Gold and Silver: What the hell happened after the FOMC?

 

I’ve been insanely busy last couple weeks.  I got back from Lake George and we have some friends staying with us for the next few weeks that have been traveling. We’re having a bunch of furniture moved and delivered, and then I get to top it off with a pretty severe cold of some sort in June.  (Go figure). I feel pretty crappy but trying to get my thoughts down on the metals here.  I’ll apologize ahead of the time for the sporadic jumpiness of moving from 1 thought to another, but I’m focusing on getting those thoughts down, not on writing a perfect master’s thesis.  Inevitably I’m gonna miss some points, we can hopefully fill in some blanks with a Youtube Q&A in a few days when I’m feeling better, but let’s get down to the meat and potatoes of it.

Gold and Silver got murdered after the Fed meeting.  It wasn’t pretty. Moves like this, when were at this stage of the game I believe require us to sit down and calmly, rationally, and OBJECTIVELY analyze our thesis.  All signs seemed to point that we were ready to break strongly higher and we didn’t.  Quite the opposite. So, the question is why, what to expect now, and where do we go from here.

There are two things I’ve learned over the years in metals and mining and markets in general.  The first, as I’ve said many times before, is “Watch the miners”.  Gold rallied nicely to 1920 after my call for a bottom on March 2^nd at 1705.  The actual low was 6 days later and a whopping 1.7% lower, but March 2^nd was the low to the day on the GDX.  We rallied $250 from there, or about 15%.  The GDX rallied double that, about 30% to a high of 40 then stopped.  A 100% outperformance by miners may seem great, but I would have expected more, and the rallies to be broader based among the miners.  NEM did tremendously, breaking to a new high. SAND and FNV did great and made up a lot of lost ground in the correction. Miners like ABX and AU were more disappointing, as were the Jrs and the GDXJ, which we would have expected to outperform the majors.

This first clue of underperformance by miners, and jrs to majors made me a bit uneasy for a little while, but in the past that can be the case for a few weeks.  What you DON’T want to see is a constant impending breakout being pushed down or have no buyers wanting to follow through and buy at higher prices for much longer than that though. Everyday we didn’t breakout was a ticking clock making the odds that we will breakout that much less.  We had a lot of hurdles, so it seemed like there was just a few obstacles to overcome, be it options expiration, jobs reports or FOMC meetings.  In hindsight, I believe I should have placed a higher emphasis on this then I did.  It would have led me to de-risk a bit and saved me some money from this last crash, and hopefully would have done the same for anyone who followed that advice as well.  The lesson I have learned in the past remains true over a decade later.  When miners start turning higher while metals are dropping, a low is likely near as was the case in March. This was a major factor I used to call that low in March as well as the low on Nov 30^th at 1760 which I nailed to the day.  (Ironically, here we are right back where we were 7 months ago.)  But when metals are rallying strongly and miners SHOULD be breaking out and aren’t, watch out below.

Regarding this drop, I want to make some notes on some things that other people are saying about it.  I’m not trying to call anyone out directly, but I see things floating around and the same narratives from different people being said.  First is the “This was clearly manipulation” argument.  Let’s just start by saying no one of us lowly peasants has the ability to see enough information from our computers to KNOW what is manipulation and what isn’t.  All markets are manipulated.  Gold and Silver especially.  I don’t KNOW that the 500 million ozs sold in 60 seconds at 7:34 EST on a Sunday evening was manipulation.  Sure, it could be a panicked whale who didn’t care about execution, or a fat finger, etc.  But as they say, the simplest explanation is often the correct one, and the simple answer is that it’s more likely some banker is trying to create a momentum waterfall effect that trigger the algos to jump in and keep selling to benefit their own positions, rather than someone willing to lose millions in their execution by dumping rapidly at an illiquid time.

