Going for Gold

It should come as no surprise that a 50% increase in the Federal Reserve’s balance sheet in a short time, plus trillions in fiscal stimulus from the government, mixed with historic unemployment and GDP forecasts, have made gold a great investment.  I would like to highlight though, that gold was a great investment last year as well, gaining nearly 20%, at a time of solid economic growth, no inflation, the highest interest rates we’ve seen in a decade (for at least part of the year), and all-time high stock prices.  A time when nothing was going “wrong” and people scratched their heads as to why anyone would invest in gold.

Similarly, after bottoming at about $275 an oz in 2001, gold began steadily changing trend and moving higher, doubling from 2004 to 2007, at a time of amazing economic growth, little inflation, and all-time highs in stock prices.  Nothing was seemingly wrong then either and people were scratching their heads as to why anyone would invest in gold.  And then it happened.  The same then as it did now.

• No, gold going up was not predicting a global pandemic.  Increased capital flows into safe-haven assets like gold, WERE however predicting a market that was way over owned, over leveraged, over enthusiastic, and ripe for a crash regardless of what the catalyst or “black swan” ended up being.  This wasn’t totally oblivious, people saw this, people said this.  If you’re paying attention, they really do ring a bell at the top.  CNBC spent months just before the crash pumping an article on social media about all the cash Buffet has and how they were baffled that he wasn’t panicking to spend all of it right away.  Bob Moriarty, in very plain English said we are going to crash, VERY badly, multiple times within 6 months of it happening.  Countless Wall Street big wigs proclaimed "cash is trash" in financial media.  The sudden action of he fed pumping in October should have been a very big clue as well. The market’s parabolic move higher in Jan 2018 convinced me to bail.  It crashed soon after, in the first batch of 1000 point down days we had ever seen.  Over the next 2 years, I missed out on an additional 17% in the SPX, assuming I could have nailed selling right at the high.  I’m certainly not crying over that lost opportunity.

The market has been problematic for a good couple of years before this happened, and in the grand scheme of things, cashing out 2 years ago when things crashed the first time doesn’t seem so stupid now.  Looking at it now, holding on for that extra little bit was just exacerbated greed, and that is exactly what market tops are.  You could look back now at a chart of the SPX and see that last, dying, bullish effort in stocks as it hit the “exacerbated greed” point, or you could have just been looking at what the gold chart was doing.  It wouldn’t have told you “Mortgage Crisis!” or “Global Pandemic!”, but the reasons behind price movements are immaterial.  Financial news spends 8 hours a day trying to explain the reason why the market is down today.  There are more sellers than buyers.  That’s it.  CNBC doesn’t know the motivations behind every one of those buyers or sellers any more than you or I do.  They spend 8 hours speculating on the cause when all you need to know is the result: Where is the money moving?  Regardless of your feelings for a particular investment or asset class, no one in history has ever invested their money into any asset for no particular reason.  There is always a reason.  So, when you see gold start increasing dramatically, and there is no obvious “problems” in sight…get ready.

I think that gold is prepared for a multiyear bull run.  It has already gone up a lot, and is likely due for some cooling off here, as it has done in the past.  There are 2 scenarios I am looking for in regard to a pullback in gold that I will talk about.  In addition, the gold miners have severely underperformed the metal.  With gold moving as dramatically higher as it is now, their performance can at best be described as sub-par.  But when things are moving lower, the miners have gotten destroyed.  They are undervalued based on almost any metric you can come up with.  I believe after a pullback in the metals, you will see likely the last of “stupid cheap” prices in miners.  Even if that is not the case, I believe the profit potential on a modest rise in the miners is easily 30-50%.  You’d be hard pressed to find that kind of potential and value anywhere else in the market right now.

I am going to focus on analyzing some individual miners in this article and I am going to classify them in 3 categories.  The first is “Investable”.  These are the gold assets you can buy and just hold as long-term investments in your portfolio for the next few years.  The second category is “Undervalued”.  These guys are the ones that I believe are undervalued miners that are benefiting from higher profit margins and increased reserves that the market is not accounting for in their stock prices, because investors are used to suboptimal performances from them. These stocks are in a solid position for great gains in an environment of higher precious metals prices but could very easily give a lot of their gains back in the event of a nasty correction. These I would buy while the “wind is to my back” with gold and silver prices trending steadily higher, expecting a hefty 30-50% profit, maybe more, but I would not get greedy or overstay my welcome with these, so I would recommend taking profits on large spikes higher near price target points.  The third category will be “Speculative”.  These are mostly small miners, development companies, miners with high costs and debt, in which a higher metal price could really “save the day” for some of them, resulting in much higher gains.  But the overall risk is much higher as well.  These stocks you should do extensive research into before buying.  These are the kind of stocks where you could easily pick 10 and put an equal investment in all of them, betting on higher metals prices, then watch some go up 50%, others lose 50%, some double, and others go bankrupt.  Then you are left being right about your overall thesis of buying gold and miners and having 0% profit to show for it overall.  They could have spectacular moves higher or go completely bankrupt, so be aware of the risk.

First let’s look at the gold chart.  In 2008, in the midst of a liquidity crunch, gold got slammed 30% from $1000/oz to $700.  After that, it began steadily moving higher.  The first 2 major peaks gold made on its bull run that it began in 2009 corrected about 15%; from $1000 to about $850, then from $1225 to about $1050.  After that, corrections lower were 9%, then 8%, then 6.5%, finally culminating with very shallow pullbacks and a massive blast off to $1920/oz that marked the peak of the bull move two and a half years later.  Ironically today, after hitting $1700 as the Corona-virus fears peaked, gold again was a victim of the need to raise capital and plunged $250 to $1450/oz.  This time it was only about 15% down, before turning around and then tapping $1800.  Now we’ve hit the real ceiling everyone has been eyeing, the level gold tapped 3 times in 1 year from Nov 2011 to Oct 2012 before collapsing.

Gold is now up about 50% in 18 months, and it’s unlikely we power through this level to test all time highs without a pullback.  Right off the bat, we can see we have significant support at about the $1550 level, which interestingly, is about 15% lower from $1800.  This would be a logical first target for a pullback.  It is not that gold might follow the EXACT same trajectory it did from 2009 to 2011, it is simply how bull markets are born and die.  They begin in skepticism, mature in optimism and die in euphoria.  And the gold chart from 2009-2011 perfectly paints that picture of investor sentiment.  Every move at first corrected down more because even the bulls didn’t believe in it and figured “Ok, this has to be it, sell”.  In the middle of the bull run, the idea that it was a bull market became more common place, “Yeah it’s been trending higher, so you should buy it on dips.”  Finally, there are very little dips.  Investors are piling in, and “analysts” calling for extreme gains are all over financial news.  And then that’s it.  A blow off top spiking higher and a crash.  It won’t necessarily be the same, but there’s a good chance it will rhyme.  So, we will be looking for bigger pullbacks for now that we expect to diminish in the future as the bull market goes on.  A 15% pullback to strong support at 1550 seems logical.

