May You Live in Interesting Times

 

It should be apparent over the last few years why this is a curse, not a blessing. Alas, things continue to get more interesting. In addition to a pandemic, a resulting economic collapse, high inflation (a result of their “solution” to the economic collapse), we can now tack on War in Europe, a declining economy, an inverted yield curve predicting yet another recession, and skyrocketing interest rates (the solution to the inflation that was the solution to the collapse that is most likely going to be a major catalyst in the next collapse). Lather, rinse, repeat.

There is so much going on regarding the economy that I could probably go on endlessly on various different things, but I won’t bore you with all that. (That I save for my friends and girlfriend. And sometimes the cat when they all stop caring). As I’ve said before, I prefer to watch price action in the market as the biggest “clue” in what is being thought and focused on, rather than focusing on the macro and developing a thesis for how the market will trade based on that.

In my view, the problem with that mentality is two-fold. First, your analysis of the data and what the data will be, may be wrong, and second, even if you're right about the data, your interpretation of how the market will trade off of that data could be very far off.  If you’ve been “watching and learning” over the last few months/years, you can probably think of at least a couple “marco” focused guys who’ve had rigid interpretations of how the market should be trading, that have been terribly wrong. As Mark Twain said, “It’s not what you don’t know that kills you, it’s what you know for sure that just ain’t so.”

Let’s dive into gold, silver and miners.

I’ve shared the gold “cup and handle” chart a few times before, and from the big picture aspect of this chart formation, there is nothing unusual here even after this sell off. In fact, I think we could stand to see further declines without doing too much longer-term technical damage. There is an 18-month downtrend line of declining highs we broke strongly above back in February. Currently, its sitting nicely aligned with the 61% Fibonacci retracement from the 1680 lows in March and August, to our recent highs at 2100, right at about 1830.

This area at 1830 also makes up the “ceiling” that gold had from June to when we broke above in February. (With an exception in Nov when we pushed above by about $50 to 1880. That rally proved to be short lived, but we were able to nail the turning point in early Oct beforehand and made a pretty nice profit on it.) It would be perfectly normal from a technical analysis standpoint, if gold were to retest that broken trendline level, so we still have a good amount of room here before needing to worry.

That being said, we are VERY oversold short term right now. RSI on 4 hr gold hit 19 this morning, the lowest level since mid-November. (After that decline, gold slouched for about a month, then began drifting higher. 2 months later, it ripped up 17%, or $300 to retest all-time highs in just 5 weeks.  A similar situation now still leaves us setup well for a summer rally and Aug peak. A 17% gain from 2100 is 2450, pretty close to the projected target of this cup and handle).  

This decline has been very harsh and very fast and its likely time for a pause here. Gold is sitting at support near 1890-1900 that it’s tested and held at twice before. Daily RSI is right at 40, a level that has held on every pullback since December, and is a level we typically see readings above during upwards trending markets, which I’ve talked about before. (Inversely, downwards trending markets often see highs on RSI around 60.) In hindsight, we can see that a little over a week ago, when gold tested the 2000 level, RSI peaked and reversed at exactly 60 as price reversed and also closed below that 23% Fib level. That may have been a warning sign a correction was forthcoming.

    If you’ve been focusing on Silver, you might be a bit more pessimistic. While it’s important to take into account how silver is acting, GOLD is always the one in the driver’s seat for the metals that should be given more attention. And if you’ve followed me for any period of time, you’ve probably heard me say “watch the miners”, as I give a higher weighting to their performance than either silver or gold, and here’s a perfect example why:

I had called for a low March 2, 2021.  A major factor in that call was a reversal higher in GDX (the same thing that occurred on the low on Nov 30^th 2020, which we also nailed for a nice $200 rally). Gold kept slumping for a few more days after that and GDX marked a few cents lower the next day then began moving higher. By the end of March, Gold had retested that low at 1680, double bottoming. Silver though, as highlighted by those 2 circles, made a lower low later in March. One looked like it could be bullish, the other looked certainly bearish. The tie breaker, and the one that gave you the best hint of what was to come next was the GDX, which bottomed 4% higher than it’s low earlier that month.

Once again, we have a similar setup. Gold has tested these lows near 1900 a few times now and held, while we see silver making a lower low. I think much like 1 year ago, silver is painting a more bearish picture that may not necessarily be true. On the upside, we stopped and reversed from the lows early in the day today on silver and then gold and miners followed, so we may indeed be seeing a bit of a pause here in these declines. There is very strong support below these levels, here at 23.50 as well as 23, 22 and the final lows at 21.50 hit last fall and winter. Granted, on the lowest side of that range around 21.50, that is still down almost 8% from where we are now, but we’ve already dropped 12% in about 1 week.  Precious metals are volatile assets. Best get used to that kind of volatility sooner rather than later.

Another point on silver, we reversed and headed lower right at resistance at the 23% retracement from the 2016 lows to the 2020 highs. RSI also stopped and reversed lower at 60, the same as it did in gold. This again, was a SMALL warning, but it was a warning. Reversals like these are usually not a bad sign to maybe bail on the last of the “dip” buys you made on the way up. Perhaps overly cautious, but when you’re dealing with assets that can drop 10-15% in a week, it’s not a bad idea to be a little extra cautious with additional money you put in to “trade” or dip buy to leverage profits on the way up.

Moving on to miners, GDX has had a horrid few days here, declining 16% in 1 week. But we are now approaching an area of support in the 33-35 level that was the ceiling for GDX all through the summer and into the winter. Just like Gold and Silver, GDX is also very oversold in the short term. Additionally, we had a pretty significant bounce off of today’s lows. At the worst point, GDX was down about 5.5% and bounced 2% off that level. In comparison, gold bounced $8 from its lows and silver bounced 20c, or about 1%. So this relative outperformance at the end of the day for miners when at major support may be solidifying that idea that we’re making at least a short term bottom here.

