I’ve been insanely busy last couple weeks. I got back from Lake George and we have some
friends staying with us for the next few weeks that have been traveling. We’re
having a bunch of furniture moved and delivered, and then I get to top it off
with a pretty severe cold of some sort in June.
(Go figure). I feel pretty crappy but trying to get my thoughts down on
the metals here. I’ll apologize ahead of
the time for the sporadic jumpiness of moving from 1 thought to another, but
I’m focusing on getting those thoughts down, not on writing a perfect master’s
thesis. Inevitably I’m gonna miss some
points, we can hopefully fill in some blanks with a Youtube Q&A in a few
days when I’m feeling better, but let’s get down to the meat and potatoes of
it.
Gold and Silver got murdered after the Fed meeting. It wasn’t pretty. Moves like this, when were
at this stage of the game I believe require us to sit down and calmly, rationally,
and OBJECTIVELY analyze our thesis. All
signs seemed to point that we were ready to break strongly higher and we
didn’t. Quite the opposite. So, the
question is why, what to expect now, and where do we go from here.
There are two things I’ve learned over the years in metals
and mining and markets in general. The
first, as I’ve said many times before, is “Watch the miners”. Gold rallied nicely to 1920 after my call for
a bottom on March 2nd at 1705.
The actual low was 6 days later and a whopping 1.7% lower, but March 2nd
was the low to the day on the GDX. We
rallied $250 from there, or about 15%.
The GDX rallied double that, about 30% to a high of 40 then stopped. A 100% outperformance by miners may seem
great, but I would have expected more, and the rallies to be broader based
among the miners. NEM did tremendously,
breaking to a new high. SAND and FNV did great and made up a lot of lost ground
in the correction. Miners like ABX and AU were more disappointing, as were the
Jrs and the GDXJ, which we would have expected to outperform the majors.
This first clue of underperformance by miners, and jrs to
majors made me a bit uneasy for a little while, but in the past that can be the
case for a few weeks. What you DON’T
want to see is a constant impending breakout being pushed down or have no
buyers wanting to follow through and buy at higher prices for much longer than
that though. Everyday we didn’t breakout was a ticking clock making the odds
that we will breakout that much less. We
had a lot of hurdles, so it seemed like there was just a few obstacles to
overcome, be it options expiration, jobs reports or FOMC meetings. In hindsight, I believe I should have placed
a higher emphasis on this then I did. It
would have led me to de-risk a bit and saved me some money from this last
crash, and hopefully would have done the same for anyone who followed that
advice as well. The lesson I have
learned in the past remains true over a decade later. When miners start turning higher while metals
are dropping, a low is likely near as was the case in March. This was a major
factor I used to call that low in March as well as the low on Nov 30th
at 1760 which I nailed to the day.
(Ironically, here we are right back where we were 7 months ago.) But when metals are rallying strongly and
miners SHOULD be breaking out and aren’t, watch out below.
Regarding this drop, I want to make some notes on some things
that other people are saying about it.
I’m not trying to call anyone out directly, but I see things floating
around and the same narratives from different people being said. First is the “This was clearly manipulation”
argument. Let’s just start by saying no
one of us lowly peasants has the ability to see enough information from our
computers to KNOW what is manipulation and what isn’t. All markets are manipulated. Gold and Silver especially. I don’t KNOW that the 500 million ozs sold in
60 seconds at 7:34 EST on a Sunday evening was manipulation. Sure, it could be a panicked whale who didn’t
care about execution, or a fat finger, etc.
But as they say, the simplest explanation is often the correct one, and
the simple answer is that it’s more likely some banker is trying to create a
momentum waterfall effect that trigger the algos to jump in and keep selling to
benefit their own positions, rather than someone willing to lose millions in
their execution by dumping rapidly at an illiquid time.