But there is another scenario this picture might be painting.  It looks right now, like gold has formed a picture-perfect “bowl” formation over the last decade and could be setting up to form a “handle” on a massive “cup and handle” formation.  Cup and handles are widely regarded as one of the most consistent, bullish, chart patterns and the longer a formation is, the more “solid” it is said to be.  On a cup and handle, a pullback to form a “handle” on this chart pattern should not fall below about 50% of the “depth” of the bowl.  The top area is $1800, the low of the bowl was $1050.  This gives us a depth of $750, indicating that a handle should not dip below $1800, minus $375, or about $1425.  Again, very interestingly we can see our strongest support level at around the “breakout” point of $1400-1450.  This also is the level gold caught at in the massive “corona liquidation” we saw a few weeks ago.  After the handle forms, a break above the $1800 resistance level gives us a target that is equal to the breakout point plus the “cup” depth.  In this case, that is $1800 + $750 = $2550/oz.  That’s about 75% higher from the anticipated pullback area for the handle at $1400.  It’s very interesting how these pictures paint a pretty clear and logical scenario that oddly aligns with support points and previous lows.  So which road gold decides to go down will be interesting to watch, but either way it looks obvious that you should be a buyer as we pullback to the 1550 level and lower.

Investable

Onto the gold stocks and we are going to start with one of my favorites, RGLD.  After plunging to 60, RGLD has nearly doubled your money already if you were quick enough to buy it there for the whole 5 mins it lasted.  We have rebounded to 110, but are still within a range of declining highs since last summer, after peaking at nearly 140.  Looking back, 60 was so beautiful you will likely never get it again, but all is not lost if you missed that opportunity.  There is strong support at about 90 on RGLD, and I would expect to see at least that level in a decent pullback.  From there, support is a stepladder down, coming in about every $5, at 85, 80, 75, and 70.  Our expectation would be for 80-90.  This is a good position to buy into RGLD and they have proven over the last decade that this is a stock you can invest in long term that will do well in good times for gold, and also do well in the not so good times as their business continues to grow and make money.  Ultimately, we would be looking for a retest of the all-time highs after a correction, back near 140, giving you a profit of nearly 50% on this name.

Franco-Nevada (FNV) has been a difficult one recently.  I bought FNV a while ago and it has soared.  Since then, I have been wanting to add to my position, but have found it difficult because it has never really fallen to a level that I believe offers a great value.  This is often the case with “leaders” in a sector.  They will continue to outperform while giving very little opportunity to buy.  FNV has rocketed to a new high as gold taps 1800, which few gold stocks have actually done, proving it really is one of the best names to own for gold.  The difficulty is the buying point.  On a correction, it would be unlikely to get a great pullback on this.  It will likely be shallow and bottom between 90-100.  That I think is a good level to buy at, while of course, leaving some dry powder in case of a deeper correction.  I would have a target of around 140 on this stock as well, giving a great profit potential from a buy at 90.

WPM is the other great royalty/streaming company that has weathered the bear storm in gold and silver much better than most miners and offers a great upside potential.  This again has been difficult to “buy” because corrections are always shallower than I would like, but it is again, a sign of why you should be in the leaders.  Too many times people make the mistake of buying a laggard in a sector because the value is still there after a move higher in their competitors.  Investors expect it to play catch-up to the rest of the industry.  What usually happens is the laggard continues to lag, while the leaders continue to lead.  You’re not “pulling one over” on the market and getting a “deal”.  Laggards lag for a reason.  WPM is high quality for a reason.  With a decent correction I think it’s possible to snatch up WPM at about 26.  I would love to get 22-24 level, but I doubt that will happen, as it will likely keep trading for a premium.  My target for this one would be back to it’s all time high at around 40, giving it about 50% profit potential.

Newmont mining is the only miner I’m putting in the investable category and for good reason.  Miners are subject to cost increases, host country instability, literally 1000 different variables that impact their business that is not the case with royalty companies.   NEM is the biggest gold miner in the world with about 7.8 million ozs of gold expected to be mined this year, and 15 operations in 9 different countries.  8 of their mines are in geographically safe places like the USA, Canada, and Australia.  The acquisition of Goldcorp last year was one of the best buyouts I ever could have hoped for in the gold sector, combining Newmont’s management with the addition of Goldcorp’s assets.  For years, it performed like a lot of the other gold miners, getting killed when gold goes down, and drastically underperforming the metal.  That has turned now.  NEM has a great production, a great portfolio of assets, great management and looking at the stock chart, it shows.  NEM is up 100% since this time last year. And in addition, they have raised their dividend and will likely continue to do so as gold goes higher.  The last few days have been almost parabolic as it has shot higher and tested it’s all time high from 2011 at 62/share.  I would be looking for a test of around 50-45.  There is support there at 45 and around 40, but this would be very lucky if we pulled back to there.  This is one you should own, so keep dry powder and buy small amounts as it declines.  If we never see 45-40, at least you got some at 50-45.  If we do, you can buy a little more.

Undervalued

First up on undervalued is going be one that I was debating putting in the “investable” category, Sandstorm (SAND).  I decided to put it in undervalued instead because the companies in “investable” are all much larger, more established companies with bigger operations, and SAND is a little different, and more of a growth story.  I do believe it is investable for a longer-term horizon if you are bullish on gold, but I also believe there are protections in the other “investables” like much larger and more solid revenue from their operations and dividends that SAND is not equal to (yet).  If you’ve been invested in gold stocks over the last decade, you’ve probably noticed how much better the royalty model has performed and have been dying for more companies to invest in of that business model versus miners.  SAND offers the best of both worlds, because you have the superior royalty model coupled with the growth story of a junior miner.  As they continue to expand their assets and revenue stream, you have a solid growth play and gold play.  I was lucky enough to add to my position in this during the recent plunge at about $4.40, but I doubt we will see those extremely low levels again.  The $5 area offers good support and is where I’d look to buy more of this.  Again, keep dry powder in case you get a better opportunity, but I wouldn’t depend on it, so don’t get to greedy.

AG is a stock I have been a shareholder of for over a decade, buying in the $2-4 range from 2009-2010, and getting a nearly 10-fold increase by 2011.  They have not been slouching during the decline period in precious metals, increasing their production from about 10 million ozs a year in 2012-13, to over 20 million expected this year.  Their estimate for their all-in sustaining cost is about $14.50/oz for 2020, earning them about $1/oz right now where silver prices are.  The margins for the silver miners are not spectacular, and that is not news to the market which is why most have lagged gold miners.  But with a production level that is about 50% higher than just 3 years ago, their leverage on higher silver prices is much more massive than ever before.  The market might be expecting $1 in profit or less off of their production right now, but if you are eyeing a silver price that is closer to $20/oz after a correction here in the metals, then that profit margin is 500% higher then it is now.  Looking at the chart, those lines I drew at the bottom might seem all clustered together like there is not much difference between the support levels, but I doubt we will see the spike low area near $4 again.  Buying at $6 and below is a great price I believe.  If you can nail it at about $5.50, I think you have a 100% profit margin on this, as I believe that a conservative target is back to recent highs near 11, especially if were looking at $20 silver.

