Withholding Production and PM Dividends Part 2

    Before getting into part 2, I want to look at where we stand in the PM markets after a very interesting week.  We had a spectacular move in silver and some silver miners on Thurs and Fri, specifically First Majestic on the back of the short squeeze movement in GME and AMC.  Silver moved up on Fri to nearly touch the 28 level it dumped from earlier this month.  The silver chart technically, looks beautiful, and is sharing the “cup and handle” formations I’m seeing across the entire silver complex.

    

    What I am concerned about right now is how far ahead of gold silver has run.  The 28 level on silver is where we dumped from earlier in Jan.  On gold that level is 1960.  Currently silver is $1 below that level and gold is $110 below that level.  That is a pretty big divergence, and we can see it in the plunge the GSR took below the consolidation it has been holding since Aug at around the 70 level.  In the long run, silver has a lot of catching up to do with gold and a massive outperformance is what I am expecting, but this kind of divergence in the past has led to fake outs. 

    In addition to the Gold/Silver divergence we have the GDX divergence.  While many silver miners have been killing it recently, the GDX is dragging across the bottom.  The “dump” level on silver is $1 away, which is roughly 4%.  For gold its $110 away which is 6%.  For the GDX, that level is about 39, which is about 13% higher from here.  That’s a VERY big underperformance, and that typically isn’t what happens during strong trending moves higher.  Looking at the GDX/GLD ratio, we can see miners are continuing to underperform vs the metal, which has been the case since Aug.

    Here is what I want to see.  As silver is now just under 28, I want gold to start gaining ground towards the 1960 level.  At least pushing above 1900.  Meanwhile, the GDX needs some very strong moves to begin the typical outperformance we can expect from long trending moves higher. I want a push back towards 38-39 and I want to see the GDX/GLD ratio, currently at 0.20, push above 0.21.  While this is happening silver consolidating under 28 would be typical bullish behavior while gold catches up a bit.  This also gives us the typical back test of the consolidation break down in the GSR that we would expect.  If we get something like this in the coming days and weeks, it will definitely look like we are entering a strong multi month move higher for PMs and miners. Perhaps it is the chronic contrarian in me, but for now my outlook regarding the last 2 days of moves in silver and silver miners is still “cautiously optimistic”.

    In addition to the chance that silver maybe faking us out for now, I have been saying for weeks that insane movements in all assets, bullish sentiment and complacency in the market have been worrying me a lot.  This short squeeze stuff with GME taking down funds that now must sell many other assets, bonds, other stocks, PMs, etc, could spiral into a fast move down in all assets and into the dollar as people raise liquidity.  Don’t take this the wrong way, I am not predicting a crash, I am not advising selling anything and trying to buy it back cheaper or shorting stocks, gold etc.  I am simply saying the environment right now is very risky so plan accordingly. Now is not the time to be holding leveraged ETFs or a margin balance. Unleveraged portfolios only need to hold, and you will be fine in the long run. Gold corrected from 1700 to 1450 back to 1700 in 12 days last March.  A liquidity panic is not something that changes a trend or stops a bull market, its just a panic event.  I am just simply saying, the likelihood of us experiencing something like this is more elevated, so acknowledge the risk.

 

Now on to part 2.  Precious Metal Dividends.

    I’m going to start with another story that my grandfather and father originally told me, and also heard Jim Sinclair talk about 10 years ago when I worked with him doing investor relations.  During prohibition, National Distillers Products Corp was no longer able to sell alcohol for public consumption, so they shifted their attention to producing chemicals and industrial alcohol.  All the whiskey it had in its warehouse was forced to just sit there and age. (Horrors!)  When prohibition was repealed in 1933, National Distillers had already been operating in the chemical and industrial sector and had changed their name to Quantum Chemical, so they weren’t about to jump back into the whiskey game.  But here they are, with a warehouse full of now 14 yr. aged whiskey which is legal to the public again.  So, they decided to pay a dividend in whiskey.  For every 5 shares of the stock you had, you got a receipt to pick up a case of whiskey from their warehouse.  Naturally, the stock skyrocketed because everyone wanted in on a dividend paid in whiskey.

    Now there’s another aspect of this story I want to highlight.  During the time of the great “whiskey dividend”, whiskey was in very short supply.  It had been illegal so there was no one producing a large amount of it.  One reason for the skyrocketing of the stock was so people could get their hands on good whiskey, because it was impossible to find.  Not unlike gold and silver bullion is today.