Now on the flip side, you can do that tick by tick, hour by hour,
day by day, and see the effects last for a relatively short period of
time. What you CAN’T do is CAUSE or
CHANGE a trend. If manipulators had the
power to cause a bear market or prevent a bull market, gold would have never
broken above $50/oz after Nixon ended Bretton Woods. It never would have rallied nearly 8 fold in
10 yrs from 250 in 2001 to 1920 in 2011.
They simply would have prevented it.
Sometimes it’s just investors wanting to sell. I watched people stamp their feet and scream
manipulation as gold plummeted in 2012, citing that QE is still continuing and the
Fed saying they are looking to raise rates in a few years means nothing today. Also,
that the Fed CAN’T raise rates, no matter what they say because it would cause
our debt to go insane. That wasn’t the
case, and those people rode their positions down 80% in some cases in that time
frame. So the point here is this: Could it
have been manipulation? Absolutely. But be
careful blindingly applying the manipulation argument to every down move.
Sometimes investors sell. Calling every time
the market moves against you “manipulation” makes people lazy and complacent and
does nothing to help your analysis or portfolio.
Markets are FORWARD looking.
If you are investing based on what’s happening right now you are behind
the 8-ball. In 2015, The Fed DID raise
rates a few years after they originally began talking about it and a few years
after gold began crashing lower. (Although not much by historical standards. And the debt skyrocketed and continues to.
People thought 10 trillion was inconceivable. We’re approaching 30 trillion
now. Don’t think we can’t make it to 50 trillion.) If you look at the Fed’s
balance sheet over the last few decades, the fastest increase occurred around
2012, right as gold was breaking support at 1500, and on its way to a low of
1050 three years later. So, this is not causation, as I’ve seen many point out.
As I have said before, the correlation with QE and gold comes from the loss of
confidence in the Fed and the system.
The increase in their balance sheet and the rise in gold is a symptom of
the same disease.
The next point is BASEL III, which everyone in the gold camp
is talking about. “This drop was a
manipulated, planned attack before it’s implementation.” First, I hate to say this, and maybe I have
been beaten down in the gold markets too much after 13 years doing this to see
any “light at the end of the tunnel” in terms of a change in how things are
done, but it makes no sense to me why a group of financial elite would impose a
system that would cease the very profitable games played in the metals markets
that have benefited their buddies for so long.
I don’t think this is a paradigm shift or frankly, anything that will make
1 iota of difference in our regular 8 am attacks or Sunday night manipulation
events. In fact, I’d take the opposite
side of that. The Hopium being built
into this by gold bulls I think leaves us vulnerable to a further sell
off. Basel is a nonevent, and again,
markets are forward looking. This was
introduced back in 2009. If you are
expecting a magic change overnight, you’re going to be disappointed because
there is nothing “new” here.
Now, I want to highlight 2 gold charts that I think bear a
resemblance from a technical analysis standpoint to where we are now. The first is 2008-2009, the second is
2011-2012.
In 2008-09, we had started with a similar downwards channel correction
after 1st hitting new highs at 1000/oz on the heels of the financial
crisis. Gold topped in March and
bottomed 8 months later in Oct. It was
the only correction in the 10 yr bull market where the moving averages crossed
lower, until the top in 2011. It rallied strongly and fell back after retesting
1000 down 15% to 850. We then began to
coil tighter. The channel breakout morphed into a longer-term inverse head and
shoulders consolidation and finally broke out to new highs about 6 months
later.
Today, in 2021 we saw gold hit a new high at 2100 in Aug on
the heels of the global pandemic. It
corrected in a channel downwards for exactly 8 months, bottoming in March. It has been the first time since we began
rallying in late 2018 that those moving averages have crossed lower. We broke
strongly higher and have now fallen back hard to retest that breakout area of
the channel. Looking at this drop now,
we can see how this could also be forming a big inverse head and shoulders
consolidation. The similarities are very striking.
Back in March, we were looking at bullish sentiment at
extreme lows, the kind you typically see at bear market bottoms, not during
bull market corrections. Articles were
floating around saying “Gold has failed” as Bitcoin hit 50k+. We are right back at dismal sentiment that
reminds me a lot of the lows we made in 2018.