Yamana, AUY has performed nicely over the last year or so and I expect that to continue.  They were able to sell an asset that was underperforming for them and use the money to pay off debt and have since also increased their dividend.  Their production of 972k ozs of gold last year is expected to modestly increase to 1 million ozs a year by 2021 with an expected all in sustaining cost of around 1000/oz, giving them significant profit at these gold prices.  There is not much of a “growth” story here, but there is another undervalued gold miner here with solid operations and production looking at $700 in profit per ounce at these levels.  There is good support in the 3.25-2.75 region, (we will call it about $3).  The recent highs around 4.75 and 4.50 also seem like a logical bullish target after a pullback, giving a nice opportunity for a 50% gain from $3.

SSR Mining has performed very well over the last year or so.  I have not followed this company as closely over the years as others but I have been paying closer attention this past year, and I like what I am seeing. Their 3 major mines are in the USA, Canada and Argentina, and are expected to produce 360k ozs of gold and about 6.5 million ozs of silver this year.  Last year they reported record production which equivalated to 420k ozs of gold equivalent ozs at an all-in sustaining cost of around $960/oz.  After hitting 19, it crashed in the liquidation panic down to 9 and is now stalling out on the rebound at 17.  9 would be an ambitious target, but I think we can see 11-12, and that’s where I would like to start picking some up.  With their solid production and costs, I’d expect a target back near the highs, giving a 50%+ profit potential. 

PAAS has been another very good performer.  They had a production of 25 million ozs of silver in 2019 and 560k ozs of gold at an all-in sustaining cost of 10.50 and 950 respectively.   Their original guidance for 2020 would be about a 10% increase in silver production, to about 27.5 million ozs, and about a 18% increase in gold production up to about 650k ozs.  (I say original guidance because most companies have pulled their guidance due to COVID-19).  Their anticipated all in costs for 2020 work out to a silver equivalent of about $5.50/oz, giving them significant profit at these levels.  The stock has performed very well over the last year or so, going from 11 in June to a high of 26 just in February.  It plunged back to 11 in the liquidity scare, and then rebounded nearly 100% to 21, and now sits at about 19.  Again, 11 would be great but I won’t hold my breath.  Silver has lagged and the high silver exposure in PAAS could drag it down on a pullback, so I would be looking for about 15-14 as a target to buy at.  At that point, a rally back above 20 is giving you nearly 30-50% in profit which I think is not an extreme expectation. 

HL, Hecla has performed better than I would have expected.  I bought some at about 1.60 and doubled my money within a year.  On this past plunge downward, it bottomed at about 1.50 and bounced up 66% to 2.50.  This is one that could just as easily have been in the “speculative” category, but with solid production, low cash costs, and the market performance, I think it is superior enough from those other “speculatives” to be put in the undervalued list.  There is solid support here around 1.50, and like a lot of the silver miners, has noticeably underperformed gold, so I would in this case, be expecting a retest of the lows in that support area.  I believe at around 1.50, you are buying an undervalued mining company with a 50-100% upside potential, but I should note, I wouldn’t place a huge investment in this name, but it is worth owning some.

CDE is another that has surprised me on the upside but performed about as expected on the way back down.  This is another stock that was borderline “speculative”, but a few things are giving it the “undervalued” edge, including solid production on their operations and their diversification from a mostly silver producer, to about a 55/45 split between silver and gold.  CDE has stopped reporting all-in sustaining costs, but as of not too long ago, they were about 18/oz, making them very high in the industry.  Cash costs are less, but all in sustaining cost factors in development costs for new operations they are working on, which are very high right now at CDE, as they are burning through their reserves very quickly.  The benefit to high cost producers is when metals begin to rally to their cost level.  At 14, no one is counting on any profit from CDE.  At 18, they are now break even and the markets assumption of no profit or a significant loss begins to change rapidly, and these miners play catch up really fast.  After going from a little under $3 in June and tripling to a little over $8, it’s been one of the best performers last year that I have in my watch list.  But as metals pulled back and the panic ensued, it lost all of its 2019 gains already in 2020.  The outperformance of gold to silver is going to help their costs this year, and if you are looking for silver at $20/oz, then the market is severely undervaluing CDE right now.  This is another I think could retest its panic lows near $2.50, and I would like to pick some up at $3 or less.  I believe the move to $8 was a little over enthusiastic so I would not target that area on a move back up.  I would be looking for an upside target around 5-6.50, still giving a 100% profit from a buy of 2.50-3.

GFI.  Over the last few decades everyone has done everything they possibly can to get as far away from South Africa as possible.  Although there is more gold in SA than nearly anywhere else in the world combined, political instability makes it not an attractive place to do business.  In addition, many mines in SA are very old and go miles into the ground to produce gold, making costs very high.  The upside is reserves.  With such high costs, it may only be economical to mine 20 million ozs at a price of 1500/oz.  but at 1800/oz, now there could be another 10 million economical ozs, and that often happens to these SA miners.  GFI has diversified away from SA as well, now having operations in Ghana and Australia.  They have solid production and even pay a dividend which is always nice to have.  My biggest gripe here is hedges.  The company has hedged 200 million liters of oil at a price of 58/ barrel for their operations going out until 2022.  They have also hedged a significant amount of their gold production at around 1300/oz.  When profit margins are thin, it can be enticing for management to hedge costs and profits so that they are at least marginally profitable, rather than roll the dice and risk bankruptcy.  This would be fine if anyone was ever able to get it right.  Looking now, buying your oil for this year at 58 and selling part of your gold production at 1300 sounds really stupid, because it is.  Their operations are solid though, and I think in a pullback to near 4.50-5, there is a target of about 6.50-7.50.  This is not as enticing as other miners, so it shouldn’t be a focus on your portfolio.

HMY I believe offers a better value to GFI, without the missteps of bad management.  This is another borderline “speculative” so I wouldn’t build a huge position in this, but I believe at these gold prices, their reserves and profit margins are very good, and I would love to buy a little of this near the $2 level.  This is another that has been one of the best performers on my watchlist, tripling from it's low near 1.50.  I believe this is due to the significant leverage to gold prices that South African mines have. I would target an area of about $3-4 as a price target, and I think that is conservative.

Speculative

MUX has had a very hard time.  Its biggest benefit has been CEO Rob McEwen as it’s biggest shareholder, holding 20% of the entire stock while taking $1 salary a year.  He has invested 164 million into the company of his own money.  The entire market cap right now is about 400 million.  He could buy the other 80% outright and own the company privately for an additional 320 million.  He wouldn’t do that, because he is smart enough to know that he will never get the value for his company privately that he would on the public market, but that does in some way leave a “put” in the stock price.  Their production costs are quite high at over 1200 for their all-in sustaining cost, with not much in actual production.  The stock has performed horribly for a decade, losing over 90% of its value after falling from a high of $10 in 2011.  This stock has already doubled off its low of 50 cents to now $1, and could do something similar if we have a retest near that 50 cent level, leaving an enticing profit potential, but less enticing when you consider the risk, and the many other miners with better portfolios out there.  Bite on this if you really want to, but I wouldn’t buy much or expect much.