Not to digress too much but I want to make a point here.  I've said "watch the miners" so many times they should put it on my gravestone. But if you've been employing that mentality over the course of the last year, I hope you understand now why I say that. We saw gold peak on March 8th at 2100. GDX hit 40 then reversed hard, down about 10%. As gold consolidated at a level almost $200 from the high, GDX continued higher. Countless down days in gold the last couple of months saw GDX open down 1-2% then end the day green again. Miners shrugged off all weakness in gold and kept chugging along.

This is the EXACT opposite of how they acted all through the summer till about Jan this year. Every time gold was up, miners didn't care and kept heading lower. Consequently, that entire time period when they were acting this way was not a great time to be holding them. When I turned bearish in June last year, this was a major reason why. A lot of people dismissed the relative weakness as manipulation, or the market being "stupid", saying my claim that miners lead metals was completely untrue.

The fact is, we've called several major lows in gold and miners over the last couple of years, most of which were to the day or within a day or 2 of the lows and all of those were preceded by miners reversing losses and exhibiting relative strength to the metals. Inversely, I was one of few bears in June citing this as a reason for concern and repeatedly had my analysis dismissed. For the next 8 months, PMs and miners proved to be a terrible asset to be holding.

Miners leading metals isn't always the case. As many have been quick to point out, 2 or 3 major lows over the last decade or longer this was not the case for. The last article I wrote, "Bull State of Mind" I pointed this out. In 2016, there was no warning at the lows, gold and miners just took off like a rocket, and I warned we will likely see similar when gold finally bottoms this time, but I believed after an 18 month consolidation, if gold was going to break down, it would have done so by now.  This was a major reason why I turned bullish again. Another major reason was hearing many of the people who criticized my analysis in June, that there is risk in PMs until the fed begins hiking rates, begin to finally throw in the towel and accept that that was likely going to be the case. 

   I'm an introvert. When the room gets too crowded, I start worrying. I'm glad so many finally figured it out, but it was 6 months too late and it was time to be planning for the bottom, not planning for risk. I said this bottom will likely give no hints when it arrives and will be difficult to catch by the methods I typically use and that was exactly the case. The rally ripped out of nowhere catching many off guard. Despite getting no clear "signals" that I usually go off of, it's worth mentioning we still caught that low nearly perfectly. After 8 months of being bearish, I turned bullish again and posted that article on Jan 27th citing my reasons why. On Jan 28th GDX retested lows at 28.67, then turned and took off, gaining 45% in 2.5 months.  The point is, more often than not, watching the miners gave you the best clues for turning points in the metals, and whether or not it was safe to come out and play. For 8 months since June, it was not. The last few months have been very noticeably different.

After any type of move, be it long term or shorter term, I pay a lot of attention to the counter trend reaction. Looking longer term, GDX is now testing the 50% retracement of the entire move up from the lows around 29 in late Jan, to the high just 1 week ago at 41. Two steps forward and one step back is completely normal, healthy price action here, (even though it took us 2 and a half months to take the 2 steps forward, and 1 week to take the 1 step back). We have some elasticity here for further declines just like gold and silver, but I think we should start firming up here now.

In the shorter-term aspect of looking at the “corrective” move, we just suffered a fast 6-point drop. One step back would be a 3-point rally. If price were to rally to near 38 and begin to falter, that may be a cause for concern, signaling further declines but we need more time to analyze how we are reacting here. Worth noting, 38 is right where the moving avgs currently sit, that are both turning down sharply and about to give a bearish cross lower. A rally up to near that level that can not hold for a long enough time to turn them higher and give us a bullish signal would also back the theory that a concern about further declines is warranted.

I want now to talk about what my concerns here are, and even though I am still bullish, there are a few of them. The first is a bit unusual and is highlighted by the purple lines in the GDX chart. Today’s gap down was at the EXACT same level as the gap lower after the June FOMC. For those that remember, it was the pitiful performance of miners relative to metals and the Fed hinting at a tightening cycle beginning soon that was the reason I turned bearish on PMs and miners after that happened. (And it was the right call. GDX dropped 20% from there and did basically nothing for the next 8 months) The similarities in this drop and that gap are a bit too much to ignore. 

The reason we pay attention to charts is because a chart is simply a visualization of price action. Price action is the result of the human emotions of fear and greed that drive buying and selling. These emotions and behaviors have never changed throughout history, which is why we can look at charts of tulip bulbs from the 1600s, railroads from the 1800s and tech stocks from the 2000s and see the exact same pattern play out over the course of those 400 years.

That being said, there is no “fear of taper” anymore or anything else regarding this tightening cycle. Fed is talking about 50bp hikes now and the 10 yr is an inch away from 3%, the highest level in almost 4 yrs. (Since fall 2018, as gold was making its final bottom and the fed was making it’s final rate hike. They started cutting a few months later). The Fed can go ahead and hike, it doesn’t matter, the market has made the hikes for them already. If there’s an underlying fear in gold right now, I don’t think further tightening by the Fed is the reason.

I don’t particularly see a reason right now for extreme fear in gold, so I do not think this is a similar situation to June. I of course, could be wrong. In a few months, we could be looking back and see the reason quite clearly, as is the case with the majority of investors in the market. By the time you catch on, everyone knows, and you’ve missed the chance to act. A major difference I’m seeing between now and June is this: In June, gold was getting killed and miners were getting killed even deader. Right now, miners are getting killed (AFTER a 45% run higher in GDX) but gold’s action is not at all bad, in my opinion.

Additionally, it’s not just a factor of price action, but of price action over a period of time. Last summer, as gold and miners got killed, the was no relief bounces. Every very oversold time when it was logical that we SHOULD see a bit of a bounce, we didn’t. This went on for WAY longer than is healthy in a market that should have been trending higher. Multiple times we saw gold up $20 only to see GDX open up a dismal 1%, then lose it all and close down 2.5%, despite metals holding their gains. It’s possible we can get that, it’s only been 1 week so we need to give this time to see if price action repeats as it did then, and caution may be warranted. Or, if things begin to firm up here, as I think they should.