    For anyone who doesn’t know the technicalities of it, when you are selling a stock short you are borrowing it from someone who owns the stock, selling it today at the market price, and hoping you can buy it back cheaper later.  You MUST return the same amount of shares of stock you borrowed, no matter what the price is.  Ideally, the stock goes down and you can buy it back cheaper, return the shares and pocket the difference.  If the company pays a dividend in that time frame between when you borrowed and sold the shares and when you returned them, you as the short seller are responsible for paying it to the person who’s shares you borrowed.  This gives an added cost to shorting companies that pay good dividends, and paying a dividend in the first place is often enough of a deterrent to make a short seller pick another target in the sector he is bearish of.

    In the situation with National Distillers, nobody was short that stock.  The extra complication by paying a dividend that was not cash would be incentive enough to make short sellers stay away, but whiskey was impossible to find.  They used something that was in very short supply to pay as a dividend that nobody else was able to get their hands on, effectively making trying to short the stock absolute suicide.  If a precious metals miner were to take up a dividend policy that paid in bullion, ALL short sellers would exit their position.  The stock could trade freely based on value, not games played by big guys who pound it down to make a quick buck.

    As PM investors we have a few common beliefs among us.  One is a generally agreed upon notion that physical supply of gold and silver is unbelievably small.  Even the smallest rebalancing of portfolios by SOME wealthy individuals to include physical gold and silver would absorb ALL existing supply.  In fact, a friend who exclusively invests in bullion contacted Kitco in December looking for Gold Pandas.  They had a “whopping” $400k of them.  A moderately wealthy upper-middle class person looking to diversify their 4m in retirement savings to a 10% physical gold position would take all of it, and there’s nothing left for you.  There has been much debate over the years as to the methods to invest in Gold and Silver.  Some prefer bullion only, some prefer shares with more leverage to higher prices.  Many want a balance of both.  We all also understand that after physical supply is gone, the only thing left is the miners.

    When you’re holding your bullion in your hands, there is nothing standing between you and it.  No middleman.  But in the course of acquiring that bullion you had a miner, a mint, a dealer, a coin store, a pawn shop, etc between you and your gold and silver.  As shareholders in mining companies, we are owners of the companies pulling it directly from the earth. The only middlemen are the company’s management, who are obligated to act in the best interest of us, the shareholders.

    In Part 1, I talked about mining companies being in a position now to withhold a percent of production for not only higher profits, but to constrain the physical supply market and constrain those “players” that like to “play games” with PMs.  A move like this would take bold management to pull off, but it is not impossible.  However, the idea of a PM dividend is much less risky for the average miner to do.  Right now, #silversqueeze is trending worldwide.  I encourage these efforts to buy up bullion so there is not enough for these “players”, but I have bad news.  There is not enough for us either.  However much bullion you have now, if I asked you how much do you want to have, you’re probably going to answer “more”.  How will we get more physical when the dealers, pawnshops and coin stores are plumb dry?

    Easy.  We are the owners of the companies pulling it out of the earth.  We deserve the right of first refusal on their production of gold and silver BEFORE it is sold to the rest of the market.  If a miner is going to pay a dividend that costs them say, $10m a quarter, that value worth of the metal should be set aside for the dividend to shareholders that want to opt into a bullion dividend.  After that, it can be sold to the market. Remember the cabbage patch kids and tickle me Elmo crazes?   Flew off the shelves, no one could get their hands on them.  You really think the owners of the companies manufacturing them had to disappoint their kids Christmas morning because they couldn’t get one, or do you think special exceptions were made to give some to the owners before selling to the rest of the market? Now picture that we’re talking about something actually important, like gold.

    I mentioned in part 1 that a production withhold would likely be easier right now for a silver miner than for a gold miner, and I believe the same for a PM dividend.  Say a gold miner pays a 2% dividend.  On a $100k investment, that is $2,000 a year.  Which is enough to get 1 gold coin a year from.  On a silver miner with a 1% dividend yield, a $25k investment would get you $250 a year, enough for 10 silver coins.  I personally would much rather earn 10 silver coins on $25k then 1 gold coin on $100k, but that is also in general why I favor silver right now and why I expect a much lower Gold to Silver ratio.

