How to make friends and influence people

I haven’t been making many friends the last few months with my views on gold and silver.  I know this because besides the blasting comments I get from people, I continue to get more twitter followers and yet my total follower amount has gone down. It seems gold bugs don’t like it when other gold bugs say, “Hey, gold doesn’t look so hot right now.”  Don’t kill the messenger, I’m simply reiterating the market’s price action.  If you don’t believe what I’m saying, why don’t you ask your own portfolios?  You don’t need to be a technical analysis guru to understand that when a market has 4 red days a week and 1 mild green day, and that action has been continuing for months, you are likely not in a market that’s trending higher. Sometimes interpreting the market direction can be as simple as that.

Gold reversed the entirety of its strong move higher on Wednesday and got murdered once again after the jobs report Friday. Silver has been acting weaker than gold for months and that is not what we want to see in a bull market.  Usually, silver should lead.  Silver also broke an important uptrend line last week but recovered quickly giving us a little hope. On Friday, it broke that uptrend again while gold tested its long uptrend line since the 2019 lows.  Perhaps silver is continuing to lead, just not in the direction bulls want.

As I’ve said before, in bull markets in precious metals, we want to see silver outperform gold.  We also want to see miners outperform the metals and additionally, juniors outperform the majors.  The formula should work like this:

JR Silver > Major Silver ≥ JR Gold > Major Gold ≥ Silver > Gold

If you’ve been paying attention recently, it has been almost exactly reversed. Junior silver companies have gotten beaten with nearly 50% losses on many. Major silver producers have been terrible performers as well, but mildly better.  AG has lost 30% since late May while CDE has lost 40%. Junior golds have performed similarly to major silver producers.  GSS lost 40% since late May and intermediate gold producers like IAG lost 35%. Bigger gold producers like NEM, (the only one I think is worth owning), after being the only major to break to a new high, corrected only 20% from that level. Royalty companies, which performed extremely better than miners in the bear market have also held in very well and FNV is currently just 5% from its all-time high. Silver is down 15% from May when it was 28.60 and gold is down half of that, only 7.5% in the same time frame.

For those that read my last article published on June 29^th or watched the Palisades Gold Interview about it 1 week later, I talked about the major silver producers (and the major and intermediate gold producers fall in the same category as this), being in essence, “directional trades on the metal.”  Sure, they have individual stories, and some have done better than others, but mostly they are a leveraged bet on the direction of the metals. Juniors are building value through expanding their assets. Additionally, very large majors who have significant cash flow and dividends can offer some “protection” to the downside and royalty has the added benefit of reduced exposure to the numerous issues that can arise for mining.

This was my thought process when raising cash and majority of the things I sold were major silver producers and intermediate and major gold producers.  I took some money off the table in some junior silvers and royalty, but for the most part, I kept the largest chunk in stocks like FNV, RGLD, NEM, WPM, SAND as well as small sitfolio stocks that despite short term extreme volatility, will continue to build and add value.  I sold heavily in the major silver producers and sold the entirety of certain positions that have continuously underperformed. Additionally, I added puts on the GDX to mitigate losses on my core holdings and add to my cash.  This is seeming now like it was the exact right method to go about this.

I recently had a person criticize my incorrect previous bullish “calls” from before while another person commended my “calls” for caution from more recently and wanted to say something regarding that too. 

I am not a psychic.  No one is. I don’t have a crystal ball on the desk in my office that I consult for market directions. To quote the name of a book by Bob Moriarty (that I highly recommend) “Nobody KNOWS Anything.” I don’t know what will happen tomorrow any more than Buffett or anyone else. Gurus’ “calls” are guesses, plain and simple. Granted, they may be very experienced in that industry, but they are guessing, that is it and anyone can do it with enough experience and have a similar accuracy track record in their “guess” work.

The only thing I am doing is watching the market action. Tape reading as the old timers would call it. From there, I am using my 13 yrs of experience in watching the “tape” every single day for 8 hours a day to interpret when things are generally acting bullish or generally acting bearish, and if a shift is taking place from one side to the other. Past that, the rest is just gut feeling, and other clues I’ve picked up over the years that I have previously shared with twitter followers and anyone who reads my articles or has seen my interviews. But like I said at the beginning of this article, sometimes it’s as easy as looking at a continued pattern of many weaker red days and a few mildly strong green days to notice something is wrong. I believe that is what we began to see going into the month of June. We witnessed massive selling that continued unabated. Buyers were nowhere to be found. That’s not a good sign after believing we had capitulated only a few months earlier.

By far my biggest concern though, the biggest “gut feeling” that has me worried right now is listening to gold bugs talk.  I wish you guys understood how much it is EXACTLY the same arguments, explanations, excuses and conspiracies I heard from 2012-2015. In the end it was only themselves who suffered.

“The market is manipulated.” Yes, all markets are, in the short term. But if there was overwhelming demand to buy gold at 1850, investors wouldn’t pass up the opportunity. We wouldn’t be sitting here $100 lower. There are people whose sole job is arbitrage. They will buy 50m in Euros from a seller knowing they can offload it to a willing buyer 10 seconds later for 1/1000 of a penny higher and keep the difference. If gold was mispriced, they’d be buying it.

