Tuesday, May 18, 2021

Don't panic to book profits just because you have some.

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

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