    Now I know what everyone is thinking.  Logistics.  Are companies really supposed to mail bullion to shareholders?  The costs, the time to do it, the paperwork, insurance, etc.  It would be a nightmare.  But there is another way.  Some mining companies have a bullion store where you can buy coins and bars directly from the miner’s website.  I’ve bought from both First Majestic and Great Panther before. Now picture this… As a shareholder, you choose to opt into a PM dividend.  You signup with an account at the miner’s online bullion store.  You include information to verify the shares you hold.  Every dividend cycle, a virtual gift card is replenished with funds you can use to buy bullion with and pay for shipping and insurance on bullion that has been withheld from the market and earmarked specifically for shareholders first.

    There would have to be some restrictions, of course.  This is not 1933, 5 shares will not get you a whole case of whiskey.  In Sprott’s PSLV fund, you can redeem the silver you just have to own a significant amount of the fund to do so.  Perhaps not that constraining, just enough to eliminate those that only hold a few hundred shares for instance.  I know I certainly would not mind paying the shipping and insurance costs out of pocket to have bullion sent to me if I was even offered the opportunity to be paid a dividend in PMs, and I imagine most would agree.  Additionally, National Distillers stock went significantly higher, from about 19 to over 100 largely based on people buying it only for the dividend.  How much money would you pour into a miner that offered bullion as a dividend?  Additionally, if your cash right now is tapped, how many other mining stocks would you sell in favor of buying the only one that pays a PM dividend?

    There is a significant opportunity here to be a leader in the PM space by paying a dividend in bullion, and it doesn't need to be as complicated as it sounds.  I have never met a PM investor who's eyes didn't light up at the idea of a dividend paid in gold and silver.  It is something nearly all shareholders of PM miners want.  Physical metal is something we all know will be impossible to obtain for most people if there is any significant money moving into PMs and bullion that drys up supply.  We are already seeing it.  Bullion dealers are increasing premiums since this morning, some are out of stock.  Others are refusing to sell until they see where prices open tonight.  There is only one place left to acquire physical bullion from when supply runs dry and that is directly from the companies pulling it out of the ground. 

    Contact the companies you are shareholders in.  Push them to withhold production for higher prices.  Push them to sell bullion direct to the public and to offer a dividend in bullion.  Tell them as a shareholder, you want right of first refusal for their gold and silver, BEFORE it is sold to the market!

    On a final note, I just wanna say I am blown away by the #silversqueeze movement and everyone that has been working so hard to push this thing into the public light.  I've been in this industry for a bit and everyone in it knows how incredibly small it is.  1% of the market cap of Microsoft, Amazon and Apple could buy NEM outright.  10% of their combined 5 Trillion market cap could buy nearly every gold and silver miner on the NYSE.  Gold and Silver have never been mainstream investments, so when I see #silversqueeze trending on twitter in NYC that is HUGE!  I don't know if this is what ends up blowing the lid off or not, but it is very clear, something is brewing.  For decades, Gold and silver bugs have been waiting for the day the PMs begin to fairly represent their true values as hard assets against the US dollar and other fiat currencies, and many have not lived to see that day.  We are witnessing history.  We are part of it.  Push forward.  #Silversqueeze.

 

Withholding Production and PM Dividends, Part 1.

    I wanted to take a moment and share my thoughts this weekend about being shareholders in gold and silver miners and tell a couple stories I have heard over the years from the old school guys that were before my time in the industry.  I think these examples are extremely relevant today for precious metal miners and for us, as shareholders in them.  Some of you may know these stories or have heard arguments for their implementation before in the PM sector, but for those who haven’t, a little history…

    (I was surprised that after a quick google search there are still press releases about this over 15 yrs later, so you can look it up and find some more details.)

    Goldcorp was founded in 1994 by Rob McEwen. By 2000, they had become one of the biggest gold miners in the world at a time when gold was about to transition into a bull market.  McEwen was very bullish on gold and an exceptional CEO who made incredibly bold choices that set them apart in the industry and grew them into such a big competitor to the other major miners.  In 2005, while gold was once again butting heads with the $400 level where it consistently was being pushed back from, McEwen believed it was headed higher, closer to $800 an oz.

    Now here is a lesson in good management, bold leadership, and bad management, where bad decisions typically begat more bad decisions.  For years as gold would tap $400, Barrick took advantage of this by hedging a portion of their future production by selling it at that price.  For years this worked, and Barrick made a few billion in extra cash through this method but became complacent, outstayed their welcome and overleveraged their reserves.  I believe by the early 2000s they had hedged around 20% of all of their reserves at ~$400/oz.