From that standpoint, this is a big positive. As an investor, it is a great time to begin
buying positions or adding to them for the long term, but don’t expect instant
gratification. To make exploding moves
higher, we need the momentum driven by large specs and retail investors and you
can’t expect the “gold has failed” crowd to turn around and buy a few months
later after a move of couple hundred dollars higher.
We need explosive breakouts to new highs that create FOMO for them to
jump in, and we need time to grind down their thesis and prove it wrong. From
this standpoint, there are a lot of similarities with 2009, but it could spell
out a lot more grinding back and forth before we breakout, wearing out all the
weak hands.
In the 2nd scenario, 2011-2012 we can also see a
lot of similarities. Gold moved
parabolically higher to 1920 then suffered a big slam down to 1550. We consolidated, rallying twice to 1800,
making a double top then falling back down to 1550. Moving averages crossed lower in 2012 and after
a long consolidation at the lows, we made one more stab at 1800, moving very
fast to get there. During this time,
miners frustratingly underperformed. Not reaching levels they were previously
hitting the last time gold was 1800.
This was gold’s last hurrah and the miner’s underperformance while the
metal consolidated at these high levels (which should have been great cashflow for
producers) was a clue it may have been over. 1 year later gold was down 30% and
still dropping.
Today, Gold moved parabolically higher to 2100 then suffered
a huge $250 slam down back to 1850. We rallied up to 1960 and came down hard
again, hitting new lows. We shot up to
1960 again and made a double top in Dec and reversed down hard once more. After some consolidation at the lows in March,
we ran up close to that double top once again moving very fast to get there. Miners had been underperforming while
consolidating at record highs (which again, should have been great cash flow
for producers). This also was a clue as
the metal has now dropped down hard since then.
From a fundamental standpoint, in 2012, QE was alive and
well. The Fed’s balance sheet was
expanding, and rates would not rise for another 3 years. Deficits were still enormous, and nothing was
stopping the expanding debt, and nothing has since. Very similar to where we are now. The fears of hyperinflation never occurred,
the stock market kept chugging higher and the loss of confidence from the
financial crisis subsided.
Today, we are seeing inflation, much higher in CPI and PPI
then we did then, even though we all saw prices rise and products shrink in
that time frame. The question now is, do
we see inflation continue to increase?
Will the fed lose control? Or is
it more logical that the next step is a paring off of inflation along with
commodities that have pulled back substantially. When the inflation we've predicted is here now, and everyone is talking about it, what next? As someone said, maybe it's time to "zig while everyone else zags." Do the deflationary forces in our economy overwhelm
inflation, as they did in 2012? We can see no rise in the velocity of money despite
fed printing post financial crisis. The
money simply was not going out into the economy enough to cause runaway
inflation. We can see the same thing in
the velocity of money today. There is
one key difference, however. Every fed
chairman from Bernanke to Yellen and now Powell has said in almost every
congressional hearing, “We will continue to keep monetary policy accommodative
to reach our desired targets on our dual mandate of monitoring inflation and
unemployment…blah blah blah… BUT WE WOULD LIKE TO SEE MORE FISCAL STIMULOUS
FROM CONGRESS.” (Because pushing on a
string of bond buying and 0% rates won’t save the world on its own.) Today, we are getting a big amount of that
fiscal stimulus, and that is very different from before. $800b stimulus package and $3b in cash for clunkers is
NOTHING compared to the money we’re throwing around today, and that is VERY
significant. Additionally, with
economies “opening back up” and vaccinations happening, there is an argument
that can be made that the “loss of confidence” is subsiding. This loss of
confidence has been a never-ending underlying theme since 2008 from what I
believe, and is not “over”, but is not in “fever pitch” as much anymore and
that I think is something to note.