Moving back to the gold chart I do see another concern. Again, we pay attention to similarities in patterns because they are depictions of human behavior that have a tendency to repeat again and again. What concerns me here is the striking similarities in the 2 runs up to 2100 in Aug 2020 and just recently, highlighted in the black boxes.  Not only is the price action identical in both instances, but price itself is as well. Both these tight consolidation patterns happened after a straight up move to 2100 and are consolidating at the exact same levels. The concern is what happened next, a dive down to 1760, rally of $200 then a decline of $300 to 1680 over a period of 6 months. Obviously, we will have some waiting to do before new highs if this plays out the same and begins breaking down much more from here, and I don’t think that’s what any of us want (unless you’ve been severely underinvested).  

There are differences though. In Aug 2020, gold was hitting a new all time high up 50% from where it was just 6 months earlier. Today, after a tiring, 20% down 18-month correction, we have retested those highs beginning from a higher starting point over a shorter period of time. This reminds me more of the final few months as gold tested 1000 in 2009, before breaking out and doubling over the next 2.5 years.

In Feb last year, weekly moving avgs gave a sell signal on gold that was followed by a steep decline to 1680.  MACD crossed below the 0 line and RSI broke below 40, both are levels we want to see hold on a weekly chart if there is to be a long-continued bull move higher. (2009 to 2011, weekly gold RSI stayed above 50 and MACD decently above the 0 line on every correction for over 2 years.) After that correction, gold moved strongly higher and every correction after saw RSI hold above 40 while MACD stayed neutral, completely flat at the 0 line. Weekly moving avgs gave a bullish cross higher in Feb and soon after we’re retesting all-time highs.

2009 was nearly identical action. A moving avg bearish cross in Aug 2008 saw gold decline sharply to 700, the 2006 highs. RSI broke below 40 and MACD crossed below the 0 line. A few months later, gold had rallied, MACD crossed back above the 0 line and stayed above it while RSI stayed above 40 as well. Moving avgs gave a bullish cross higher and soon after we were testing the all time highs at 1000/oz. We took a few more months to breakout entirely, but we got there. After that, RSI never went below 50 on any correction. MACD stayed above 0 line as well. Corrections in gold came down to the 30 week moving avg then resumed moving higher while the moving avgs themselves also trended higher and did not give another bearish cross “sell signal” for 3 years, all while gold doubled in price.

These were the key signs to be long and stay long for the long term, and I think we will see something similar again. Moving avgs have crossed higher and weekly gold is now testing right in that area. MACD is comfortably above the 0 line and can still afford some cooling off here. RSI has held above 40 since last June and is currently 52, so it can also cool off a bit still. Longer term, things look good, and I have no reason to believe this is anything but just a correction for now, but we do need some more time to hash things out and make sure this doesn’t continue to bleed and repeat price action like we saw over the summer. The extreme drop in miners, is still a little concerning.

Another concern here is something in technical analysis people like to call the "false break before the real move", and it's exactly that. It's when a market is consolidating and breaks lower or higher initially, only to reverse that move and break in the opposite direction for a longer term, trending move. If that is the case here for gold, then this false break moved up 25% from our lows at 1680, and that has to be one for the record books in terms of a "false" break. While it is certainly possible with this ever increasing volatility, I think it's unlikely and refer back to the 2009 analogy, that this is likely a retest of highs and final coiling that will eventually breakout and give us a long term trending move to new all time highs.

There is one more obvious risk to address here and it’s the “Master Key” in terms of market risks across all asset classes, and that is a recession. Gold likes to run up ahead of recessions, as it did from 700/oz to 1000/oz leading into the financial crisis, and as it did from 1150/oz to 1700/oz as it did leading into Covid and the 2020 market crash. 1 month ago, the 10 and 2 yr yield curve inverted. In 50 yrs, there has never been a time this hasn’t resulted in a recession and there has been no recessions since then where the yield curve inversion didn’t proceed them. So, it’s been 100% accurate with 0 false signals. That’s a far better record than any economist or analyst I’ve ever seen. I’m siding with the yield curve that a recession is coming and is likely the culprit of “higher costs” through both inflation and rising rates. It seems very likely at this juncture that the Fed has made a critical error in not tightening fast enough and will now push rates to a breaking point in the face of a struggling economy.

On average, a recession typically follows around 12 months after an inversion. In 2008, the yield curve inverted 16 months before the recession. In 2020, it was only 9 months. 12 is the average, but in this overleveraged, highly indebted, increasingly volatile world we live in, there is no reason it can’t happen much sooner. The market has resumed tanking and has lost over 7% in just 3 days, approaching back to the lows of this corrective move, and doing so alarmingly fast. My thinking was that gold will have time to run leading into a recession within 12 months, and there will be an opportunity for profit taking and cash raising on gold positions BEFORE a market crash, which in both 2008 and 2020 led to a slew of margin calls that took everything down with it, including gold. But we very well can be a lot closer to a recession and a major crash than I think. 12 months is just the average. There’s no reason it can’t be 4 months, or 6 months. (And make no mistake, leverage and volatility have done nothing but increase. This affects all asset classes. In a massive crash, everything gets sold. To most investors, gold is simply a hedge, not a position. Apple is their position and when Apple is down 30% and their “hedge” is up 20%, which do you think they’re going to sell?)

Now keep a few things in mind. If a recession and crash is closer than we think, this doesn’t mean cash out on your retirement account. When the yield curve inverted in May 2019, the market went up 20% after that. When the crash came, it was down 20% from that level when the inversion happened… for about 2 weeks. If you nailed buying EVERYTHING back at the low, you got a nice discount. But most didn’t and missed a 100% rally in the SPX over the next 2 yrs. In reality, most looked at 50% declines in the SPX in 2009 and 2001 and assumed similar, so when the SPX was down 25% in March 2020 they sold expecting another 25% down and that of course, was the bottom.