    In the meantime, Rob McEwen was a gold bull believing the end to a 2-decade long bear market was coming.  His thought process was this:  If I think gold is headed higher than the current price near $400 an ounce, why should we sell our gold at $400 an ounce?

    So, he didn’t.  By 2005, Goldcorp was withholding their production from the market.  About 31% of their Q3 production in 2005 - which is a pretty massive amount - they stockpiled. Rob McEwen even said at the time that with their cash reserves, they could stop selling ALL the gold they produced for 2 full years and still be able to cover their dividend payments.  (Goldcorp was one of few companies that paid a dividend every month.  On dividend reinvest, it compounds faster than quarterly payments).  Gold soon broke above 400, and went on to a high of ~720 the following year.  Then, Goldcorp dumped their horded ozs on the market at a price that was significantly higher than market price at the time of production and it gave them an exponential increase in their profit margins.  This of course blew away earnings estimates and sent the stock soaring.  Anyone foolish enough to have been shorting Goldcorp had their heads handed to them and likely vowed they would never short Goldcorp again.

    Back to Barrick.  While this is going on Barrick begins realizing they’ve screwed themselves by selling so much of their gold at 400 as prices were rising to nearly double that, and costs were rising quickly as well.  Obviously, their profit margins were razor thin and dropping faster as oil - which is typically a gold miner’s biggest cost - began pushing above $100 a barrel in 2007.  So, in order to not see all profit evaporate for their incredibly bad hedging decision, they decided to make another one.  This time by hedging a portion of their 2008 oil cost at ~100 a barrel.  By 2008, oil had dropped to $30 and Gold had risen to 1000/oz.  Having been dead wrong on both their production hedges and cost hedges, which destroyed billions in shareholder value over years, Barrick threw in the towel in 2009 and issued $3 billion in stock to pay off the remaining 9.5 million ozs it had left hedged.  In return for the poor performance shareholders suffered during the beginning of the bull market due to management’s bad decisions, management rewarded them by diluting shareholders by 12.5%.

    (This, in short, is why I have never in the past, or ever will in the future, be a Barrick shareholder)

    But back to Goldcorp and the concept of withholding production.  For the past few years this has been an impossible concept for any miner, as margins and cashflow were so thin.  Today, that’s not the case anymore, with gold miners seeing their largest profits ever at these prices and silver miners seeing margins increase in some cases by 1000% at prices today near $25/oz.  The idea of withholding a percentage of production can absolutely be a reality for some mining companies.

    The idea however is not very likely considering management of some companies.  You would need bold leaders who believe in a bull market in PMs and are not afraid to lean into the bull market and think outside of the box for ways to make their companies more profitable.  This is not something that is likely from say, Newmont.  While Newmont has believed in higher metals prices, as the only Gold Miner on the S&P-500, they have typically refrained from making extreme calls on future metal’s prices or embarked in unconventional business practices as to not alienate investors.  But I can think of some silver mining companies that certainly have the ingredients, including bold management and leaders who believe in higher silver prices, that can pull off an incredible move like the one Rob McEwen did in 2005.

    A silver miner, mining at a cost of $15 an oz has a $10 profit margin today with silver at 25.  If silver climbed back to $30/oz, it would be 20% higher than the silver price today but the profit margin for the miner would increase by 50% to $15.  And that’s only selling at a price that is 20% higher than right now.  McEwen did this at prices that were nearly 100% higher.

    At $10 profit per oz, a silver miner can increase their annual profit by a full 10% by withholding 20% of their production and selling it at 30/oz, assuming the other 80% is sold at 25/oz.  And again, this is at only 20% higher prices than where we are now.  I fully expect that if a silver miner has enough production and cash flow to pull this off, they can sell at $40/oz, increasing their profit margin 150% from $10 an oz, to $25 an oz.  That would equal a 30% increase in total annual profit vs selling all ozs at 25.

    There is a silver lining here too (no pun intended).  By doing this, short sellers in PM stocks could be in for a world of hurt, as they were when Goldcorp did this in 2005.  It will make forecasting their profits far more difficult and effectively make the Due Diligence the short seller has to do, far more complicated if not impossible.  Announcing to the market that management has decided to withhold 10-20% of their production until they feel prices are better valued than they are today would be enough to shake a significant number of short sellers out of their positions.  This could be very beneficial for any company that is currently struggling with the problem of a large short position in their shares. 