IAG was one of my favorites in 2009-2011.  Unfortunately, since that time their production level has dropped, their costs have increased and they’ve made some foolish bets on their hedges, hedging oil costs at around 57/barrel.  It bottomed at 1.15 in 2015 then rocketed to over 7 the next year before losing it all again.  This past panic plunge brought it nearly back to that 1.15 level, bottoming at 1.40 I would be compelled to buy a very small amount at $2 or less, with an expectation of about $3 on a rally, maybe even $4.  I would not count on much here, but with an 850k/oz a yr production, there is profit potential in this one if you get it cheap, but I wouldn’t expect it to outperform it’s peers. 

EXK has performed dreadfully.  Their all-in sustaining cost is at $21/oz.  Production declined 27% last year to 7.1 million ozs of silver equivalent.  There is nothing here I see worth it.  However, a greatly rising silver price, close to their cost price would certainly make the market reevaluate its economic feasibility and could see a very big rise, if indeed production declines start turning a corner as management believes.   It’s lost half of its value since September with a recent low of 92 cents.  It could easily break that and head lower, then rebound 100%, but I believe there is better stuff to buy out there.

FSM and EXK have been pretty equal in their stock performance for the last couple of years.  There has been nothing here that is impressive.  This is a stock I also own some of and I have been very disappointed and do not have much faith in a rebound.  It bottomed recently at 1.50 then doubled to 3.  There is certainly money to be made if you want to try and catch a falling knife, but there is money to be made in safer stuff too.

Honorable and Dishonorable mentions

There are some I am just not going to take the time to analyze and I will briefly explain why.  GOLD, Barrick/Randgold merger, has been a historically terribly run company.  Barrick hedged oil costs in 2007 at 100/barrel and hedged their gold earlier in the decade at about $400/oz.  After NEM bought Goldcorp, the new Barrick launched a hostile takeover of NEM with an offer below the market price.  The new CEO tried to explain why they “shouldn’t have to pay a premium” to NEM shareholders to take their assets, because the “synergies” would be more profitable for them with the merger.  This is two companies with historically bad management merged into one dreadful one.  The stock has performed pretty well actually despite this, but their dumb decisions are like a ticking time bomb I would be avoiding in fear of what “brilliant” idea they come up with next.

GSS is a high cost producer in Ghana, that would greatly benefit from gold at these prices, but it hasn’t translated to the stock performance.  There is better stuff out there.  GPL has done nothing but go down for years and nothing has impressed me at all about the company’s portfolio or management.  NGD has been another dreadful story that continues to get worse.  There is nothing here to buy and they will likely get bought out for pennies or go bankrupt.  AU has performed quite well actually but is another story of bad management and ill-timed hedges.  A lot of the time, these companies can perform based on their assets, so long as management stays out of the way.  I’d avoid this as well.  TRX has been developing the same property for decades, and after personally working for them for almost 5 years, I do not see any advancement in reserves, any timeline on production, (let alone earnings) or any royalty contracts which was its entire purpose when it was formed.  I have serious doubts this will ever reach any meaningful level of production or ever prove any meaningful deposit, and don’t advise gambling on a 50-cent stock simply because a big wig like Jim Sinclair is the CEO.  OR is a royalty company which I would have loved to own, but they recently purchased a mine they intend on producing themselves, steering away from the royalty model for some unknown reason.  In addition, many believe they are biting off more than they can chew with this purchase and that the value is just not there.  Again, I’d avoid.  I’d especially avoid any company or management who thinks mining themselves is a better alternative than royalty contracts.

So, there it is.  Almost all the miners on my watch list broken down with what I believe are very good buy points if we can get a decent correction in the metals, with (what I believe) are conservative price targets on a move back higher.  I may be wrong about the “last chance to buy miners at stupid cheap prices”.  The market might already be catching on, so it might be advisable to buy more lots in smaller amounts starting a little sooner.  Gold has already pulled back nearly $100 from the high and miners have not gotten crushed like they have in the past.  Earnings on a lot of these stocks for Q1 will start coming in next month and I believe they are going to be very good across the board, so take an opportunity on pullbacks to buy and hold the investables, buy and sell the undervalued ones on big swings higher, and be very careful about speculating with the others.  If you lighten significantly in your undervalued category you will book profits while still maintaining a solid gold position in some of them and long-term positions in your investables.  As always, be careful out there in the market and stay safe.  

-Jonathan M Mergott

**Full disclosure, many of the stocks that I mentioned I am an owner of personally, in all 3 categories.  Do your own due diligence on ALL investments.  Don't blindly listen to me or anyone else.

This is What Keeps Me Up at Night

The best way to learn about how to do something is to just do it.  And nothing motivates a person to do something themselves more than poverty.  I’ve been very fortunate in my life to have spent a large part of it being very poor.  This might sound like an oxymoron, but it isn’t.   Thanks to poverty, I was forced to learn basic car mechanics, and can fix or replace simple things like brakes.  I moved into a rundown apartment in a spectacular location and spent the better part of 2 years renovating it.  You could look at the place and clearly tell a professional did not do the spackling, but it was still 1000% better then when I originally moved in and it only cost me a couple hundred dollars.  It’s important to have knowledge in a variety of areas.  Career wise, you probably want to focus your skills and specialize in one area but good luck getting through life knowing nothing other than accounting.  Considering everything that is going on, this is a great time to learn a skill or study a subject that you have always been interested in, separate from a hobby or from your career.  With the way the financial markets have been, this is a great time to study how to read and interpret a balance sheet and how to invest money for your future.  So many people have told me in the past that they do not understand finance or markets in the least, then follow that up by asking me “what stock should I buy?” without the slightest understanding of what a share of stock even is.  There are some great resources that can help you, from YouTube lessons to pdfs of books you can google like “Finance for Dummies”.  This is of course the case with any subject, so whatever you are interested in, take this opportunity of isolation to learn something new.

Knowledge is power, but knowing when to use your power is wisdom, and knowledge is useless without wisdom.  The worlds most powerful weapon is useless if you can’t aim it.  Knowledge is like learning how to fix a car’s transmission by watching video tutorials, reading about it, and seeking advice from professionals.  Wisdom is knowing that you probably shouldn’t attempt it yourself for the first time on a $40,000 Mercedes.  The Dunning-Kruger effect is cognitive bias, that essentially, accounts for the overconfidence that a beginner has when they begin learning something new, and the doubt that professionals in their field face as well.  You will never hear me confidently declare that the market “will” or “will not” do this or that, because after years in this industry, I am fully aware of what I don’t know.  As is the case in most professions.  The more you know about a subject, the more you realize the depth of knowledge that is available on a subject and the relatively small amount you know in comparison.  This leads the most knowledgeable people on a subject to seem perhaps, less confident on what they say, while amateurs “know” what they spout out to be true beyond any doubt.  (I am reminded of Dennis Gartman a few years back, confidently declaring we will not see oil back above $44/ barrel in his lifetime.  It was back above that level 4 months after his confident call.  I believe he has retired now, but is still alive and kicking, despite oil staying above $44/ barrel for the entirety of the past 4 years, up until just recently.)

