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Sit back and relax – 2011 was a strange year. Gold and silver were stellar performers in the spring and summer, which is very unusual and they have under-performed in the fall, which is also unusual. All of this is leading up to a monster year in 2012, which I fully expect to be the best year ever at Miles Franklin. Just be careful about your investments in the mining shares. I’m pretty much out, for now. There will be a time to jump back in, but not now.  

Leverage (margin) in gold and silver is very low, currently sitting just off historically low levels and supportive for a lot of fresh funding to enter.

GOLD: there have been three instances since 1988 that leverage has been this low.

November 1999, gold increased 6% in 2 years.

December 2005, gold jumped 66% in two years and September 2008, gold jumped 85% in two years.

September 2011, gold has yet to mirror the above stellar gains and is currently up just 4% from September levels.

Silver: there have been four other instances since 1988 that leverage has been this low.

January 1998, silver dropped 4.5% (post Buffet Intervention).

April 2004, silver jumped 104% in 2 years.

September 2006, silver jumped 95% in 1.5 years (before 2008/Lehman kicked in).

October 2008-March 2009, silver jumped 187% from March 2009 on.

September 2011, silver has only gained 4.9% since the September flush out.

In the short-term, gold and silver could move lower from these levels, due to Europe not understanding that we are in a DEBT crisis, not CURRENCY crisis, and since people will need to raise cash, they are dumping everything, even solid assets like gold and silver, along with the dead weight. This will have the effect of setting up a HUGE rally in the medium-to-longer-term. 2012 will be a HUGE year for gold and silver.

I follow Roger Wiegand and he says:
Big American banks are having a bad day as they overloaded on European sovereign and corporate debts to the extent it could destroy some banks. Citigroup stated this morning that if the Euro fails, gold could have a fast run to $2,500 and we agree. Bloomberg told us today that China and India buy half of the jewelry market raw gold and they are going weaker in their purchases now.
I do not want to see gold under $1,607 or silver under $30, and think we do not go there. The way things are shaping-up for commodities and metals right now, the PM’s and related shares should be strong buyers in the first half of 2012.
That is right along with my thinking.

I pointed out in yesterday’s daily that my first mentor, Richard Russell issued a warning to his subscribers imploring them to GET OUT OF ALL STOCKS INCLUDING PRECIOUS METALS STOCKS. I have subscribed to Russell for more than 25 years and experience has taught me to take his warnings very seriously. How seriously? Yesterday, I sold two-thirds of my mining shares and two-thirds of Susan’s mining shares and am now sitting with a lot of cash on the sidelines. I bought more Silver Eagles yesterday and shortly, will buy a whole lot more. I believe that gold and silver physicals are not in danger of collapsing but if the Dow takes a dive, as Russell suspects, then the mining shares will fall like a rock. I do not wish to participate.

Last night Russell added the following:
A dreadful stock market performance. Gold thinking in the face of a super strong dollar. Today’s low volume rise on the NYSE was hardly impressive. We saw two sick rallies in the Dow each of which was followed by a sell-off. Very poor action with institutions bailing out.
I’m afraid there’s going to be pressure on gold (a very strong dollar). This means pressure on the gold mining shares (which show poor relative strength compared with the metal). Personally, I’m going to sit with ALL my gold items. For faint-hearted subscribers, this may be the time to lighten up and sell your gold mining shares. No sense staying up at night and worrying.
Many years ago, Russell described the stock market as a bathtub full of water with lots of rubber toys floating on the surface. The water level represented the overall stock market. The rubber toys were the individual stocks floating on top of the surface. When the drain plug was pulled and the water level fell, all of the rubber toys fell with the water. That is why if the Dow plunges, it will take all stocks, including the mining shares down with it. That is exactly what happened in the 2008 crash and it will happen again.

The question you must ask YOURSELF is will the Dow crash? Russell is convinced that the Great Bear Market that commenced in 2001 has never run to its conclusion. After the initial drop, a Fed-funded bear market rally ensued, but this is still a long-term Primary Bear Market and the big fall is yet to come. He thinks that fall is not far off. I haven’t seen him this nervous since late 2000 when he also pounded on the table to GET OUT of the market. I will take my chance with the R man.

BUT – the key for me is to take all of the mining share proceeds and quickly re-invest them in physical gold and silver so as not to be sitting on the sidelines when the Primary Bull Market in gold and silver re-ignites very soon. Yes, the mining shares can and will go down at the same time physical gold and silver will rise, in Russell’s scenario. He is NOT selling any gold! Physical gold, that is. I go a step further; I am buying!!!