    But here comes my favorite part.  You could just NOT tell them.  There is no reason you HAVE to inform the market that this is what you plan to do.  You could just let them find out on your next earnings release.  It’s amazing how pain sticks with us as humans.  Do something that hurt significantly, and you are unlikely to do it again.  Get blown away on a short position on a PM stock, and if you are ever bearish again on PM miners, you’ll absolutely choose another company in the sector to short next time around, or avoid doing so altogether.

    As PM mining share investors, we are lucky because there is a common theme among us.  We typically all own these shares because we believe metals prices are going higher.  Sure, there are individual growth stories, but most are not investing based solely on a single company’s story that has no relation to a rising metal price.  This is not necessarily the case for say, Apple shareholders or many other companies in different industries.  This is important, because we are the owners of the company and we have a consensus where we believe in higher metals prices.  Management’s job is to do what is in the best interest of the shareholders.  So, if you own shares in mining companies, take the time to contact them and ask them this:

-Do you believe the price of gold/silver is going at least moderately higher from today’s prices?

-(I believe a decent margin of these companies would answer “yes”)

-Then why are you selling all of your gold/silver at today’s prices?

    As I mentioned, this is a very out-of-the-box idea.  Mining companies are in the business of pulling metal out of the ground and selling it, not storing it or speculating on future price movements.  There are few if any companies that would be willing to adopt such an idea.  But it has been done in the past and done very successfully.  The result was developing Goldcorp into a leader in the gold sector, rivaling major producers like Newmont just 15 years after its start.  (Worth noting, Newmont who ultimately bought Goldcorp, is 100 years old this year, founded in 1921.)

    What we need today is a leader in the PM space.  A production withholding policy would be a game changer that will be the envy of every PM mining investor.  I believe shareholders have a consensus with their beliefs about metals prices and would support such a bold move.  Management works for us shareholders.  If you believe a policy like this will benefit the company and shareholders, let the concept of withholding part of their production from the market become our battle cry.  Ask the companies you’re invested in why they are not doing this.  There is an incredible opportunity here and I believe someone will take up this flag and run with it and be rewarded with increased profits, an army of loyal and very happy shareholders, as well as a mass exodus of short sellers in their shares. History doesn’t always repeat, but it can rhyme.

-Jonathan Mergott

Riding the Gold Bull in an Algo-driven Market Tsunami

Yesterday was bloody in precious metals.  Silver tanked 10% at the worst point of the day and many miners were down 10% or more.  Gold bulls on twitter suddenly got quite as virtually everyone was analyzing the market, their portfolio, and trying to see "what went wrong."  Looking at it, and I think it is clear this was a dump.  But it shook a lot of people, so I want to write a bit on what is in store for the future here and what we can expect trying to ride a volatile gold and silver bull in a market driven by momentum chasing algos and how to not get bucked off the ride until you’re ready.

I responded to a comment on Twitter yesterday and said this regarding the metals dump and one person’s panic:  Step 1: Analyze the fundamentals of the situation.  Is our analysis on a much higher gold and silver price flawed somehow?  Step 2: Look at the technicals.  Do they confirm the fundamentals?  As I like to say, “watch the miners” for clues as to the next move in the metals.  Do the miner charts look bearish?  Step 3: Analyze your personal situation.  Are you leveraged too much?  Did this correction shake or hurt you to the point where you cannot stand to see another one?  Are you risking more money than you can afford to lose?  (I mean this both literally and psychologically).  If the answer to these questions is all “No”, then proceed to Step 4: Turn off the screen and go fishing.  It’s not time to buy, it’s not time to sell, there is nothing you can do here sitting by your computer other than shake your own resolve, so get up and leave.  I want to break down these points in more detail.

Is the fundamental analysis correct?  You should always know what you own and why you own it.  This seems obvious, but you’d be surprised.  Why do we own gold?  For wealth protection, historically.  That is why people buy gold.  But what drives people to seek the protection they find in gold to begin with?

A little about myself for those who don’t know me well.  I like to say I was raised by old school gold bugs.  My father, my grandfather, my great-grandfather were all PM investors at different times in different decades.  My father had been a gold and miners investor from the late 90s through the bull market from 2001-2011.   My grandfather and great-grandfather worked together investing through the 70s bull market.  Prior to it, my grandfather was a broker, back in the days before call waiting, when 2 brokers sat at a table with 6 phones on it.  The other broker at his table was Jim Sinclair, who for those of you that don’t know, famously called for gold to go from $50/oz in about 1972 and hit $900 by 1980 and he ended up being off by a whopping $13 when gold topped at $887.  I worked with Jim Sinclair as an investor relations consultant from 2011-2015.  I managed a primarily gold and silver investment fund from 2008 through the metals peak in 2011.  I currently manage a non-profit investment trust my great grandfather began 65 years ago.  (We are primarily invested in gold and silver miners). 

