It’s been two and a half months since I called for a low in gold on March 3rd at about 1705. We dropped about 1.8% lower to 1673, but that day was the exact low in the GDX. Now, gold and silver are finally breaking higher. Gold is up $200 from that low, miners are screaming, with the GDX up 30% from that bottom call, and gold bugs are happy for the first time in months. Are we a bit over extended? Is enthusiasm too high? Could we pull back a bit? Absolutely! A few thoughts though before you rush to take profits now that you have some…
Jesse Livermore is widely regarded as the best trader and investor
of all time. He was also a business partner
with Bert Seligman, Jim Sinclair’s father.
(I’ve mentioned this before, so as many of you may know I worked for Jim
Sinclair for half a decade starting in 2011 as an investor relations consultant,
advising him and management of what shareholders want to see, so I’ve been privy
to some stories about Livermore’s life and their experience with him, as well as
some of Jim’s own, often wild tales, straight from the horse’s mouth.)
Livermore famously said, “Be right and sit tight”. But to expand
on that, he also said “Do more of what’s working, less of what isn’t” sounds kind
of obvious, right? But you’d be surprised how many people do the opposite, so let’s
break that down. It goes hand in hand with an old trading adage, “kill your losers
fast and let your winners run”. There’s only
4 possible outcomes of a trade or investment: you make a small profit, you make
a small loss, you make a big profit, you make a big loss. Theoretically, if you dump your underperformers
before they get a chance to be big losers, then the only outcomes you're left
with are a small profit, a small loss and a big profit. From an accounting perspective, the small
profits and the small losses all even out in the wash and at the end of the day
all you’re left booking is the big profits.
“Do more of what’s working, and less of what isn’t.” In other words, if your positions are making you
money, your analysis was correct. It makes
no sense to exit positions that are confirming your thesis.
Another word of caution.
Do not put too much faith in correlations. If you’re worried about a dollar rally, don’t
be. It usually means nothing when gold is
in bull mode like it is now. If the dollar
is going higher, it’s just a loss of confidence in another fiat currency in the
race to 0 for all of them. Two months ago there was an article that perfectly marked
the gold bottom, called “Gold has failed.” In reality, bonds have failed. There
are 2 safe havens left, and that is cash and gold. I absolutely can see a situation
where both rally strongly together. As I’ve
pointed out before, in 2010 the dollar rallied 20% from around 73 to 89. Gold dipped
initially, but by the time DXY was 89, 9 months later, gold was actually UP, from
1220 to 1250.
The caution carries over to underlying assets. If you think a $50 pullback in gold is possible,
amounting to around a 3% correction, TYPICALLY, you would expect about a 6% correction
in the GDX. There is no guarantee that will be the case however. Miners are waking up and dips are being bought.
A short-term pullback in the metal means nothing in the grand scheme of their quarterly
profits when the trend is clearly higher. A 3% pullback in gold could be a 1.5%
pullback in the positions you sold. While
you’re waiting for the next 5% down on the miners you sold, they go 5% up and you
panic and buy them back for more. Now you
have less shares than before and you’re eroding your wealth.
Another point, and a lesson from my own mistakes with silver
during the 2011 moonshot. Somewhere around
25-30/oz, we were quite overbought and extended, more than we have been in a very
long time. I expected a pullback, likely
to retest the 21 area high from before the 2008 liquidity panic/margin call crash
that sent everything down.
It never happened.
I took some profits on some silver miners that went up significantly,
very quickly, expecting to buy them back during a good pullback that never came. I had cash on the table that I wanted in silver
miners, but I was short sighted and tried to micromanage a massive parabolic move
higher. I can be a bit of a perfectionist at times and I had screwed up my plan,
and it infuriated me that I was so stupid and short sighted.
Don’t cry for me, I did just fine. But I could have done much better. Silver’s nature
is to scream when it starts moving. It won’t
make sense, the typical expected pullbacks never come. It’s a momentum chaser’s dream. Consider the advancement of algo trading systems
today vs 10 yrs ago and how quickly they operate, as well as the percentage of the
market they make up. It could be much more violent and much faster. I’ve said repeatedly
to expect volatility to increase as time goes on and that’s exactly what’s happened
and it will continue.
One final point. Gold
Ventures, or GV as we all know him, nailed this perfectly in his thesis when he
developed his positions a long time ago.
It’s the SIT-folio.
So SIT.
You MIGHT get a chance to make some adjustments on a pullback
if you’re lucky, but don’t count on it.
Don’t make the mistake of trying to micromanage this. If you’re exclusively a trader, it’s fine take logical profits. If things move higher, it doesn’t matter you’re on to the next thing. Your goal is income.
That’s not what
I’m doing, and it’s not what I think anyone should do in this PM bull market. This
isn’t a trade. I’m buying incredibly undervalued assets with extreme leverage to
a massive bull market in precious metals. I expect to make multiple times my money
when this is all said and done, and set my foundation up in a place where it can
sustainably continue to donate to charities worldwide for centuries to come. In terms of that great big picture of hundreds of percent returns, a 3% pullback in
gold is absolutely meaningless.
The safety bar has come down and is locked in place and the
roller coaster is moving. You’re in it
now, so get ready for some lightning.
-Jonathan Mergott