With that being said, it was a great time to have SOME cash. I bought HL for $1.60 in March 2020 and that is the type of opportunity that is terrible to miss, so if you have not reached the point in your investing career where you have realized having at least a small cash position available at all times is wise, you might want to think about that. If a recession is on our horizon, we know how they will “fix” it. We’ve seen this movie before. 0% interest rates, quantitative easing (ever expanding, likely to include outright stock purchases next time around) and govt spending. And the beneficiaries of these policies will be gold and stocks, so having some cash to buy at panic prices would be ideal.

One final note regarding Jr miners. Many have been frustrated regarding small Jrs not really moving on this last rally in gold. As a few have correctly pointed out, investing in Jrs is investing in what typically is the most profitable, but final stage of a gold bull market. Chances are you’ve seen the “bubble model” chart below and while it is meant to represent a bubble, in reality it’s a fair representation of any bull market, as by nature the final stage and highs of a bull market will be typically bid up in speculative euphoria to levels far beyond any realistic valuation. We just suffered a long, painful 18 month correction in gold, and in that time nearly everyone proclaimed, “gold is dead” and that it’s “on it’s way out as an asset class”. This quick spike back to all time highs has not convinced any of them that they were wrong. If anything, they’re likely shrugging it off as a double top, panic reaction to Ukraine invasion, etc. We are far from the speculative euphoria that comes from a rush of money flowing into small gold and silver stocks.

Let’s look at the bull market cycle of tech stocks for example. Around 2010, smart big money institutions were buying stocks like Apple. While that move seems obvious now, back then we had the European debt crisis and there were many concerns of a double dip recession. Tech wasn’t as clear a buy then as it may seem now. In 2010, AAPL was about $8-10 (adjusted for split). Over the next 5 yrs it went to 32 and by 2015, it was all CNBC could talk about, and every retail investor in the world was in it drooling all over every earnings report. By that time, the smart, big money had made their profit and were looking for what’s next. Who is going to grow into the NEXT Apple?

In 2014 when it debuted, no one was talking about ARKK. A fund consisting of “innovative” small tech companies, most of which with little assets and revenues, and almost all of it with no earnings whatsoever. While the whole world is laughing at Cathie Wood right now, after ARKK has lost 66% from its highs, that ETF went from $15 in 2015 to $150 in early 2021. A 10-fold return in about 5 years. 

Now, we have likely seen the peak in tech, so we have an entire picture of beginning to end to analyze here in this bull market cycle. What started with big institutional money buying large tech companies, ended with retail investors yoloing call options on unprofitable small tech companies based solely on hope. The themes of the last few years have been retail investors pumping up things like ARKK, TSLA and GME. I personally can’t think of a better depiction of the end (perhaps an exaggeration though) of a bull market cycle than that.

The moral of this story is, as a Jr mining investor, you’re buying ARKK in 2015. A basket of companies with no earnings and little in assets all hoping to be the next Apple. Some will have fantastic gains, some will do ok, some will go under. Jr mining is the same. They all are money pits throwing cash into the ground in the hope of increasing their assets. Some will succeed in increasing their values and do fantastically well and become the next Newmont. Some will do ok, some will go under. (And ultimately, like all bull markets, many that don’t do a good job increasing the value of their assets will still do ok, as market speculation will send them way higher than is justified by logical valuations, same as with ARKK).

There’s reason why NEM hit new all-time highs and most Jrs haven’t budged, outside of individual good news stories that have driven a few higher.  NEM is the largest gold miner in the world. They have the best assets and the best management. It’s got a 57 billion market cap, they pay a 3% dividend, and they’re the only gold miner on the S&P 500 (and many big funds are limited by market cap size, credit rating etc in stocks they can buy, making NEM one of the few they can invest in). In other words, to the smart big money buying into the beginning stage of a bull market, they’re Apple. When the big money has made their profits and retail is foaming at the mouth over NEM’s gains, you are already positioned in what they are going to look towards next in the euphoric speculative end phase of the bull market, that is usually the most profitable.

To sum everything up, we do need a little time to see how things play out. Violent price swings one way or another don’t mean much if they can’t hold over a significant period of time. But I do think we are due to find some support here and pause a bit. More correction can certainly come, but until I see any significant reason otherwise, I am remaining bullish longer term with the obvious caution that a recession can be headed to us sooner than we think.

 I’ve said it before and I’ll repeat it, volatility will only increase over time so be VERY careful using leverage, and ideally stay away from it all together with the headwinds we have right now. Make a plan to build some cash if you don’t have some, but don’t panic sell your retirement account. Most importantly, do what you must to ensure your portfolio SURVIVES until payday comes.

-Jonathan Mergott

Bull State of Mind

Jan FOMC played out exactly the opposite of the Dec FOMC meeting. In Dec, gold was breaking down, silver was hanging on to the 21 area by a thread and GDX was threating to break to new lows again. We got a strong reversal that flushed out some bears and gave metals and miners time to pause. Fast forward now to Jan FOMC, and gold is at 1850, testing the downtrend line its failed at 6 times before, silver gets a jolt of energy, surging up to nearly 25, and miners start looking like they want to join the party as well, shooting up quite a bit in just a few days.

But alas, it was just a dream.

Miners unwound pretty quickly while gold held in and silver still looked fairly bullish. If you’ve been following me for a while and reading my articles or listening to interviews, you know I put a higher weight on the performance of miners vs the metals. The fact that miners unwound while metals stayed looking pretty decent was more likely a bearish sign then an opportunity for miners to “catch up.” 

