Jay O'Keefe's Investment Letters

Letter 27 
May 22, 2008

Gold, Silver, Stocks and Cash

Touching Base
Letter 26 was mailed on April 30, 2008. Since then, I have made four purchases which have been reported on the web site, http://somehelpful.info/Money/, under Jay¡¯s Transaction Log, and the portfolio updated and reported under Jay¡¯s Portfolio.  A few people have told me they like this plan, and that it has been very helpful. I appreciate this feed back. We have been trying to make the web site more user-friendly, and always appreciate any suggestions for further improvement.

Since we plan to leave tomorrow for our 50th wedding anniversary celebration (a cruise) with the whole family, I doubt there will be any transactions in the portfolio, or further letters until after June 3. Therefore this letter is just to touch base.

Gold and Silver
You may recall (Letter 24, April 14, 2008) my discussion of 5-year charts of gold and silver, showing their price action relative to their 200-day moving averages. At that time, gold had made a new high at 1032, and was 30% above its 200-day MA.  I suggested a correction down to or near the moving average would be normal and healthy. Gold did in fact correct down almost exactly to its moving average, about 846, then started back up, rising rather strongly to its current level around 920-935. This is classic bull market behavior, and once again the 200-day MA has "defined¡± the bull market.

gold Technical chart [Kitco Inc.]

Silver also corrected from its high around 21 down to around 16, stopping just short of touching its 200-day MA, and is trading around 18 as this is written.

Silver Technical chart [Kitco Inc.]

The question now is, is the correction in gold and silver over? No one knows, certainly not I.  Because of the short duration of the correction (under two months), it could easily last several more months, or even a year. The precious metals could go into a trading range for a year or so, or they could proceed to new highs in this current move underway.  Either would be consistent with the secular bull market. If I were forced to guess, I would lean toward new highs in the near future, but that is purely a guess.

Regardless of the path the metals take from here, if I did not have my full allocation, I would continue to dollar cost average, or buy the dips, whichever opportunity presented itself. One other point I would repeat is that my allocation to physical silver is between three and four times my gold allocation. This comes from my conviction derived from studying experts I have confidence in, especially Jason Hommel and Ted Butler.  I get the feeling something major may be developing in the supply-demand dynamics of silver. You can follow the story in Hommel¡¯s recent reports (click on the link).  He and Ted Butler may be doing investors a favor if they succeed in exposing some price manipulation which may have been going on for a long time. My opinion is that it wouldn¡¯t take very many more investors deciding to own physical silver, or very many of those who have bought silver in the form of ¡°paper¡± investment vehicles demanding delivery of their silver, to dramatically change the dynamics of the silver market.  We could be near an explosion up in the price of silver which would correct the under-valuation of silver relative to gold, and the dollar. Just a guess, but the signs are there in my opinion.

As you know, I do not want a high allocation to stocks. But I do want to gradually accumulate more gold and silver mining shares, which I believe will participate in the precious metals bull market. This is all covered in letters 24, 25 and 26, along with Jay¡¯s Transaction Log and Jay¡¯s Portfolio updates.

What about oil stocks? Currently I own only one oil company stock, SU (Suncor Energy Inc). It has done wonderfully well. Earlier in the commodity bull I began buying it at 36. Recently it has been trading in the 140s. It is approaching the upper trend channel, and could become a candidate for sale up to one-third. I would not want to part with my two-thirds core position until near the end of the commodity bull (likely several years away). As you know I also own an initial position in a refining company stock, VLO (Valero Energy) . Since these are my only energy company stocks, I am reluctant to do the partial sale on SU. I haven¡¯t decided. It does appear that crude oil is becoming ripe for a major correction. So I¡¯m certainly not interested in buying with oil making new all-time highs. But if we get a major correction, I would begin looking at the blue chip oil companies, several of which I would like to own (at much lower prices), including CHK (Chesapeake Energy Corporation), XTO (XTO Energy Inc), ECA (Encana Corp) and COP (Conoco Philipps).

My final comment on stocks is that I don¡¯t want total stocks to exceed a 25% allocation at this time. The possibility of a deflationary accident is too high.

I am very comfortable with a 42% allocation to cash, and no debt. This is one of the best hedges (insurance) against a major debt-defaulting crash. I¡¯ve lived through two of them. They are engraved indelibly in my memory. I pray none of you will have to experience anything similar, but it can¡¯t be ruled out. As you know, I have been diversifying some of my cash out of US dollars into five other currencies, FXA, FXC, FXA, FXY and CNY. This has been a good strategy so far. See Jay¡¯s Portfolio for current suggestions.

Before I close, I want to thank and praise the Lord for the good investment results the portfolio has enjoyed so far this year (not to mention all my other blessings). I made a quick estimate of performance. The portfolio is up 14.7% for the year to date (last night¡¯s close). That means it¡¯s up 6.7% in May. As I said earlier in the year when it was up over 15%, it probably won¡¯t continue at this pace, especially since it is now over 40% cash, but at least at present it is ahead of schedule for equaling the average return over the last nine years. I am very thankful.

A Brief Bible Study
As I close, would you indulge me a few words of Bible truth?  The following is a quote from one of my mentors under whom I studied the Bible for many years.

"Affluence convinces the human heart that man can fulfill his quest for autonomy. Jesus in His parable of the sower refers to ¡®the deceitfulness of riches.¡¯ Wealth creates in man the illusion of being in control, deceiving him into believing that he does not need God. For this reason, the more people have, the less grateful and the more angry and sullen they become. Money will not free a person from what he desires most: the absence of pain, fear and death. Only Jesus can do this, and only in eternity. But the path to heaven necessitates the surrender of your desire for autonomy. You cannot have both Jesus and your independence.¡±

My comments on the above: A loving God will introduce pain and opposition in the life of His child who is seeking independence. I¡¯ve begun to notice that there are far more Scriptures which make that point than those which describe how He gives us the things we consider to be blessings. In fact, it seems to me that Scripture emphasizes that eternity is where we¡¯ll finally experience absence of pain, fear, etc.

I pray God¡¯s best for each of you¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Jay

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"Well done, good and faithful servant; you were faithful over a few things,
I will make you ruler over many things.  Enter into the joy of your lord"
(Mt. 25:21 NKJV)

If you have not been faithful in the unrighteous mammon, who will commit to your trust to true riches?" (Lk. 16:11 NKJV)

The Apostle Paul wrote, "Now godliness with contentment is great gain. We brought nothing into the world and it is certain that neither can we take anything out. So having food and clothing we will be content with that. But those who want to get rich fall into temptation and a snare and into many foolish and harmful desires, that plunge people into ruin and loss; because the love of money is a root of all kinds of evil; in their greediness some have been led away from the faith and have impaled themselves on many distresses." (1 Tim. 6:6-10 NKJV)

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The information in these letters is the responsibility of Mr. E. Jay O'Keefe, but all your decisions are your own responsibility.

This web page was last updated on 11 January 2009 .