Now on the flip side, you can do that tick by tick, hour by hour, day by day, and see the effects last for a relatively short period of time.  What you CAN’T do is CAUSE or CHANGE a trend.  If manipulators had the power to cause a bear market or prevent a bull market, gold would have never broken above $50/oz after Nixon ended Bretton Woods.  It never would have rallied nearly 8 fold in 10 yrs from 250 in 2001 to 1920 in 2011.  They simply would have prevented it.  Sometimes it’s just investors wanting to sell.  I watched people stamp their feet and scream manipulation as gold plummeted in 2012, citing that QE is still continuing and the Fed saying they are looking to raise rates in a few years means nothing today. Also, that the Fed CAN’T raise rates, no matter what they say because it would cause our debt to go insane.  That wasn’t the case, and those people rode their positions down 80% in some cases in that time frame.  So the point here is this: Could it have been manipulation?  Absolutely. But be careful blindingly applying the manipulation argument to every down move. Sometimes investors sell.  Calling every time the market moves against you “manipulation” makes people lazy and complacent and does nothing to help your analysis or portfolio.

Markets are FORWARD looking.  If you are investing based on what’s happening right now you are behind the 8-ball.  In 2015, The Fed DID raise rates a few years after they originally began talking about it and a few years after gold began crashing lower. (Although not much by historical standards.  And the debt skyrocketed and continues to. People thought 10 trillion was inconceivable. We’re approaching 30 trillion now. Don’t think we can’t make it to 50 trillion.) If you look at the Fed’s balance sheet over the last few decades, the fastest increase occurred around 2012, right as gold was breaking support at 1500, and on its way to a low of 1050 three years later. So, this is not causation, as I’ve seen many point out. As I have said before, the correlation with QE and gold comes from the loss of confidence in the Fed and the system.  The increase in their balance sheet and the rise in gold is a symptom of the same disease.

The next point is BASEL III, which everyone in the gold camp is talking about.  “This drop was a manipulated, planned attack before it’s implementation.”  First, I hate to say this, and maybe I have been beaten down in the gold markets too much after 13 years doing this to see any “light at the end of the tunnel” in terms of a change in how things are done, but it makes no sense to me why a group of financial elite would impose a system that would cease the very profitable games played in the metals markets that have benefited their buddies for so long.  I don’t think this is a paradigm shift or frankly, anything that will make 1 iota of difference in our regular 8 am attacks or Sunday night manipulation events.  In fact, I’d take the opposite side of that.  The Hopium being built into this by gold bulls I think leaves us vulnerable to a further sell off.  Basel is a nonevent, and again, markets are forward looking.  This was introduced back in 2009.  If you are expecting a magic change overnight, you’re going to be disappointed because there is nothing “new” here.

Now, I want to highlight 2 gold charts that I think bear a resemblance from a technical analysis standpoint to where we are now.  The first is 2008-2009, the second is 2011-2012.

In 2008-09, we had started with a similar downwards channel correction after 1^st hitting new highs at 1000/oz on the heels of the financial crisis.  Gold topped in March and bottomed 8 months later in Oct.  It was the only correction in the 10 yr bull market where the moving averages crossed lower, until the top in 2011. It rallied strongly and fell back after retesting 1000 down 15% to 850.  We then began to coil tighter. The channel breakout morphed into a longer-term inverse head and shoulders consolidation and finally broke out to new highs about 6 months later. 

Today, in 2021 we saw gold hit a new high at 2100 in Aug on the heels of the global pandemic.  It corrected in a channel downwards for exactly 8 months, bottoming in March.  It has been the first time since we began rallying in late 2018 that those moving averages have crossed lower. We broke strongly higher and have now fallen back hard to retest that breakout area of the channel.  Looking at this drop now, we can see how this could also be forming a big inverse head and shoulders consolidation. The similarities are very striking. 