There is another point I want to hit. Paul Tudor Jones was
on CNBC a few weeks ago proclaiming he was buying “Everything inflation”. Gold, commodities, and bitcoin. He really sold that narrative. This worries me because guys like him aren’t
freely giving retail investors their advice, their talking their book. In 2009, when gold was around 1000, Maria Bartiromo
was interviewing George Soros in Davos.
It was after market hours, but he had said “I think gold is the biggest
bubble in history.” Gold slammed down
about $40 instantly. Fast forward 3
months later, Soro’s fund filed their holdings and it showed a massive increase
in GLD and GDX holdings. He was creating
a selling event so he could buy into it. He probably had traders working at
that moment, snatching up gold being sold in a panic. Similarly, if Paul Tudor Jones is telling you
to buy “everything inflation” what it means is he already did 6 months ago. Now he’s trying to sell and wants to drum up
some demand, so he doesn’t overwhelm the market while he dumps it all. Make note of these things and pay attention
when big names do this in the future. When you keep seeing fund managers in the
news and on CNBC talking about buying, it’s a bearish sign.
I said at the beginning of this article that there are 2
major things I’ve learned over the years. The first, in terms of gold is “watch
the miners.” Here’s the 2nd,
paraphrased from a line in the movie “The Departed”:
“You don’t have to understand why, just listen to what the
market is telling you.”
Some of the worst mistakes I’ve made I didn’t listen to what
the market was telling me and blindly followed my own analysis which ended up
being wrong. Ignored the obvious, and was pompous enough to think I was smarter than the rest of the market, and the other fund managers making 10s of millions a year. I’m reminded of a mining
stock I had bought 10 years ago. My
analysis said it was worth 3x what it was.
As gold and silver rallied, it underperformed when my analysis said it
should be outperforming. About a year or
so later, and probably around a 30% loss, I finally threw in the towel. It wasn’t a huge investment so it didn’t devastate
me but had I have listened to what the market was telling me as it continuously
underperformed, I could have gotten out earlier with a smaller loss and been able to do something
more productive with that money.
Wall Street is the most competitive industry on earth. You should assume you’re probably not the smartest person in the room. I’ve made this point regarding Barrick vs NEM. Sure, basic cash flow and earnings analysis might tell you at 2000 gold, Barrick is a better buy. But guess what? Everyone who took Finance 101 can do that same basic math, so it’s safe to say that if the guys out there making 50 million a year are buying NEM instead, while Barrick continues to languish, there is a reason why. You don’t have to fully understand why, you just need to listen to what the market is saying.
I’m still trying to understand what the market is “telling”
us here, and I don’t necessarily know for sure.
What I do know is this was a BAD slam down, and we have not recovered
from it. Metals have been flat lined
ever since. I expect a bounce here, but
we haven’t gotten one yet, and it’s certainly not improbable for ugly to get
uglier and oversold to get more oversold.
In short, I’m neutral on the metals right now. My targets for 50 silver, 2300 gold by Aug/Sept will likely not occur in that time horizon. I am NOT Bearish, simply neutral in the shorter term. I do believe my targets will occur and the rises from miners that come with it, because I remain long term bullish for now, but based on price action and sentiment, it is unlikely we turn on a dime and break higher, there will have to be some grinding out and slow building first I believe. There remains the chance however, that the bull market in gold is done, and I think we need more time to look at this to determine if that is the case. We should be able to tell more based on the next rally higher. How high does it go, and how the miners act should give us some clues as to if this was just a sharp correction in a longer than expected consolidation, or if this might be the end of the road and worth derisking significantly more.