So, while it is important to learn a little bit in a large variety of subjects, it is equally important to understand what you don’t know.  The knowledge of how to fix your roof is great to have, but the wisdom to know when it’s best to hire a professional is more important.  Which brings me to the subject of this post.  I am becoming more and more terrified by people and their actions, and their “knowledge” on a subject.  This is nothing new, we’ve been seeing this with the Anti-Vax crowd over the last few years, and consequently witnessed a resurgence in things like measles shortly later.  (Just a side note here, the infection rate of COVID-19 is about 2.5, meaning for each person infected, they on average will infect about 2.5 more people.  The infection rate for measles is 18.)  People began listening to a washed-up porn star talk about her son’s autism and 1 study -since proven entirely false- backing up that vaccines could be the cause.  Next thing you know, a few hours of YouTube videos have rendered years of medical study by doctors entirely useless.  The Dunn-Kruger effect at work.  Start from somewhere in the middle, learn a basic amount about a subject, inject incorrect information into your correct information because you are not knowledgeable enough on the subject to tell the difference, apply your own biased hypothesis to it, not test that hypothesis yourself, then declare confidently that you “know” the conclusion.  You can apply the same basic, “lack of scientific method” to a lot of things people think they know about.  For years and years gold bugs have been  screaming about bank manipulation whenever gold is down (but never when it’s up).  That JP Morgan's short position is gonna "blow up" any minute now.  They've never been right because they don't understand the basics of the function they talk about. Be VERY fearful of information from anyone who is shouting what “will” happen with such certainty. 

But in this instance there are many things.  5G however stands out as a big one.  At least 2 people I know have been talking about how 5G towers are what’s causing COVID-19.  There is a Youtube video about a cell tower installation engineer who quit his job over his 5G/COVID concerns.  You can probably find the 10 min video easily, in which he offers very little scientific or medical evidence to back up his claim.  Mostly, this conspiracy theory seems to be centering around a map of a 5G tower installation areas and the correlation between after these towers appeared, and the rise of COVID-19.  Magically it seems, that 5G towers were put in the same areas that are seeing the worst outbreaks in COVID-19.  Therefore, without any prior knowledge of either of these subjects, we can conclude that 5G cellphone towers cause COVID-19, right?  Correlation does not necessarily equal causation.  Here is an example of this.  Below is a chart.  You might say these two lines are correlated very closely, so perhaps, they affect each other.  The lines are plotting 2 things, Divorce rates in the state of Maine, and the per capita consumption of margarine.  Clearly these two things have nothing to do with each other, and no sane individual would think that divorce rates decrease BECAUSE people are eating less margarine, nor would you conclude that margarine consumption decreases because of divorce rates falling in Maine.  The fact of the matter is, you could overlay a map of 5G cell phone towers, with COVID-19 cases and they will look similar.  You could do the same with “Subway restaurants” across America, or with members of hair restoration clubs across America, or even “dogs with heartworm” or factions of the KKK across America.  The moral here is, there is no correlation between any of these things other than this: COVID 19 infections, hair restoration club members, dogs with heartworm, Subway sandwich shops, and KKK factions all exist in places were PEOPLE exist.  The denser the population, the more of all of these things you will find.  The correlation here is simply population density.

This certainly isn’t the only ridiculous notion I have heard regarding the virus or what we should be doing about it/who is to blame, etc.  Many people are very pissed off that the economy has effectively come grinding to a halt due to a virus that kills less people then the flu.  And many of those people are defiantly carrying on with business as usual.  A lot of states do not have the orders to stay home that we have in the NYC area.  I am sure in many of these places, people attended Easter Sunday church services, or have generally been not caring about the stay at home orders.  I think it is worth noting, that the death rate is not what worries most, it is the infection rate, which is twice that of the flu.  As a Doctor explained to me, the paradox for why COVID-19 is more dangerous than SARS is that it is actually less dangerous.  SARS was a very serious respiratory disease and once you got it, you were likely in a hospital ICU with severe symptoms.  From this standpoint it made it easier to isolate and diagnose.  Also, infected patients did not typically live, which quelled the spread.  COVID-19 they expect that up to 25% of all people who have it show no symptoms at all.  They are just walking around infecting others and are none the wiser about it.  While the symptoms might be nothing for them, they could be deadly to the elderly or to sick people whose immune systems are already compromised.   Also, the time from infection to the time symptoms begin to show can be much longer, so even those who realize they have it and isolate immediately, could have been infecting people for quite some time prior to that, furthering the spread even more.

Complicated problems rarely have simple solutions, and anyone advising a simple solution to a problem like this, is likely experiencing the Dunn-Kruger effect, where their minimal knowledge leads them to believe they “know” the answer clearly.  Trust experts, when it’s your health, your car’s transmission, your roof, matters of high importance.  Do your own research and get different opinions so you can understand more about a wide variety of subjects and handle basic problems in your life with the knowledge you have gained, but when it’s a matter of importance and seriousness, have the wisdom to trust the experts.  My biggest fear right now, what keeps me up at night is the defiant group, the 5g conspiracy people, the people that think this isn’t serious, or is a hoax to gain control politically etc. These are the people that can screw up these efforts for every and we could see this virus popping up and having us need to shut down in response for a long time to come.  If NYC gets over the curve, and rural areas begin seeing outbreaks pop up, we’re going right back into shutdown mode and we could see this happen over and over again as we try to get the economy back to normal.  I’m not saying this all isn’t ridiculous.  I never thought I’d see the world shut down and trap me in my house over a virus.  I’m not saying they’re not trying to rob us of our freedoms either, they probably are in fact.  After all, never let a good crisis go to waste.  If there is anything, we learned from the Patriot act and 9/11, it is that.  But everyone wants the same goal; to get life back to normal.  There is already a fear of a resurgence in the fall that can bring us right back into a shutdown mode and kill the economy again, assuming it even has a chance to get back up and running by the summer.  There is no upside to not wearing a mask, not staying at home as much as you can, and taking needless risks while we wait for this to calm down.   They are not going to “start” the economy back up because you or anyone else says so or refuses to stop doing what you’ve been doing.  The faster we kill this, the faster we all get back to normal.  And the people hell bent on the fact this is all a hoax of some kind, could keep this going longer then it needs to be.  I fully believe that if we see the voluntary lock downs not stopping the spread enough, they will turn to mandatory lock downs, so protesting this is literally going to have the opposite effect of what you are trying to accomplish.  What terrifies me most is 6.5 million more weekly jobless claims in August because we still haven’t beaten this.  The economic consequences and the financial market consequences could be catastrophic if we can’t get over this in the next month or two.