Back in March, we were looking at bullish sentiment at extreme lows, the kind you typically see at bear market bottoms, not during bull market corrections.  Articles were floating around saying “Gold has failed” as Bitcoin hit 50k+.  We are right back at dismal sentiment that reminds me a lot of the lows we made in 2018.  From that standpoint, this is a big positive.  As an investor, it is a great time to begin buying positions or adding to them for the long term, but don’t expect instant gratification.  To make exploding moves higher, we need the momentum driven by large specs and retail investors and you can’t expect the “gold has failed” crowd to turn around and buy a few months later after a move of couple hundred dollars higher.  We need explosive breakouts to new highs that create FOMO for them to jump in, and we need time to grind down their thesis and prove it wrong. From this standpoint, there are a lot of similarities with 2009, but it could spell out a lot more grinding back and forth before we breakout, wearing out all the weak hands.

In the 2^nd scenario, 2011-2012 we can also see a lot of similarities.  Gold moved parabolically higher to 1920 then suffered a big slam down to 1550.  We consolidated, rallying twice to 1800, making a double top then falling back down to 1550.  Moving averages crossed lower in 2012 and after a long consolidation at the lows, we made one more stab at 1800, moving very fast to get there.  During this time, miners frustratingly underperformed. Not reaching levels they were previously hitting the last time gold was 1800.  This was gold’s last hurrah and the miner’s underperformance while the metal consolidated at these high levels (which should have been great cashflow for producers) was a clue it may have been over. 1 year later gold was down 30% and still dropping.

Today, Gold moved parabolically higher to 2100 then suffered a huge $250 slam down back to 1850. We rallied up to 1960 and came down hard again, hitting new lows.  We shot up to 1960 again and made a double top in Dec and reversed down hard once more.  After some consolidation at the lows in March, we ran up close to that double top once again moving very fast to get there.  Miners had been underperforming while consolidating at record highs (which again, should have been great cash flow for producers).  This also was a clue as the metal has now dropped down hard since then.

From a fundamental standpoint, in 2012, QE was alive and well.  The Fed’s balance sheet was expanding, and rates would not rise for another 3 years.  Deficits were still enormous, and nothing was stopping the expanding debt, and nothing has since.  Very similar to where we are now.  The fears of hyperinflation never occurred, the stock market kept chugging higher and the loss of confidence from the financial crisis subsided. 

Today, we are seeing inflation, much higher in CPI and PPI then we did then, even though we all saw prices rise and products shrink in that time frame.  The question now is, do we see inflation continue to increase?  Will the fed lose control?  Or is it more logical that the next step is a paring off of inflation along with commodities that have pulled back substantially.  When the inflation we've predicted is here now, and everyone is talking about it, what next? As someone said, maybe it's time to "zig while everyone else zags."  Do the deflationary forces in our economy overwhelm inflation, as they did in 2012? We can see no rise in the velocity of money despite fed printing post financial crisis.  The money simply was not going out into the economy enough to cause runaway inflation.  We can see the same thing in the velocity of money today.  There is one key difference, however.  Every fed chairman from Bernanke to Yellen and now Powell has said in almost every congressional hearing, “We will continue to keep monetary policy accommodative to reach our desired targets on our dual mandate of monitoring inflation and unemployment…blah blah blah… BUT WE WOULD LIKE TO SEE MORE FISCAL STIMULOUS FROM CONGRESS.”  (Because pushing on a string of bond buying and 0% rates won’t save the world on its own.)  Today, we are getting a big amount of that fiscal stimulus, and that is very different from before.  $800b stimulus package and $3b in cash for clunkers is NOTHING compared to the money we’re throwing around today, and that is VERY significant.  Additionally, with economies “opening back up” and vaccinations happening, there is an argument that can be made that the “loss of confidence” is subsiding. This loss of confidence has been a never-ending underlying theme since 2008 from what I believe, and is not “over”, but is not in “fever pitch” as much anymore and that I think is something to note.