I’m mentioning this because I have had the pleasure and fortune of working with them, their colleagues, and rubbing elbows with well-known and lesser-known great minds in the gold industry who collectively have centuries of wisdom and experience.  So, getting back to the question of why people seek the protection of gold to begin with, you can get a lot of opinions and I’ve heard some of the best analysis for a bull case in metals that’s out there.  But I think most arguments are missing one important factor.

There are those out there calling for higher gold because they believe we are headed into a depression.  There are those calling for a bull market because of looming inflation.  Then there’s the stagflation argument, a mixture of the two.  Economic deflation coupled with rising prices, the worst of both worlds for everyday people.  It seems from some people’s arguments, that you can buy gold for a looming depression/deflation or for incoming inflation, which seems contradictory.  Basically, buy gold because it will always go up in either situation, which we know is not true.  But we can point to the great depression and claim deflation.  We can point to 20% inflation by the 70s bull market peak in 1980 and claim inflation.  We can point to the fed’s balance sheet, and massive debt from 2008-2011 (and still really) and claim its debt or QE.  All these things are not inaccurate, but they are symptoms or byproducts of the greater reason why people invest in gold and what drives bull markets. 

 

Gold goes up when people lose confidence.

 

The one common theme in all bull markets in gold is a loss of confidence.  In the depression, a loss of confidence in the economic system.  In the 70s it was a loss of confidence in currency after ending Bretton Woods and seeing relentless inflation and dollar devaluation.  In 2001-2011 it was a loss of confidence that we will ever pay back our debt.  It was also the repeated bubbles and crashes that made many lose faith in the economy and the markets.  A bull market in gold is a sign of a loss in confidence in the economic system, markets, currency and the ability of government to fix it.  A loss of confidence in government itself. 

This is our fundamental case for higher gold and silver prices.  So, in the course of yesterday’s trading session, was anything done to garner any confidence in government?  What about the Fed’s management of inflation and the economy?  If anything, people’s confidence in EVERYTHING is continuously hitting all time lows from what I see.  Three days ago, people stormed the capital because they have lost confidence in our election process.  In 2009, people were shocked at our first trillion-dollar deficit in one year while our debt hit 10 trillion, only to see 10 years later for the deficit to balloon to 3.1 trillion and the debt to nearly 3x what it was a decade ago. Does anyone think we will ever pay this back?  Does anyone have any confidence in any aspect of our government to set us back on the right path? To do ANYTHING right?

People are dying, losing jobs, and homes.  No one is coming to their rescue.  The government is offering $600 of checks helicoptered out to the country.  They have no plan.  This is the most slip-shot, thrown-together “stimulus” I’ve ever heard of.  And why?  Probably because they’re too busy intricately planning how they will throw billions to bailout airlines to even waste any time with a thought-out plan on how to help you.  In the meantime, the fed pumps their balance sheet propping up corporate bonds and forcing down interest rates while the market soars to new highs after crashing 30% in 6 weeks only 9 months ago.  Tesla shares are up 1000% since then, closing in on joining the world’s biggest companies like Amazon in the 1 Trillion club, on only 20 billion in revenue…1/10 of Amazon’s revenue.  Oh, and grocery costs are going up.

I don’t want to digress into politics because I firmly believe it doesn’t matter.  The die is cast.  Whether your right wing, left wing - no one can fix the problems we’re facing and none of them care about anything other than themselves.  It’s a big club and we’re not in it. 

The world has gone mad.  Everyone is losing confidence in everything.  I lived through the last bull market.  I haven’t had the experience of living through the depression or the 70s stagflation, but I’ve worked with and heard stories from people who have.  This is the most bullish scenario for gold I have ever seen or studied.  We are going much higher before this is over.  How high depends a lot on how fast we get there.  I’m expecting gold between 3500-8000 before this is said and done, with the median target at 5000.  The point is: Our fundamental case for gold is sound.

     Now let’s look at technicals.  I posted a lot of charts on twitter yesterday, so I am not going to repeat them for the sake of time.  Take a look at the posts on my profile @Jmergz1985 to see them.