This leads me into the markets.  There is an extreme risk we are right back here by fall if this has a second wave, or possibly, we never come out of this to begin with if people who think it’s caused by cell phone towers aren’t taking necessary precautions.  With that being said, how many people actually believe the current price of stocks has any basis in reality?  It doesn’t.  It is a momentum move higher, that gets fed on by algorithms scalping for quick profits.  And this will keep going higher till it stops, then it will reverse lower and do the same.  Stocks don’t trade based on how the economy is doing.  And they don’t trade based on their earnings.  They trade based on what the PERCEPTION of what their earnings are GOING to be in the future.  There are more problems out here then we know about.   The Fed throws money at the market and it goes down, because the market wants to go down.  Now the markets going up while they throw money at it.  And it will keep going up until it doesn't want to anymore, regardless of what the fed does.  People think they have a handle on what’s happening now, and they think they can model the fallout and recovery.  They couldn’t sleep at night without their model to assure them its all going to be ok now that they THINK they have a better handle on whats going on and the repercussions.  Goldman thinks they know what GDP is going to be next 4 quarters.  Time and time again, models have failed because they can not accurately predict extreme human behavior in times of extreme uncertainty, but this time they think they know.  Once again, what will break the model will be unpredictable human behavior, like it always is.

The SPX roared up to 2800 last week which was the upper range of my original target area for it to go to. I began shorting the SPX and the Russell 2000 as the SPX neared 2650, and have been adding small amounts to my short position as it has increased.  Monday, it has pulled back, having a wild swing with a high overnight just about 2800 and a low at just about 2700.  Now this will be the “line in the sand” so to speak for the immediate future.  We could go sideways for a bit around these levels, but momentum to the one side or the other will likely come as one of these levels is breached.  Remember to buy into long positions on big collapses as you are covering your short positions on the way down.  Start small in everything you do.

We now have nearly a 16 point range, a gain of almost 100% from the low only 3 weeks ago.  We are approaching resistance, as the GDX continues to under-perform the metal, after gold reaches highs it hasn't seen in years, miners are being capped at the same highs since 2016, when gold was $400 cheaper.  A pullback is logical now.

Gold has been absolutely relentless.  We are pushing up to 1750 now and the GDX is pushing up just below its high at 31.  There have been virtually no opportunities to buy dips here which has been greatly disappointing.  NEM broke 50 on Thursday and hit 60 today.  A 20% move in 2 days.  This has been incredibly frustrating, but nothing goes up forever.  There will be small pullbacks that come that you can buy small amounts into on the miners and some junior miners.  I think it will be very difficult however, for gold miners to continue this rip higher if the market does indeed roll over and start selling off strongly.  Stocks are stocks, even if they’re gold stocks.  Liquidity panics effect everyone.  So, wait to buy bigger positions for when you see massive moves lower in an absolute 

panic.

In conclusion, I will leave you with a chart of another curve flattening, the parabolic curve of the classic investment bubble.  Where do you think the markets are in the grand picture of all of this?

Stay safe and be careful out there, in the world and the market.

-Jonathan M Mergott

Everyone is Talking Their Own Book

The market is an amazing creature.  It’s both always right and never right at the same time.   We have the most intelligent minds in the world analyzing all of the data available to us at every given second, so they can make the best investment choices.  These people should be working at NASA, but Goldman and Blackrock pay way more.  From the “always right” standpoint, at any given second or minute, the market is pricing in everything we know and everything we can logically anticipate with regards to every data piece possible.  As a whole, it is always right about what it can foresee at that given moment.  It is always wrong though, because the market makes emotional swings both higher and lower.  I think looking back now, we can all conclude the highs in the market at the beginning of this year were, for lack of a better term, bullshit.  The part where the market is always wrong can only be seen while looking back.  For example, in 2001, the S&P topped at about 1500, then declined 45% to about 800.  In 2008, the S&P topped again at 1500, then sharply declined again, 45% to 800 and stayed there for a while.  At the absolute peak of panic, it dropped quickly to 666, losing about 2/3 of its value from the high then rebounded to 800 and ultimately made it back to 1000 within about a year.  Looking back, we can conclude that further drop to 666, was a panic induced overreaction.  But this was the biggest financial crisis in 70 years, over reaction was warranted to some extent.  But then it rebounded quickly and was headed higher.  The markets quick overreaction was “wrong”.  But it was “right” for pricing in the severity of the panic, which was unprecedented up until now.  These situations are the panics you must take advantage of buying in to.

On Thursday we posted 6.6 million more jobless claims, that’s 10 million in 2 weeks.  Wednesday, ADP set the expectation by concluding that 27k people were unemployed as of March.  Friday, the BLS reported a loss of 700k.  The market barely budged.  It somehow found the perfect balance between the complete panic overreaction everyone was scratching their heads about weeks ago, and the ability to analyze the data it had available at the time, better than any model you or I or even the CDC or Federal Government could conclude about the effects of this virus on the economy.  (Or at least better than what they were willing to tell us).  We spent weeks, wondering why the market dropped 30% in such a short time, and here is the data showing us why.  But the market will likely be wrong again, pricing in swings that are too high or low at peak emotional points.  We must use these points to our advantage, to buy long term holdings, and cash in on hedges and trading positions.  It’s not in your interest to over analyze the “why”, you just need to be in a position where you can react accordingly.

Getting to the topic of this post, you also must realize that EVERYONE is talking their own book.  In other words, while they may be legitimately telling you their opinion and outlook, they have an agenda.  The Fed said they expect 1Q GDP to still be positive while 2Q GDP contracts 2.5%.  At the same time, the treasury secretary is telling congress there could be 30% unemployment.  These two things obviously do not mesh.  The Fed doesn’t want people to panic, however the Treasury Secretary very much NEEDED congress to panic into passing a bailout bill as quickly as possible, while thinking about it as little as possible.   Last week Goldman put out there GDP expectations.  It calls for a 34% contraction in GDP in the 2Q.  That is massive on a scale we have never seen before.  But Goldman wants you to panic, so they can snatch up your assets.  No matter who it is, they have an agenda; they are trying to sell you on something.  I have an agenda.  I think I am right about my analysis of this situation.  I am buying accordingly and writing these posts to share my thoughts.  Ultimately, if I am right, and people think I am right, they will buy the same things I am holding, pushing the prices higher on my own assets.  My exposure here is pretty small, so I doubt if everyone reading bought everything that I own and advise, it would make any difference.  Really, I just want to take my knowledge of markets and help people survive in an environment that I see as a slow killer of the entire middle class.  If I am accurate about what I say and gain respect and clout for it, that is great for my career as an analyst, and I would be happy knowing I’ve helped people and been accurate about my analysis.  But large or small, everyone has some form of agenda, and it’s important that is recognized whenever you analyze anyone’s opinion.  (It’s usually not hard to figure out what people or organizations get out of the points they promote.  Just be conscious of it).