There is another point I want to hit. Paul Tudor Jones was on CNBC a few weeks ago proclaiming he was buying “Everything inflation”.  Gold, commodities, and bitcoin.  He really sold that narrative.  This worries me because guys like him aren’t freely giving retail investors their advice, their talking their book.  In 2009, when gold was around 1000, Maria Bartiromo was interviewing George Soros in Davos.  It was after market hours, but he had said “I think gold is the biggest bubble in history.”  Gold slammed down about $40 instantly.  Fast forward 3 months later, Soro’s fund filed their holdings and it showed a massive increase in GLD and GDX holdings.  He was creating a selling event so he could buy into it. He probably had traders working at that moment, snatching up gold being sold in a panic.  Similarly, if Paul Tudor Jones is telling you to buy “everything inflation” what it means is he already did 6 months ago.  Now he’s trying to sell and wants to drum up some demand, so he doesn’t overwhelm the market while he dumps it all.  Make note of these things and pay attention when big names do this in the future. When you keep seeing fund managers in the news and on CNBC talking about buying, it’s a bearish sign.

I said at the beginning of this article that there are 2 major things I’ve learned over the years. The first, in terms of gold is “watch the miners.”  Here’s the 2^nd, paraphrased from a line in the movie “The Departed”:

“You don’t have to understand why, just listen to what the market is telling you.” 

Some of the worst mistakes I’ve made I didn’t listen to what the market was telling me and blindly followed my own analysis which ended up being wrong.  Ignored the obvious, and was pompous enough to think I was smarter than the rest of the market, and the other fund managers making 10s of millions a year. I’m reminded of a mining stock I had bought 10 years ago.  My analysis said it was worth 3x what it was.  As gold and silver rallied, it underperformed when my analysis said it should be outperforming.  About a year or so later, and probably around a 30% loss, I finally threw in the towel.  It wasn’t a huge investment so it didn’t devastate me but had I have listened to what the market was telling me as it continuously underperformed, I could have gotten out earlier with a smaller loss and been able to do something more productive with that money. 

Wall Street is the most competitive industry on earth.  You should assume you’re probably not the smartest person in the room.  I’ve made this point regarding Barrick vs NEM.  Sure, basic cash flow and earnings analysis might tell you at 2000 gold, Barrick is a better buy.  But guess what? Everyone who took Finance 101 can do that same basic math, so it’s safe to say that if the guys out there making 50 million a year are buying NEM instead, while Barrick continues to languish, there is a reason why.  You don’t have to fully understand why, you just need to listen to what the market is saying.  

I’m still trying to understand what the market is “telling” us here, and I don’t necessarily know for sure.  What I do know is this was a BAD slam down, and we have not recovered from it.  Metals have been flat lined ever since.  I expect a bounce here, but we haven’t gotten one yet, and it’s certainly not improbable for ugly to get uglier and oversold to get more oversold. 

In short, I’m neutral on the metals right now.  My targets for 50 silver, 2300 gold by Aug/Sept will likely not occur in that time horizon.  I am NOT Bearish, simply neutral in the shorter term.  I do believe my targets will occur and the rises from miners that come with it, because I remain long term bullish for now, but based on price action and sentiment, it is unlikely we turn on a dime and break higher, there will have to be some grinding out and slow building first I believe.  There remains the chance however, that the bull market in gold is done, and I think we need more time to look at this to determine if that is the case.  We should be able to tell more based on the next rally higher.  How high does it go, and how the miners act should give us some clues as to if this was just a sharp correction in a longer than expected consolidation, or if this might be the end of the road and worth derisking significantly more.