After any major move up or down, we want to watch the counter move afterwards. Do we lose all our gains, or see buyers come in strong at a higher low? Does a move down from highs rip back upwards, or begin to fail at a lower high, indicating an opportunity to short? Miners couldn’t hold their gains on a pullback, so that is that. No legs to that rally.

In June I advised caution in precious metals and miners, citing the Fed’s hinting of a tightening cycle and the similarities to the gold market in 2013 as my reasoning. We’ve talked for months about hedging risk on investment positions in Jr miners by buying puts on ETFs like GDX & GDXJ. Of course, my analysis was ridiculed by perma-bulls who screamed about buying every dip because “this is it.” That the Fed couldn’t taper, or the world would implode. That they would never raise rates in the face of 7% inflation because it would kill the economy and explode the national debt.

They tapered, they accelerated the taper, they’re going to be done with tapering entirely in 2 months, and nearly everyone now is certain of a rate hike in March. They’re even already talking about reducing their balance sheet by selling assets back to the market, possibly beginning this year. In that time since June, GDX and GDXJ broke to new lows in Aug, again in Sept, and are breaking down again to new lows as a write this. GDXJ has now lost 1/3 of its value just since June.

Folks, there was ample opportunity to protect your investments from downside risk over the last few months by buying hedges that could have mitigated your losses, as well as providing you with cash to buy with at lower levels. (If you had only LISTENED to what the market was telling you!) If you did this, congrats you’re sitting in a much better place then you would have been right now. If you didn’t, sorry to say but you missed the boat.

I have been greedier than most in the gold market. While many have been buying every dip along the way, we have remained hedged, nibbling only slightly on a few names for long term holdings while expecting a significant amount of more downside than most have been looking for and waiting patiently to make much larger purchases then. So far, that has paid off quite well, and will likely continue to for a brief period of time. But there is an old saying in the market, “Bulls make money and bears make money but PIGS get slaughtered.” I’m not trying to be a pig here, and I definitely am not trying to get slaughtered.

At this point, risk/reward on the short side is not appealing anymore. That is not to say we won’t go lower, or that it might not be painfully lower. (The last 15% of a 50% correction has a tendency to hurt more than the first 35%) We can certainly have a fast flush out that could be very painful. But at this stage of the game, looking at risk/reward and the probability of further downside versus infinite risk to the upside after an 18-month correction, considering the time left for further selloffs to continue, it feels to me that both from the perspective of time and price, that ship has sailed. 

Many are finally coming around to the idea of Fed tightening being the driver in PM weakness and to expect some harsh drops coming soon. (Where were they 6 months ago?) I prefer to stay ahead of the crowd. We have been so far. So now is not the time to plan for the drop, as many now think is inevitable, it’s the time to plan for what comes after.

Which means it’s time to get back into a BULL state of mind. Let’s take a look at why.

March FOMC is 6 weeks away. The Fed is GOING to hike. So far, history has rhymed quite well, with the change in control in the gold market shifting to the bears as soon as taper fears began both in 2013 as well as in 2021. Gold bottomed on the fed rate hike announcement in 2015. While history may not repeat exactly, it is reasonable to expect something similar. This is not a lot of time to start making a wish list and a LOGICAL plan to execute it. 

We probably have more downside from here, and we might even trail lower after the rate hike is announced, but in my opinion, we are nearing a point soon that I think will be a very attractive place to take positions for the intermediate and longer term. If you missed out on making a plan to protect yourself to this downside risk, make sure you do not miss the opportunity to make a plan for adding to your long-term investments that is likely coming very soon.

After 18 months of consolidation in gold, its time to make a move. I say this because in the last 15 years, Gold has had 4 major consolidations: 2006-2007, which lasted 16 months and broke higher for a 90% gain from the correction low. 2008-2009, which consolidated for 18 months and broke higher for a 180% gain from the correction low over the following 3 years. 2011-2013, which lasted 19 months and broke lower beginning the bear market that didn’t bottom for another 2 years. And then there is today. 2020-2022 which in February is an 18-month consolidation from the Aug 2020 highs. Gold, now at 1800, is currently 7% above its “floor” at 1680. Historically, we are reaching a point in which consolidations in gold begin to resolve. 

While I’m not ruling out a break of 1680 still, I’m beginning to think the odds that it happens are far less than what I thought they were over the summer. Even if we do break lower, I was never expecting the magnitude and duration of a “bear market” this time around like we had in 2013-2015 low.  So, a break of 1680, will likely be limited in both time and downside potential, assuming we don’t have an all-out market crash that takes everything down, like in March 2020.

Here are some charts a shared on Twitter. While there are many aspects of this consolidation that are similar to 2013, it also is starting to look very similar to 2006 as gold began drifting higher towards the end until it broke out. If you are of the belief we are still early in this bull market cycle for gold, this might be a more logical analogy.

Let’s look at an example of what I mean regarding a LOGICAL plan. Below is weekly GDX. Currently down 35% from the Aug 2020 high. It is struggling to hold on to this area near 30 that was the ceiling for the entirety of the bear market. The next major area of support is near 25, down an additional 15% from here. That would make it a 45% correction from the high. Could we go down 55% to support at $20? Or 60% to $17, the 2020 crash low as well as the 2014 and 2018 low? Of course, it is certainly possible, but that much of an extreme is likely not PROBABLE. (Remember, we’ve been right to be greedy and bearish, but we don’t want to be a pig.)

Now let’s take a look at Abbra Silver, as it’s a Jr many people like and one of GV’s top sitfolio holdings. If the floor gives way on miners and GDX suffers a 15% loss from here, the Jrs will be a mixed bag. Some will likely plummet; some will barely budge. Some may simply decline in line with GDX. A lot in terms of a “plan” will have to be constantly updated as markets change and a bit played on the fly as it happens, but assuming a 15% drop in GDX, a 20% drop in a volatile small cap silver Jr is a conservative and probable expectation. 