Getting to the markets, the SPX has stalled dead roughly around the 2636 area.  I was convinced we’d have a bigger move higher to 2700-2800, but it looks like this might be it.  This week I began shorting the SPX in VERY small amounts.  I had previously advised splitting the difference between outright shorts on the SPX and buying volatility as a hedge against the market and as a way to build a cash position to buy as things dropped.  I did just that myself but am seriously reconsidering my position in the VIX.  Volatility spiked weeks ago and has dropped a lot since then. I would have looked at this as a buying opportunity until someone proposed this idea:  If the market has bottomed and will head higher from here, the VIX is a sell.  If the market hasn’t bottomed and still heads lower, it is most likely we still have seen the peak of panic, and therefore VIX is likely to still headed lower even as stocks decline.  I can not argue with this logic.  It is more likely that even if the market drops greatly, we will not see the panic volatility we saw as this began, which largely could have been due to hedge fund short covering on the VIX that I spoke of a few weeks ago.  While I still own the VIX, I will be looking to sell next week and believe the best bet to play a further declining market here is to short the SPX outright in very small amounts, and to short the Russell 2000, (small cap index) which has been the worst performing index and will continue to get murdered as this goes on.  But stay vigilant.  Cruise ship stocks dived when they found out there was no bailout for them.  Oil stocks are up with Trump talking about a deal between the Saudis and Russia on production cuts, (that have yet to transpire).  Bailouts will continue to come.  This is far from that last stimulus, so be careful about what you’re betting against.  I wouldn’t recommend shorting any outright stock or industry.  Take the index as a whole as a trading position and buy that same index on the way down as a long-term asset.

Gold did just what I expected 1 week ago in my last posting.  We dropped to exactly 1575 and then bounced.  I am still hesitant about a liquidity problem that could harm the miners the most.  The GDX has been slipping a bit and is visibly showing lower highs on the rallies compared to the metal.  Silver also looks much weaker.  I believe the miners will show you the best profit ultimately, but for the purposes that most people look to gold for, the asset to buy that will perform in such a matter, is gold.  Not silver, not the miners.  If you are looking for the uncertainty hedge, the hedge against government, economic crisis, etc, that asset is gold only.  Everything else related has performed differently, and quite frankly, not as well.

I said last week I am looking for the GDX at about 22-20 range to begin buying, and I still think we get that range.  On the GDXJ I’d still look for 24-22.  The juniors have really gotten hit badly, but this is expected because many of them have much higher costs and are not situated as well financially.  But I believe it is soon time to start buying majors and juniors.  I would be hesitant with some, as mentioned before, for the long term I would focus on building a good position in royalty companies as a main gold investment position.  But at this stage, buying small amounts into declining silver and gold miners is a pretty good bet looking forward over the rest of this year.  Look up their balance sheets, do your own due diligence.  Find out who can weather the storm and whose debt will crush them.  Buying the GDXJ itself helps with the individual risk.  SSRM and PAAS are two strong silver miners that I think are good to begin buying on declines.  I also like AG.  I expect AG to gain 50% if you can get it under 6.  I want to see a little more decline in names like NEM and WPM and FNV.  RGLD and SAND have done very well from the panic levels I started buying them at and recommending them at and would love to buy more of both if we see it again.  I think 75-80 level is great for RGLD, and under 5 is a good deal for SAND.  I have liked and been a shareholder of FSM and EXK but I would be very careful about buying too much of these stocks.  They could face serious problems if silver does not move higher.  Likewise, CDE and HL are a bit of a gamble too.  If your fine with the gamble and the higher return, go for it, but just don’t bet the farm on these.

It’s Sunday night, futures open in 30 mins and the US is hitting 333k Covid-19 cases and nearly 10k deaths.  That’s 1.25m worldwide with nearly 70k deaths.  At this trajectory, we will see 1 million cases in the US in 9 more days.  NYC is still the epicenter, but it’s spreading into more rural areas that have not been taking it seriously.  They are going to prolong this for everyone, and it will drastically affect the economy.  I think we will soon see mandatory orders to not leave home.  There’s a good chance we will have to have “permission slips” to travel in the near future.  I don’t think this is paranoia, I think this is just the result of a devastating pandemic, that continues to get worse while we are seeing that even the mostly followed “voluntary” methods are not curtailing it.  The last straw left for a place like NY right now is to eliminate the “voluntary”.  As this virus spreads to areas that thought they weren’t affected, that are NOT asking people to quarantine, we could have a long drawn out problem here.  Plan accordingly.  Make sure you have some cash, make sure you have some food and essentials.  Make sure you have an emergency fund, and make sure you are using this panic to invest for your long-term future.  Good luck out there.

***Edit***
It's Tuesday morning, 7:45 EST and the SPX just hit the 39 day moving avg at 2745, right smack between my original 2700-2800 target.  Patience is a virtue.  I jumped the gun shorting this rally, but this is exactly why I emphasis "SMALL" amounts, so you can short more when there's a 1000 point rally, or inversely, buy more as things drop.  Don't allow yourself to get stuck between a rock and a hard place.  Liquidity is still King.

-Jonathan M Mergott

Now Put THAT in Your "Model"

A guy I follow on Twitter, Josh Brown, (You may recognize from various CNBC programs), nailed the quote of the week this week.  "The Dow posted a 1,300 point rally (and is back in a "bull" market now) on the same day that the US posted 3.28 million jobless claims, 4x higher than the highest report ever.  Now put THAT in your 'model'."  Every institution is trying to navigate their multibillion dollar ships through this harbor and doing the best they can to model a logical scenario in which to do it.  Events like these break the models.  Maybe they'll account for that next time around when they build new ones, and then it'll be something else.  But hey, I guess on a long enough timeline, they could literally account for every single black swan event possible.  But that time is clearly not now.

These markets are volatile and FAST, and this week was no exception.  I said a week ago I thought we were at a short term low and expected about a 6,000 point rally in the Dow, with a target somewhere around 2700-2800 on the SPX.  We hit the low (for now) on Monday then rallied strongly Tuesday, Wednesday, and Thursday to 2637 on the SPX and rallied about 4,200 off the low on the Dow before slipping again on Friday to close the week out.  WOW, that was fast.  I certainly didn’t expect to get this close to my target in 3 days, but that just goes to show you the speed and volatility of this market.  We will likely not see an 18 month or 2 year peak-to-trough bear market like we have seen in the past.  It will likely be very fast and relentless, and hit its low in half that amount of time, likely before the end of this year and at levels no one expected.  The Fear and Greed index (https://money.cnn.com/data/fear-and-greed/) spent about a week ranging from 3-6, (on a scale of 100) indicating extreme pessimism and bearishness.  Now it’s at 23, which is still very bearish, but that might be all we’re going to get.  Keep in mind, in situations like these sentiment and indicators can stay VERY negative for a very long time and just keep going down.  We likely won’t see the Fear and Greed index rise above 50 until this is over.  Likewise, indicators like RSI that are “oversold” can almost always become more oversold. Don’t confuse oversold with “buy”.  Often, oversold stocks simply flatline after falling, giving no opportunity for profit from the long side then rolling over and dying again.  (And the inverse is true as well. Overbought does not necessarily mean sell.  In the early 90s, the Dow became “overbought” on the monthly chart as RSI pushed above 70.  It stayed overbought for almost half a decade longer and tripled in that time frame.)