Funny thing is, so many people gave me a lot of crap for
expecting ONLY 100-150% returns on silver miners if silver doubled. I cited their unexciting performance so far as the
reason, and that would need to change first before raising targets. In hindsight, I’m glad I was the guy calling
for 50 silver at 26, and watching it go to 29 and back again to 26 than the guy
calling for $1000/oz Silver any day now, and giving people massive false hope. I have said many times, I’m not here to get
clicks and make money off subscriptions saying $20,000 gold and $1000 silver,
“Subscribe to find out why!” Nobody pays me anything for this, my views are my
own. I'm not paid to promote any individual stocks, I have no sponsors for my website. I share this to all of you for free and ask nothing. I make money by being right, plain and
simple. Those people are mostly scam
artists. My targets I believe to be
realistic, and I’d rather undershoot than say ridiculous numbers only to be
made a fool of. I come from 4
generations of gold bugs and investors in gold bull markets from the 70s to
today. It’s what I know, it’s in my
blood. But I am NOT a PermaBull or Bear on anything. Those people typically don't survive long term. If the situation changes,
you must change or you drown, plain and simple.
Rule number 1 of making money in the market is “don’t lose money.” Sometimes its fine to not MAKE money, but if
you lose it, you’re out of the game.
I can’t tell anyone what they should do, (legally, but also
everyone has individual unique situations and risk profiles. There is no 1 size, fits all.) But I can say this. I see 3 types of investors that are my peers
and friends when I talk to them and it usually goes something like this:
Type 1: “I’m 35 years old, I’ve worked hard all my life,
I’ve managed to save $50,000 and I don’t want to lose it. I know it’s not much, but I don’t want to
take too much risk. If there is a chance
of a downturn, I want to pull out and save my capital.
Type 2: “I’m 35 years old, I’ve worked hard all my life,
I’ve managed to save $50,000 and I don’t want to lose it. I know markets fluctuate, I’m not afraid of short-term
slam downs, but I don’t want to be in a position where I have no cash to take
advantage of it. So, if there is a chance of a downturn I'd like to raise a
small cash position so that I have the opportunity to buy.
Type 3: “I'm 35 years old I've worked hard all my life, I've
managed to save $50,000. I've done the math and I figured out that if I
continue to save money at the rate that I've been doing and I invested in the
S&P 500 at an average return of 8% a year, by the time I retire I will not
have enough money to live off of or provide for my family. If I need $1,000,000 to retire, and investing
conservatively will get me $600,000, then I won't have enough money. So, it doesn't make a difference weather I
have 600,000 or 300,000 it still won't be enough money. So my only option is to
take on a much more risk now, buy buying calls or meme stocks to try and make a
huge return now so that I could compound that in the future and be able to have
the retirement that I want and provide for my family. If I lose it all, it won't make much of a difference in the longer term, I still will fall short of where I need to be for a decent retirement, but it's my only shot of building something and getting ahead.”
Many people want to be type 3. The renegade who does the impossible and triples their money in a few months. But the reality of the situation is most people aren't cut out for it. A few months ago, GV told his “origin” story on twitter. It went something like this… he started out with $50,000 and bought call options on SLV and AGQ in 2010. He managed to turn it into around $20 million. He is a true hero.
But that is not most
people. Let’s be clear about this, this is a story of point A and point Z, and
the entire alphabet in-between was left out.
At some point in time, that
$50,000 doubled. At that point most
people would probably cash out thinking they've doubled their money and would
walk away happy. At the very least, they take out their buy costs, and run the
rest on the house’s money. Somewhere in
the middle, his 50k, turned into 2 million.
And I’m sure he’d be the first to tell you, that shortly after, within a
few days or weeks, he watched it get cut in half. Imagine taking 50k, holding on until 2
million, then losing a million dollars in a few days. Any logical human would likely think, “This
is more money than I’ve ever seen. Sure,
I just lost 1 million, but I can still walk away with 1 million now if I sell everything,
and that is life changing.” Somewhere
between 50k and that point, 99.9% of people would have walked away, and been
happy about it. This is why he’s an
absolute hero, because he held on and did the impossible.