Looking at OTC (ABBRF), Abbra hit a high of 68c, not in Aug 2020, but May 2021. (The Aug 2020 high of 35c was equal to last week’s high, actually. Again, I think this speaks clearly to the aspect that the change in control from bulls to bears in metals happened in June, as that was the high in many jr's that were bucking the trend of the majors and metals up until that point). Since June, it is currently down 60% at now 27c. A 20-25% correction from here puts us at support right near 20c, which would be a 70% correction from highs hit only 6 months ago.

Could we go to 15c? Sure. 10c? Of course, but its far less probable and too greedy an expectation in my opinion. Keep some cash in case it happens, market crashes are always a risk any given day. But start looking at these names that you like, placing a REASONABLE expectation of a range in price they may fall to in the coming weeks, then decide based on your own conviction, what you are willing to pay for them and how much capital to commit when they get to those levels. Most importantly, don’t forget to execute when we get there. Everyone likes to talk about buying the correction, until it comes, then they worry they’re catching a falling knife.

Speaking of “catching a falling knife”, something important I want to note. I’ve mentioned before that I tend to weight the market’s price action greater than macro analysis. The simple reason for this is that there can be varying opinions on the interpretation of current underlying factors, and even more interpretation of what future underlying factors will be and how the markets will react to them (because markets are forward looking, so what the data is now is already irrelevant.)  I have my ideas about what’s driving a market. Some will of course disagree and have their own ideas. We can spend weeks debating what the key drivers are in a market and never reach a conclusion, or we can just look at price action.

Put more simply, I put a higher weight on what the market IS doing vs what I THINK the market SHOULD be doing.

In line with that thinking, I generally wait for the market to give me some indication of a turn before diving in to buy on declines. Along with other criteria I use, a big factor is miners outperforming and turning higher ahead of metals. This method has worked very well in the past and allowed me to nail the Nov 30^th 2020 low in gold to the day by watching the miner performance (which turned and bottomed 4 days earlier). It also was a major factor in calling the low in early March, which was 1 day early to the exact low on the GDX. (it dropped another 8c from the previous day’s low). It also caught us a nice rally in early October.

Many who have criticized my “watch the miners/miners lead the metals” thesis, often cite the 2016 low as an example where that wasn’t true, and they are right. At the bear market low, miners consolidated and broke lower while gold maintained. Miners were not giving us any clues as to an impending further breakdown in metals then, they were just absolutely capitulating. Within days though, they turned and turned HARD. In 3 weeks’ time, gold was up 10% and GDX rallied nearly 40% off its low at 12.50. While there were no clues as to the low, the relative outperformance to the metal soon came and even buying then at around 17 on GDX left you with a nearly 100% profit 8 months later.

I mention this because it is very possible to see something similar when we get to the final low. Buying into declines from here may feel a lot like catching a falling knife. It’s important to remember a few things. First, we are buying longer term investment positions. Those are the type you want to buy when they are cheap and declining. Secondly, don’t bet the farm all at once. Plan for multiple “tranches” of buying and expect to do so over a period of a couple of months perhaps. Also, leave a little cash left over in the event things go lower than we expect, or take longer. The last bit can be deployed as we begin to get confirmation we are turning higher.

Adding LEVERAGE to our positions when things begin to start cooking, THAT is when we want to wait to see miners lead and outperform metals. By leverage, I’m talking about any position you put on in addition to your investment portfolio to make a little more as we start to run. Typically, I do this with calls on the ETFs and some producers.

Whether you want to use options or just buy the stock is up to you, but I feel this is an important aspect of taking advantage of prices moving higher. We wouldn’t be buying jrs if we didn’t believe an explosion in metals prices will send them soaring, but it is also due to their own building of their assets. Some do better than others at times then rotate their outperformance. 

Producers on the other hand, are simply leveraged bets on metals directions. If gold begins trending higher for a period of time, so will the GDX, that is a guarantee. A jr may not if say, they have a poor drill result or do a financing. Everyone wants to find the jr that’s going to give them a 5-10 bagger, but the fact is GDX in the money LEAPS will give you a 5 bagger too if we return to Aug 2020 highs at 45 in the next year. And there are a lot less variables with a basket of established, major producers if gold is moving strongly higher than trying to increase the market cap of an explorer by 5-fold.

Another point on producers. For the duration of this decline, we have been holding our Jr investment positions and additionally the highest QUALITY gold stocks we can find. To me that has meant 1 producer, NEM and the royalty companies. That’s been a good call as an equal weighted basket of NEM, FNV, WPM, and RGLD has outperformed GDX since June by 10%, and GDXJ by 20%. But as things begin to bottom and turn higher, the biggest profit is in the LOWER quality companies.

I’m not saying go all in on a high-cost producer with mountains of debt. But for example, that same equal weighted basket of FNV, RGLD, WPM and NEM got smoked by HMY coming out of the 2016 low, which outperformed them by 325%. The same with CDE which outperformed by 275%. The simple fact is, if a producer like HMY is producing at a cost of 1400/oz when gold is 1400/oz, investors know there is no profit here until gold turns, and it gets dumped, hard. The moment that starts to turn, the pendulum swings back in the other direction with equal force. GDX rallied 170% from its 2016 low by Aug that year. Both CDE and HMY went up 10 fold from their lows, all in just 8 months. Higher costs equal higher leverage, and have a tendency to scream when coming out of major lows.

Many people have asked me what Jr’s I like for when things turn higher, and I’ll be the first to say, stock picking jrs has not been my strongest suit. I’ve mentioned before, there are a lot of guys who I think have done a great job picking quality jrs with great 5-10x potential, and there are also a lot of guys who done a great job on timing and direction. These are two very different things and being good at one doesn’t make you good at the other. I’ve seen almost nobody who has done an exceptional job at both timing and direction in metals, as well as nailing the best 10 baggers.