I posted a lot of silver miners yesterday, but left out SILJ, so I’ll do that now.  If I removed prices from the chart and you just looked at the picture the candles were painting, there would be no concern whatsoever.  The previous high, as well as a long-term downtrend line are right at 17.  It tried breaking above this and couldn’t quite muster the strength and fell back.  Sure, that’s a sharp red candle there, but I can see about 6 other red candles that look about equal to it on this chart.  This looks like it’s forming a cup and handle consolidation right at its highs which is very bullish. 

From a textbook chart pattern definition (use with a grain of salt, nothing is textbook) the handle should bottom about 50% of the depth of the cup.  So being that the high is near 17, the low of the cup is near 12.50, the depth is roughly 4.50, so the handle shouldn’t drop much below half of that difference (2.25), which works out to be about 14.75.  Honestly, we could drop back to the 23% retracement at 14.30 and test that level and I wouldn’t see anything bearish about this.   I should also add, silver was 30 when SILJ first hit 17.  Now, silver is 20% away from its recent highs at 30 and SILJ is 6% away from it’s highs at 17.  The miners are leading the metal as they typically do in bull moves. This isn’t just not bearish, it is incredibly bullish.

Next up let’s look at NEM. Newmont ran up about 15% from the Nov 30 low, tested near the 23% Fib extension around 66.46 and dropped.  Yesterday we tested the convergence of the 20 day and 39 day moving averages, bounced decently from the lows and closed at the 23% Fib retracement from the Aug high and March low.  Gold miners have been underperforming silver miners, but this was expected, the same as we expected juniors to outperform majors.  There is certainly a big difference looking at this, the biggest gold miner versus the SILJ, but it is not at all bearish, just slow. 

Let’s look at Gold and Silver too.  Gold got pushed back from the 1960 level a few days ago.  This was the same level we were at when vaccine news started pounding the metal 2 months ago and we closed at nearly the same level yesterday too.  It was a nasty drop, but we tested the broken downtrend line and bounced.  We were able to close the week above the 1844 level, which is both the 38% retracement of the move higher from March to Aug, as well as the 23% retracement of the move lower from Aug to Nov 30^th.  Again, this isn’t explosive looking but not bearish either.  What will matter most is how we bounce from this.  I think we will melt higher slowly in a boring way and make our way back to 1960.  What we don’t want to see is gold regain about 50% of what it just lost and stop cold and reverse.  That may mean we are in for a deeper correction.  So, watch the area right near that fib retracement at 1891, as well as the psychological 1900 level for a failure.

 

                Looking at Silver it’s a much better picture than gold and that is what we should expect in a bull market.  We dropped from about the 28 level in Sept after an explosive move.  We managed to get back to that level and retest it a few days ago before yesterday’s plummet.  Again, if I could take prices off the chart, you’ll look at the candle and see about 6 more like it - after we plunged from 30, the drop to 22 in Sept, the vaccine news...  In mid-December we fell just short of 28 and reversed on the day then dropped the following day strongly.  We basically got those 2 days in one yesterday.  We started and ended at about the same levels. We came back off the lows nicely.  We closed above the consolidation from 22 to 25 we spent the entire fall in.  Again, this looks like a possible bowl-like formation that may mimic some form of the miner’s many cup and handles I am seeing.  (The target here would be 34 roughly).  Not a bearish picture, just a sharp pullback.

 

I could go on.  Some charts look amazingly strong.  The worst of the bunch look “meh”.  Not too great, not too bad.  Most look at the least very solid.  So, the technicals confirm our fundamental view.

        Next up, leverage and psychology.  Have you talked to your portfolio about using margin?  Do it now before it’s too late.  If you didn’t blow up your portfolio, get forced out of positions, or suffer such emotional discomfort that you sold, then congratulations, yesterday was a gift.  Why do I say that?  I think I probably lost more on paper yesterday than any other day I can remember.  Felt like a punch to the gut at first.  After some analysis, some personal analyzation of my portfolio, and a few beers last night, I realized that’s a good problem to have.  I’m certain I have had equal percentage losses, but if this was my largest dollar drop in a day than I have more money then I use to, so I’m doing something right.  Gold and Silver aren't at all time highs, the GDX isn't either.  So I've done well building a portfolio of miners that have outperformed the funds at Van Eck and elsewhere.

I didn’t sell or blow up my portfolio.  I have the same amount of ownership in the same companies I had before, they’re just worth less now than they were on Thursday.  And if you didn’t either, than its a gift because we got a test run of what’s to come without actually suffering any irreversible damages.

