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.
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