedging will make their analysis much easier, as there is one less variable that needs to be factored in.

In addition, there are plans for even more Horizon ETFs. These are expected to come out next month, and here are the descriptions:

• Horizons BetaPro COMEX® Gold Bullion Bull Plus HBU
• Horizons BetaPro COMEX® Gold Bullion Bear Plus HBD
• Horizons BetaPro S&P/TSX Global Mining® Bull Plus HMU
• Horizons BetaPro S&P/TSX Global Mining® Bear Plus HMD
• Horizons BetaPro DJ-AIGSM Agricultural Grains Bull Plus HAD

The introduction of the first two ETFs above is something I am particularly interested in. This will now mean that Canadians can trade gold directly without having to convert their money into US Dollars, (which I never liked doing) or getting into the futures market.

As soon as there is enough data to perform technical analysis of these ETFs, I will begin analyzing their charts.

Anyway, here is a quick chart of the TSX. Looks like I was wrong about the direction of the breakout:

Sunday, January 13, 2008

The Technical Analysis Continues

I think it has been 3 weeks since there was a post to this site. The reason for this is that I have moved into a new apartment, and it took some time to get settled in, and to get an internet connection reestablished. Going forward, there will be posts every weekend on this site, at a very minimum.

I left off saying in the previous post that the bearish momentum was being lost, and it looked like demand was starting exceed supply in the gold stocks sector. Here is a daily chart of the HUI that I found interesting:

There were a few posts in December that discussed a potential bearish head and shoulders pattern forming in the gold stocks charts. The above chart shows that interpretation never did come to fruition. However, when the HUI started forming hammers right at a strong support area, I think there was ample warning to cover any short positions, and consider possibly going long.

Furthermore, when gold broke out of the triangle mentioned in the previous post, you knew that going long was the better bet. To be honest though, I did not anticipate such a quick rally in gold. The fact that the triangle unfolded just like everybody suspected it would surprised me, since gold rarely does what everybody is thinking it will, which is why I am always leery of breakouts.

The only area that I played since the last post was the Canadian Energy Sector. I bought shares of an ETF that does twice the daily performance of this sector. The ticker symbol is Here is a daily chart of it:

There are so many great technical patterns that formed in the above chart. I am sure if you just click on the chart, you will see most of them, but what I felt was the strongest piece of evidence, evidence that the bulls were in control of this market, was the island reversal that formed in December. Your cue to exit was the red resistance area and overbought condition formed near the beginning of January.

In terms of where the markets are going to head in the next week, let's have a look at a daily chart of the TSX:

As you can see, the TSX is presently being compressed into an area defined by clear support and resistance. A break below the blue line would be very bearish, but a break above the red zone would be quite bullish. The odds favour a breakout to the upside, in my opinion anyway.

Finally, I think some of the impetus for a TSX breakout will be a resurgence of a beaten down banking sector. Although I never talk about financial stocks on this site, I still think this following chart is interesting:

The above chart is a weekly candle chart of an ETF that follows the Canadian Financial Sector. Although the TSX is heavily commodity driven, in order for the TSX to muster enough strength for a rally, it will still need help from this sector. And by the looks of it, that help might be in the cards for the next couple weeks. I am predicting that this ETF will hold the green support area indicated, which will help the TSX bounce off its support area.