I have done a lot better in terms of timing and direction myself. One isn’t necessarily better than the other. Everyone is looking for the stock with a 5 fold potential over a few years, but by simply timing and positioning correctly in GDX puts and calls over the last 6 months, multiple major swings higher and lower have netted us the same 5 fold return on our leverage and hedges while most 5 bagger potential Jrs have been stuck in the mud. (Something to keep in mind.)

If you are trying to research the best jrs to begin buying in the near future for long term investments, there are a few great people who have done some quality research you can start with by piggybacking on the free information they have shared and the due diligence they have already done themselves.

The first is GV’s Silver Sitfolio and Gold Fever portfolio, available here https://www.goldventures.org/. Additionally, there is great write ups he has provided that are shared on twitter and the Wallstreet Silver subreddit.

Another must follow for his picks in my opinion is Erik Wetterling, aka The Hedgeless Horseman. You can read his website here https://www.thehedgelesshorseman.com/ . Don Durrett is another who has done quality research and is a must follow on twitter as well. His website is https://www.goldstockdata.com/

Everyone now is focusing on a downside break in miners, so we’re going to look a step ahead at the bullish potential coming out of this. Like most of the market, their realization came too late, and the expected poor performance they think is coming will likely hit a pinnacle in despair and bearishness right when its time to buy. I know that investing in precious metals and miners the last 18 months has been like going through Hell, but you know what they say to do when you’re going through Hell, right?

Keep going. 

We’re almost there.

-Jonathan Mergott

Taper Tantrum 2.0: Rate Hike Hysteria

It was my suspicion since June, when I outlined some frightening similarities in gold to that of 2013-2015, that we were setting ourselves up for a similar fate.

The basic pattern of this was, down for all of 2013 the moment gold got a whiff of the Fed's intentions to begin tapering their QE program. (The "taper tantrum"). When the taper was announced in Dec 2013, we bottomed and rallied strongly for the next few months. (Buy the rumor, sell the news. Once the rumor set in of a taper, gold moved down strongly. When the news became fact, the fear had run its course and we rallied). We then resumed moving lower around March 2013, all the way to the final low in Dec 2015, which was when the Fed announced they were raising interest rates by 1/4 of 1%. Gold then rallied about 30% from 1050 to 1350, and the GDX rallied about 170% from a low of 12 to a high of about 32 in just 9 months.

As they say, "history doesn't repeat but it does rhyme" and indeed it did this time around. The moment the Fed hinted at a taper in June 2021, down went gold. Miners and silver began drastically underperforming, (a big warning sign I look for). Rallies were anemic at best and often non-existent. The opportunity to "sell on the bounce" almost never presented itself. That was the case for the next 4 months. The fed announced it would begin tapering 15b in purchases a month on Nov 4th and we bottomed 1 month before hand, presumably knowing that the taper was set in stone by that point.

GDX then rallied 20% over the next 6 weeks.  GDXJ and SILJ both gained about 30% in the same time. (Interestingly, the rally on this taper announcement lasted 6 weeks, exactly half the time as the 2013 taper announcement rally. 20% gain on GDX and 30% gain on GDXJ was also exactly half of the gains in 2013, 40% on GDX and 60% on GDXJ)

But one thing that was VERY different this time around, is how much we went down.

In 2013, Gold had tested support at 1550 3 times then broke down strongly to a low of 1180 by Dec. It was a loss of about 20%. Miners got slaughtered. GDX dropped from 40 at the beginning of the year, to 20 by the end of it. A 50% loss. GDXJ was worse, from 72 to 28, a 62% loss.

Things weren't NEARLY that bad this time around, but it was still an ugly 4 months for those who did not heed the warnings of the past. Gold tested strong support at 1680 3 times and HELD. GDX went from a high in May of 40, to a low of about 29, a 25% loss.  GDXJ fell from 56 to 38, a 31% loss. Both were almost exactly half of what we lost leading up to the taper announcement in 2013. Both of those are significant differences in the gold market this time around.

That brings us to today. Gold rallied from 1770 to 1870 over 2 weeks from Nov 3 to Nov 18th, then lost it all in 3 days. Needless to say, this is not what "dips" in a bull market look like.  In fact, what it looks strikingly like, is exactly what happened leading from the March low to the May high, and the drop in June after the FOMC.

After the consolidations on this chart (In the boxes) gold ripped higher quickly, topped out then lost all of the gains, going right back to the consolidation area before hand in both June, and now.

 

I hate to be the bearer of bad news friends, but it looks like this run is over.

It's no fun being the lone gold bug who is bearish, (the permabulls are relentless) but after last time around, I've gotten use to standing alone on my position. There seems to be a direct correlation between lonely opinions and accuracy of market calls. (Who would have thought?) I THOUGHT we had a little more room to run, and I thought if that wasn't the case, we'd have a little more time for planning and analysis on the market action if we began acting weak, but we didn't get that. We got an all-out plunge instead. (Again.)

I didn't exit some positions in time and remaining gains were evaporated. It's fine, profits were booked along the way and there is no use crying over spilled milk anyway, its in the past. So, what now?

Rate hike hysteria.

With taper out of the way and the fed clearly embarking on a tightening cycle, we know what comes next. Employment has improved, inflation is high and there is no way around raising interest rates now. 

Spare me all the explanations on why they are trapped and can't do it. People said the same about taper in 2013 and were wrong. Then they said, "Well, taper is a mistake and they'll be back tracking in 6 months."  They were wrong about that too.  They said the same about rate hikes in 2015 and were wrong. Then they repeated it was a policy mistake and they'd have to frantically cut again 6 months later and they were wrong yet again.  They said all the same arguments again 8 years later about taper 2021, and surprise, surprise, you guessed it, they were wrong.

Once again, the same people or a new crop of them are reiterating the same arguments they and others were wrong about in 2013-2015. The fed will end Taper and increase QE. They're trapped and can't raise rates.  If  they raise rates, they'll will have to drop them again soon. Etc, etc. They were wrong then; they'll be wrong now.