Getting back to the SPX, I still think there is room to run higher here and still believe 2700-2800 is a probable target.  Looking at the chart, it’s hard to believe that blip higher is a 20% move off the low.  Indicators like MACD and RSI are still very negative and have barely come off their lows.  A move into the 2700-2800 area would give a good opportunity to lighten some long positions if you still haven’t done so already.  For traders, that is the level I am looking at to begin shorting the SPX and buying volatility in VERY small amounts.  If 100 shares sounds like a good sized position buy 20 shares.  Online commissions almost everywhere are free now so there is no harm in buying 20 shares 5 times if you have to.  You might find the market taking off after you’ve only bought 40 or 60 of that 100 and you will be wishing you had the whole 100.  But I guarantee you, it’s better to make a little then to go in the full 100 and have the market move strongly against you, giving you no room to maneuver.  On the other side though, I will be eyeing the 2500 level which was Friday’s low to see if we begin breaking below that.  If that occurs, the market could begin selling off again quickly and we will have likely seen the highs for now.  As for the VIX, we began sliding quickly from the highs before the market bottomed, which gave me the indication this rally could be coming.  I had bought the VIX near the lows over a month ago before this sell off began.  My reasoning was extremely high complacency in the market and hedge funds that had been overwhelmingly shorting VIX futures likely because they were bored and because it works 360 days out of the year.  I probably made way more off of buying volatility then I ever would have if I had just outright shorted the market.  That might not necessarily continue, but I do not see volatility going away.  The VIX peaked before stocks bottomed and slide about 30% down after a massive move higher.  Another market saying: “If it’s working, let it work.”  I had a modest target on the VIX when I bought it and it far exceeded that.  As long as it was working, I left it alone and it kept going up.  When I noticed it sliding as stocks still dropped, it seemed like it was getting long in the tooth and I sold.  As long as the basic inverse relationship between the SPX and the VIX is working, let it work.  We might not see an equal performance if stocks start dropping again, but that is why I would split the difference between shorting the SPX and buying the VIX, and again, I cannot stress this enough, VERY small positions. 

Gold has been an absolute mess.  In less then 1 month we have seen it tap $1700, then go down $250  to $1450 and back up $250 again to $1700.  As I said before, people will sell anything and everything without logic or reason in a liquidity crisis.  No matter how bullish the scenario is for gold right now, you have to keep that in mind.  After a ridiculous price gyration like this, I would expect price to gravitate somewhere in the middle as it’s next move.  We seem to have trouble getting above 1700 right now, after tapping it 3 times.  We also didn’t last long at $1450 before it was bid up again.  Somewhere around $1575 would be an area buyers and sellers might find some equilibrium at.  From there, gold’s bullish fundamentals might prevail if we continue higher, but the liquidity squeeze could just as easily take gold down with everything else.

Silver looks very different.  After that massive $6 drop it had from 17.50 to just under 12, it has rallied back about half of that to $15 and stopped dead.  If indeed, gold needs to back off and find some equilibrium between these fast and extreme moves, silver will follow it lower and that could be right back to $12.  Look, silver is stupid cheap in relation to gold, history, mining costs, whatever metric you want to look at it from its cheap.  But that doesn’t mean it can’t get cheaper.  Long term, I am very bullish on silver.  But the market is telling me something that is different from my expectation, which was that silver would follow gold higher and it is not doing that.  There is a clear difference here in the performance of gold and silver.  Silver is trading like an industrial metal, and industry right now is dead.  Gold is the safe haven.  Be sure you’re buying things for the right reasons. 

The Gold stocks are looking better.  It is looking more and more like a major player, or fund in the gold market utterly capitulated their holdings 2 weeks ago when the GDX hit 16, dropping nearly 50% in 6 days. The GDXJ did even worse and rebounded less then the majors.  They are looking like they are going to roll over again here, but we may not retest that extreme low.  I would look at about 21-20 on the GDX as a pretty good time to begin buying some of the miners in SMALL amounts.  I wouldn’t rule out another liquidation though.  You have to start getting insane with price targets in these situations.  We could see 12 on the GDX but I certainly wouldn’t wait for that.  Make sure your positions and your emotions will be ok if it happens, but you should begin buying cheap assets when the market is selling them strongly.  I still believe the safest long-term bet is royalty companies, but the miners are cheap, and they offer more leverage to a higher gold price.  Oil prices have fallen drastically which will see their costs lowered and despite wild fluctuations in gold, the average sale price for miners for this quarter will likely be above $1550, a price they haven’t seen in 7 years.  And these margins are far better now then they were back then, as most miners were pumping as much gold as possible to take advantage of the high gold price and only began to address their costs when gold was falling for the following 6 years.  Like in all things, focus on quality.  Watch out for debt levels.  Newmont (NEM) has crushed the competition into becoming the premier major producer.  There are smaller miners that will likely jump way higher than NEM will, but they could be gone overnight just as quickly.  I’d love to see NEM at 40, that might be as good as you’ll get.  WPM has done very well also.  If nothing else, they have been far more stable places to park money in the gold sector then nearly every other gold stock out there.  22-24 would be a great place to buy WPM.   I still very much like Royal Gold (RGLD) but after it rallying back above 90, I'd prefer to see it back near the 80 region if possible.  There are some smaller miners I know that I would nibble on as well individually, but you should do your own due diligence and look into the balance sheets of some of these companies yourself.  Buying small amounts into the GDXJ on drops when it drastically underperforms the GDX is a good way to get exposure to the smaller miners without individual risk to any one stock.  At about the 24 area on the GDXJ looks like a good place to buy. 

COVID-19 is not getting better any time soon.  As I write this, the US is closing in on 140k cases, and almost ¾ million worldwide.  New York is nearly half of all US cases.   The hope that it will die off as weather gets warmer was looking logical, but now we are seeing warmer climates begin reporting cases.  South Africa is on lockdown, and it’s logical that they have far more cases then they are able to test for right now.  This morning, Dr. Fauci said we could have millions of cases and the US could see 100-200k deaths.   We had an unbelievable expectation for jobless claims; 1.5 million, which would be the highest report ever and we doubled it.  People are beginning to realize they will not be headed back to work or school any time soon.  On Saturday, it was reported Trump considered a lockdown of New York, New Jersey and parts of Connecticut.  This will likely be a reality at some point.  The panic has yet to peak.  The Fed has pulled out the stops, pledging to prop up every market for as long as needed and as much as needed.  The only asset class they have yet to commit to buying is stocks outright.  (And they’ll get there too).  Congress just passed a $2 trillion-dollar stimulus package, of which they are giving a whopping $1200 to (some) individuals and reserving the rest for corporate bailouts.  They won’t even roll out the checks before more money is needed.  This will not be the last stimulus package, I’d expect at least 2 more, of increasing amounts.  They will continue to bail out as the bankruptcies keep popping up, and I believe the backlash will be great enough to ensure the general public does not get left out entirely, so we will likely see more stimulus checks and measures to help individuals as well. (Pennies in the grand scheme of their spending).  Everybody is going to implode with debt.  This is nowhere near done with and there isn’t enough information to try and calculate the damage that has already been done to the financial system and the world economy.  You can’t model this.  The only thing we can do, is protect ourselves with enough liquidity and be calm and deliberate buyers as markets move drastically lower.  Decisions made in panic are rarely good ones.  In the market and in the rest of the world out there as this infection gets worse, be calm and deliberate in your decisions.  Good luck next week.

-Jonathan M Mergott