But that is not most people, and it is likely not you or me. The fact of the matter is most people who “bet
the farm and leverage to the hilt” will blow up entirely. The few that make money will take a decent
return and walk away. The average person
will try something like that, quickly lose half of their portfolio, panic, then
sell everything and walk away. This is
why I’ve said, you need to look at yourself honestly, and see who you are and
what your risk tolerance is. If you’re the type
that buys the extra car insurance when you rent a car on vacation, you probably
shouldn’t be “all in” on illiquid JR miners and call options. I don’t know what it takes for you, you’ll
need to figure that out yourself, but if these sell offs are making you lose
sleep, if they're making you panic on how you're going to pay for things in the
future, then you need to take money out of the market. Maybe you need to
diversify and have 40% SPY, with some royalty companies and some junior minors
while holding a 10% cash position at all times. Maybe a balance between
producers, junior miners and royalty with a 20% cash position is what makes
you comfortable. I can't tell you what
the answer is, you need to figure that out for yourself. I’ve said this before, I’d rather see you
make 500% on half your money in the long term, and be able to stick with it,
then go all in, panic and sell at a 30% loss.
Find the balance that works for you. The goal is to make it to payday. Sure, the payday would be better with leverage, but if you can't hold on, it's pointless. Theoretically, you can drive to your destination in half the time going 150 in a Ferrari as well, but if you can't handle that speed, and it will cause you to crash, then who cares?
I will tell you what I am doing. The day before the FOMC meeting
I got an uneasy feeling. Being that I was going to be leaving for vacation the
next day during the announcement, I didn’t want to worry about it too much, so I
sold 85% of my leveraged portfolio of call options I had been buying from
March-April. Cashed out with a small
profit, about 15% or so. The remaining
15% of that portfolio has gotten decimated since then, and the losses on that
have probably entirely wiped out the 15% gains on the 85% that I booked. Total wash for 4 months of planning and
effort. Lesson learned. I bought them at lows expecting a breakout
was imminent and it did not occur. I
probably gave up half of my profits by not cashing out about 3 weeks earlier.
I’m expecting a bounce soon, but so far, we’ve been flatlined on metals with zero buying interest. A logical target would be around 1800 at first, then possibly up to 1840-1850 area, and around 27ish on Silver. From there I would be looking to lighten my positions in major producers slightly, which I view as “directional trades”. (Around a 10% cash position) Some stocks have individual good stories. EXK and HL have done great, but FSM and PAAS have been terrible. As a whole, the SILJ has been flat. In essence, buying these producers is a bet on the direction of silver and gold, so as metals have failed to breakout over the last 10 months or so, they have not really gone anywhere.
Conventional
wisdom would say, in a correction in the metals you would want to hold onto
multi-billion-dollar companies with cash flow and dividends. But the fact is, GVs sitfolio stocks and Gold
Fever Jrs have killed it versus majors during this correction. The SILJ has been flat for the last 10 months. The GDX is down 25% since Aug. An equal weight in the top 10 Sitfolio stocks
has netted you 100% gain in the same time frame. These companies are in a position to produce
value through drilling and development of their properties, and I believe they
will continue to do well, so long as metals prices remain “economical.” By that I mean, when most silver majors are
producing for a cost of 14-15/oz, anything over 20 in silver is very economical
and attractive as takeovers for the majors. I will be looking to use my cash to
add to these if given the opportunity, as well as using it for other opportunities
I may see that are outside of the metals and miners.
At the end of the day, metals need more time, so I am going
to position myself in a way where I can be occupied by doing something else in
order to give them the time they need and alleviate the boredom. Figure out what type of investor you are and
what you need to make you sleep at night and weather the storms in metals and
miners. The goal is to make it to payday. Do whatever you need to do to ensure you can hold on long term. It seems the market for now is
determined to grind us down with time more so than price, and that can be more
difficult sometimes to deal with mentally.
Don’t use margin, don’t invest money you will need to spend anytime
soon. Stick with the leaders, you don’t
need to understand fully why they are outperforming, just listen to what the
market is telling you, and humble yourself. You are not the smartest person in the room. The market will show you if your analysis is correct or if you're missing something. Watch the miners,
and they’ll clue us in to the next moves in metals.