They WILL raise rates, it’s just a matter of when. As of right now, the market is expecting June-Sept 2022 and I think that's about right. (Although I think it will be sooner rather than later). Until that point comes, Gold looks to be headed lower. (If history repeats like it did on this taper announcement, we will also likely bottom slightly ahead of a rate hike announcement).

I don't know how low, but I do know moves in gold almost always overshoot in both directions, so prepare to be terrified when it happens.  If I'm guessing, 1500 sounds like a reasonable expectation if gold breaks support at 1680 (which I think it will). Being that 1500 sounds "reasonable", I'm preparing for "unreasonable" and that could be 1400, which would retest the former resistance ceiling in gold during the entire bear market.

That’s down roughly 20% from here on Gold. You better believe that if the metal goes down 20%, miners will get murdered. I think GDX could drop 30% and maybe more over the next 6 months if 1680 gives way.

 

It’s important to understand a few things. First, my goals may not necessarily align with yours, and that can be the case with a lot of people whose work you may read or listen to interviews from, so keep that in mind.

 

My goal is to build JR gold and silver positions when they are cheap. These are long term investments that I do not believe are dependent on gold going to 3,000/oz to be profitable. They’re undervalued and have good assets. Additionally, majors will have no choice but to buy them as reserves continue to deplete. When the market makes a turn downward, like I believe it is doing now, I am hedging those positions by buying puts on ETFs and producers. We could go down 5% over 2 weeks, or 30% over 6 months, there is no way to know how long or how far, so I react on sell signals by protecting myself. When I believe we are turning higher, I take profits from my hedging positions and buy more Jrs, usually now at a good discount. I then add positions to leverage to the upside in the leading producers. Again, it could be a few weeks or much longer and higher so I react accordingly and ride till upwards momentum begins to stop. You never know how far or how long a move will last, but it’s impossible to profit from it if you’re not in it.

Lather, rinse, repeat.

If what you want to do with your investments is buy, hold and not look at them again for 5-10 years, most of this is probably irrelevant to you, and that’s fine everyone has different goals and styles that suit them.  But I would still believe it is missing opportunities to protect yourself from losses in the meantime.

For example, buying and holding 1000 shares of GDX from 2011 at 60 until after Aug 2016, when GDX rallied 170% from the 2015 low at 12, would still put you at down 50% over that period of time.  Even exiting the market at 40 in 2013 when GDX began breaking lower and underperforming metals would have allowed you many opportunities to buy back twice as many shares at half the price or less in the coming years. By Aug 2016, after that 170% rally from 12 to 32, you would actually be up about 7% instead of sitting on a 50% loss over the course of 5 years.

Miners lead the metals, and the bull market formula is: JR silver>Major silver ≥ Jr Gold> Major Gold ≥ Silver>Gold.

This is what I’m looking to see if price trend is to flip bullish or bearish. Miners have held up ok on this dive, but silver is really letting go.  It looks like the formula is about to flip backwards again and I expect miners to have lack luster rallies to sell into (again) over the next coming weeks. We look very much like we are repeating what happened in June.

Going to wrap this up with a couple of basic charts.

Weekly gold gave a buy signal when the moving averages crossed late 2018. That buy signal held through every correction until Feb 2021. In May it crossed higher again but was slammed down quickly, making it look like a fake out. On this last rally, moving averages “met” and LOOKED like they may cross higher again but suffered the same fake out fate as we’ve now slammed down again. RSI has been holding at 40, but being pushed back at 60, indicating no clear direction or control in the market as of yet. MACD crossed below the 0 line and has tried twice to push back above it again and failed as well.

 

Now here is that same basic Moving average crossover signal from 2009 until 2013.  It’s virtually identical. Buy signal in early 2009 remained through all corrections until crossing lower in May 2012.  In Aug 2012, we got another “buy signal as gold tested 1800 for the last time, but it was again, a “fake out” and reversed lower again early 2013.  RSI also held 40 throughout that consolidation and was pushed back around 60 as well. (It did move slightly higher, to ~66 on the last tap of 1800 though) MACD had crossed below the 0 line the same time as the moving average sell signal, rallied back above, then reversed lower after about 3 months.

 

The next test of 1550, the floor gave out, and I expect a similar, although less drastic move if we break 1680.

Here is the same Moving average signal on GDX. It crossed lower 5 months before gold, then broke its floor at 50, down 20% to 40, which it also “led” gold on by about 9 months. We got the same fake out rally that quickly lost it again and it fell HARD, but the miners led and warned of this first. Additionally, RSI broke below 40 in mid-2012, 6 months before gold broke down. The last rally pushed it just above 60, then it tanked to incredible oversold levels as miners dropped over 50% in less than 1 year.

 

Now here is the GDX today. Moving Averages gave a buy signal late 2018.  They briefly crossed in the 2020 crash but corrected quickly. They crossed lower in Jan 2021, about 1 month ahead of gold. We got the same fake out cross higher in May, then they crossed lower again by July-Aug. Unlike gold, they have stayed lower on this rally, not even rising up to meet each other. Also, unlike gold, the GDX broke to a new low below its march low, while Gold has Continued to hold its low at 1680. This is exactly what it did in 2013 as well. Also similar to what happened 2012-2013, RSI on the GDX broke below 40, twice actually, in March and again in Aug-Sept. The May rally saw RSI top out at 60, but this last rally only made it to 56.

 

It seems to me, after this rally since early Oct got pushed back strongly, that the warnings in miners and metals that were there 2012-2013 are repeating again now in a strikingly similar fashion.

I think this is worth paying attention to. As always, this is not investment advice and all risks on positions you take are your own. Do your own research.

But while you’re doing it, it’s worth looking at some of these clues from the past.

-Jonathan Mergott