Funny thing is, so many people gave me a lot of crap for expecting ONLY 100-150% returns on silver miners if silver doubled.  I cited their unexciting performance so far as the reason, and that would need to change first before raising targets.  In hindsight, I’m glad I was the guy calling for 50 silver at 26, and watching it go to 29 and back again to 26 than the guy calling for $1000/oz Silver any day now, and giving people massive false hope.  I have said many times, I’m not here to get clicks and make money off subscriptions saying $20,000 gold and $1000 silver, “Subscribe to find out why!” Nobody pays me anything for this, my views are my own. I'm not paid to promote any individual stocks, I have no sponsors for my website. I share this to all of you for free and ask nothing.  I make money by being right, plain and simple.  Those people are mostly scam artists.  My targets I believe to be realistic, and I’d rather undershoot than say ridiculous numbers only to be made a fool of.  I come from 4 generations of gold bugs and investors in gold bull markets from the 70s to today.  It’s what I know, it’s in my blood.  But I am NOT a PermaBull or Bear on anything. Those people typically don't survive long term. If the situation changes, you must change or you drown, plain and simple.  Rule number 1 of making money in the market is “don’t lose money.”  Sometimes its fine to not MAKE money, but if you lose it, you’re out of the game.

I can’t tell anyone what they should do, (legally, but also everyone has individual unique situations and risk profiles.  There is no 1 size, fits all.)  But I can say this.  I see 3 types of investors that are my peers and friends when I talk to them and it usually goes something like this:

Type 1: “I’m 35 years old, I’ve worked hard all my life, I’ve managed to save $50,000 and I don’t want to lose it.  I know it’s not much, but I don’t want to take too much risk.  If there is a chance of a downturn, I want to pull out and save my capital.

Type 2: “I’m 35 years old, I’ve worked hard all my life, I’ve managed to save $50,000 and I don’t want to lose it.  I know markets fluctuate, I’m not afraid of short-term slam downs, but I don’t want to be in a position where I have no cash to take advantage of it. So, if there is a chance of a downturn I'd like to raise a small cash position so that I have the opportunity to buy.

Type 3: “I'm 35 years old I've worked hard all my life, I've managed to save $50,000. I've done the math and I figured out that if I continue to save money at the rate that I've been doing and I invested in the S&P 500 at an average return of 8% a year, by the time I retire I will not have enough money to live off of or provide for my family.  If I need $1,000,000 to retire, and investing conservatively will get me $600,000, then I won't have enough money.  So, it doesn't make a difference weather I have 600,000 or 300,000 it still won't be enough money. So my only option is to take on a much more risk now, buy buying calls or meme stocks to try and make a huge return now so that I could compound that in the future and be able to have the retirement that I want and provide for my family.  If I lose it all, it won't make much of a difference in the longer term, I still will fall short of where I need to be for a decent retirement, but it's my only shot of building something and getting ahead.”

Many people want to be type 3.  The renegade who does the impossible and triples their money in a few months.  But the reality of the situation is most people aren't cut out for it.  A few months ago, GV told his “origin” story on twitter.  It went something like this… he started out with $50,000 and bought call options on SLV and AGQ in 2010.  He managed to turn it into around $20 million.  He is a true hero. 

But that is not most people. Let’s be clear about this, this is a story of point A and point Z, and the entire alphabet in-between was left out.   At some point in time, that $50,000 doubled.  At that point most people would probably cash out thinking they've doubled their money and would walk away happy. At the very least, they take out their buy costs, and run the rest on the house’s money.  Somewhere in the middle, his 50k, turned into 2 million.  And I’m sure he’d be the first to tell you, that shortly after, within a few days or weeks, he watched it get cut in half.  Imagine taking 50k, holding on until 2 million, then losing a million dollars in a few days.  Any logical human would likely think, “This is more money than I’ve ever seen.  Sure, I just lost 1 million, but I can still walk away with 1 million now if I sell everything, and that is life changing.”  Somewhere between 50k and that point, 99.9% of people would have walked away, and been happy about it.  This is why he’s an absolute hero, because he held on and did the impossible.