There was one chart I posted in a comment to a post by @TheLastDegree, which I will repost here (For those who aren’t following @TheLastDegree, I highly recommend you do.  I have seen very few, if any people not only nail timing, price, and strategy as accurately and as many times as he has but also nailing stock picks that have unbelievably outperformed their peers in the gold and silver sector.)

This is the Silver chart from Oct 2010- April 2011.  Going over the chart, I calculated 5x in 6 months that price moved intraday 6% or more.  One of those times, like yesterday was a 10% move, and there was also a 15% decline for about 3 weeks in January. Silver ended January near $27 (only about 5% higher than where we are now) and practically doubled only 3 months later. 

This was exactly 10 years ago.  For context, the Dow was 12,000, oil was 90 and Tesla was $5.  Volatility has increased immensely since then.  Prices move far more drastically in far less time in all asset classes.  From top to bottom, the 2008 financial crisis bear market in stocks lasted about 18 months and lost a little over 60%.  The Covid-19 bear market lost 30% in just 4 weeks, then broke to new highs 5 months later.  This is what you get when momentum chasing algos make 90% of the trades on the NYSE.  EXTREME volatility.  It’s not going away.  It will only increase.  In already volatile assets like gold and silver, this means we will see extreme moves in the future, more than even yesterday’s move. 

That’s the bad news, we will see more of this.  The good news is it will be followed by 10% up days in the future as well.  The other bad news is that the next step will be 15% down days.  As the saying goes, bull markets take the stairs up and the elevator down.  It’s what keeps it going, people panic, selling on big down days than chasing prices higher.  If yesterday put you over the edge, consider your personal situation and strategy in order to keep your portfolio in harmony with your psyche.  Here is what I advise:

• Do not invest any money you may need for expenses in the future, or a possible unexpected large expense. 
• Do not invest any money you are not prepared to lose.  Right now as we speak, some Fortune 500 company is cooking their books Enron style and no one has any idea until it blows up and goes to 0.  This can happen to any stock, anytime, it is always a risk.  If it’s too much, don’t do it.
• Do not use stop loses on your long-term gold and silver positions.  If your stop is too tight, you WILL get stopped out in volatile swings often and usually end up buying back higher.  If your stop is too loose, you will see volatile swings that will stop you out at terrible prices and it will ultimately prove a pointless endeavor that doesn’t actually offer you any “protection”.  In short, you’ll get bucked off the bull before you want to.
• Do not use margin.  You might think a small leverage of 5% is fine, and theoretically will not result in a margin call even in a crash but consider the mental anguish of the volatility on days like yesterday.  Also even a 99% chance you won’t blow up your account means a 1% you do and walk away with nothing.  If you are going to use margin at all, make sure you can pay it off immediately on the spot if need be, in full without selling your positions.
• If the mental anguish was too much yesterday, consider keeping a portion in cash or completely unrelated assets, like the SPY fund.  (And always remember, in a crash everything will go down.  When the margin calls come, if you can’t sell what you want, you sell anything you can.  This is why gold reverses it’s bull moves in major market crashes.  No one wants to sell their AAPL stock, so they sell their gold hedge, and then usually have to sell their AAPL anyway) If you suffered a bloodbath in call options on metals and miners, consider converting some percentage into stock, at whatever level will help you sleep at night if this happens again.
• Prepare to see this again.  Prepare for worse.  Prepare for the fact that at $100 silver on it’s way to $150 or higher we will likely see a swift, brutal, 30% drop in a short period of time.  Prepare for how much more your portfolio will be worth then and how many paper dollars you would lose in that situation.  If your doing something right, it will be a lot more than whatever you lost yesterday.  Think about the exact amount you could lose, 30k, 50k, 250k.  Really think about losing that kind of money in a few weeks.  Then when it happens, you’ll be prepared, you were expecting it.  (No guarantee it doesn’t still feel like a punch to the gut though)

     So the fundamentals are sound, the technicals back us up and we’ve got our financial house and our minds in order for what’s to come.  There is no need for alarm here.  It hurt, its done now, the bull market is not over yet.  Let’s watch some of these key levels and prepare for a possible reversal on the relief rally, worst case scenario.  Crashes can happen anytime.  Know what you want to do in that situation and how you’re going to do it.  But for now, all is well in Gold and Silver land.  Nothing here is unusual or has suddenly turned bearish. Now let's bring on Monday.

-Jonathan Mergott