But that is not most people, and it is likely not you or me.  The fact of the matter is most people who “bet the farm and leverage to the hilt” will blow up entirely.  The few that make money will take a decent return and walk away.  The average person will try something like that, quickly lose half of their portfolio, panic, then sell everything and walk away.  This is why I’ve said, you need to look at yourself honestly, and see who you are and what your risk tolerance is.  If you’re the type that buys the extra car insurance when you rent a car on vacation, you probably shouldn’t be “all in” on illiquid JR miners and call options.  I don’t know what it takes for you, you’ll need to figure that out yourself, but if these sell offs are making you lose sleep, if they're making you panic on how you're going to pay for things in the future, then you need to take money out of the market. Maybe you need to diversify and have 40% SPY, with some royalty companies and some junior minors while holding a 10% cash position at all times. Maybe a balance between producers, junior miners and royalty with a 20% cash position is what makes you comfortable.  I can't tell you what the answer is, you need to figure that out for yourself.  I’ve said this before, I’d rather see you make 500% on half your money in the long term, and be able to stick with it, then go all in, panic and sell at a 30% loss.  Find the balance that works for you. The goal is to make it to payday.  Sure, the payday would be better with leverage, but if you can't hold on, it's pointless.  Theoretically, you can drive to your destination in half the time going 150 in a Ferrari as well, but if you can't handle that speed, and it will cause you to crash, then who cares?

I will tell you what I am doing. The day before the FOMC meeting I got an uneasy feeling. Being that I was going to be leaving for vacation the next day during the announcement, I didn’t want to worry about it too much, so I sold 85% of my leveraged portfolio of call options I had been buying from March-April.  Cashed out with a small profit, about 15% or so.  The remaining 15% of that portfolio has gotten decimated since then, and the losses on that have probably entirely wiped out the 15% gains on the 85% that I booked.  Total wash for 4 months of planning and effort.  Lesson learned.  I bought them at lows expecting a breakout was imminent and it did not occur.  I probably gave up half of my profits by not cashing out about 3 weeks earlier.

I’m expecting a bounce soon, but so far, we’ve been flatlined on metals with zero buying interest.  A logical target would be around 1800 at first, then possibly up to 1840-1850 area, and around 27ish on Silver. From there I would be looking to lighten my positions in major producers slightly, which I view as “directional trades”.  (Around a 10% cash position) Some stocks have individual good stories.  EXK and HL have done great, but FSM and PAAS have been terrible.  As a whole, the SILJ has been flat.  In essence, buying these producers is a bet on the direction of silver and gold, so as metals have failed to breakout over the last 10 months or so, they have not really gone anywhere. 

Conventional wisdom would say, in a correction in the metals you would want to hold onto multi-billion-dollar companies with cash flow and dividends.  But the fact is, GVs sitfolio stocks and Gold Fever Jrs have killed it versus majors during this correction.  The SILJ has been flat for the last 10 months.  The GDX is down 25% since Aug.  An equal weight in the top 10 Sitfolio stocks has netted you 100% gain in the same time frame.  These companies are in a position to produce value through drilling and development of their properties, and I believe they will continue to do well, so long as metals prices remain “economical.”  By that I mean, when most silver majors are producing for a cost of 14-15/oz, anything over 20 in silver is very economical and attractive as takeovers for the majors. I will be looking to use my cash to add to these if given the opportunity, as well as using it for other opportunities I may see that are outside of the metals and miners.

At the end of the day, metals need more time, so I am going to position myself in a way where I can be occupied by doing something else in order to give them the time they need and alleviate the boredom.  Figure out what type of investor you are and what you need to make you sleep at night and weather the storms in metals and miners.  The goal is to make it to payday. Do whatever you need to do to ensure you can hold on long term.  It seems the market for now is determined to grind us down with time more so than price, and that can be more difficult sometimes to deal with mentally.  Don’t use margin, don’t invest money you will need to spend anytime soon.  Stick with the leaders, you don’t need to understand fully why they are outperforming, just listen to what the market is telling you, and humble yourself. You are not the smartest person in the room.  The market will show you if your analysis is correct or if you're missing something. Watch the miners, and they’ll clue us in to the next moves in metals.

 -Jonathan Mergott