Even if it was a successful scheme of suppressing prices for a long period of time, what difference does it make why? The only thing that matters is if your making money or not. If you’re not, you don’t need to know every detail of why, you just need to recognize that, and adapt. Maybe it is the market, maybe it is manipulation. But most likely, it’s just you who is wrong. Would you rather feel better justifying losses to yourself, or would you rather make money?  

“We’ve never seen this much debt or spending.” Every single year our deficits and debt increase without fail, so you can say that everyday and it would be true. Our debt just hit a new high since I finished writing that sentence.  I have a book on my bookshelf called “The Hyperinflation Survival Guide” by Gerald Swanson, written in 1989. On the cover there is a red line shooting higher.  It’s a prediction on the national debt, which he expected to be 10 trillion by year 2000. A number that at the time seemed unbelievable and would surely collapse the dollar. He was off by about 8 yrs, we hit 10 trillion in 2008. Here we are in 2021 closing in on 30 trillion and the US dollar index is rallying to 93 and is very much still the reserve currency of the world. These things are not perfectly linear with gold, clearly.

“The Fed is trapped; they can’t raise, or taper and inflation is too hot.” They are not trapped, nor were they 10 years ago when Yellen warned the market repeatedly, she was going to raise rates, and kept raising them while everyone screamed how it “couldn’t happen.” (Ironically, that was gold’s low. Buy the rumor, sell the news. When the news is bearish, sell the rumor, buy the news). The Fed is SUPPOSED to be independent, and while we all know that’s not really true (Especially after watching Powell fold like Origami on rates after being berated by Trump), the national debt is not their problem, and they don’t care if increased rates cause it to rise more significantly. That’s an issue that congress got themselves into, and its congress’s problem to fix it. (Good luck.)

Additionally, inflation is here, its not coming. Sell the news! Especially when looking at inflation data and seeing that one of the biggest causes has been the supply chain issues due to the pandemic. Those ARE transitory, and likely to ease, as input costs already have.  Are we going to see 10% inflation in the future?  We very well could, but I’m willing to bet, based on what the market is saying that we will see DISINFLATION first, dropping to closer to 3% year over year before we do. (Which by the way, is exactly what happened in the early 1970s. From 6% inflation to 3%.  It doesn’t necessarily derail a long-term multiyear gold bull thesis, but in today’s volatile environment, it very well could make you suffer devastating losses in the meantime.  Like the 90% loss in the GDXJ from 2011-2015, that will never return to its highs due to dilution of shares by Jrs just to stay afloat. And many didn’t anyway.)

“The Dollar is going to collapse.” Maybe, but if you think America’s situation is bad, have you even looked at Japan and Europe? If the dollar is going to collapse, I believe the Euro and Yen will collapse before it. And being that the dollar is free floating against those other currencies, that means it will go much higher first.

“The stock market is a Ponzi scheme, and when it collapses, we’re going into a depression like no one has ever seen.”  Everyone knows this probably won’t last forever, but I’ve watched 12 years of everyone disbelieving every tick higher the market has made, and yet here we are at 4400 from a low of 666. That’s a 560% gain in 12 years that most of the doomsday, Zerohedge readers missed out on entirely, and still refuse to believe they were wrong about. The more people disbelieve the rallies and wait for crashes, the more it rises on a wall of worry. It truly is the most hated bull market in history.

As for the “depression like no one has ever seen”, it’s highly unlikely. Why? Because the biggest issue in the depression that made it so bad, as opposed to a just really bad recession that bounced back, was an utter collapse of money spending. People lost their jobs, and their spending went to zero. Then they lost their homes, they went hungry, etc. This is the very purpose of social programs like housing assistance and food stamps, unemployment etc. I am not trying to get into a political debate about right or wrong here, it really has nothing to do with that. Whether you agree with these programs or not, the BIG PICTURE purpose of them is to prevent spending from going to zero and a depression on that level from ever happening again, and it has worked. (And when all else fails, mail out some checks). 

We just watched an economic collapse where some data points came in WORSE than the depression and some worse than we’ve ever recorded. I’m not saying the economy is good right now, but clearly, we are not in the same place we were in 1933. (And a large factor in that is because when unemployment hit 15% last April from 4.4% 1 month earlier, people's spending didn't drop to zero) Can things get worse? Absolutely. Could we see years of devastating inflation or deflation? Of course. But so far everyone who has bet on the end of the world has been wrong.

“Who is left to sell here? How much lower can these stocks really go?”  To address the first part, YOU... You are left to sell. And many who think similarly. As for the 2^nd part, another story: One time I thought my analysis was smarter than the market and confidently said to my dad the same thing, “How low can it really go”. He shared with me what my grandfather told him when he made the same mistake of saying the same thing early in his career.

“ZERO. AND DON’T YOU EVER F***ING FORGET THAT!”

He didn’t, I haven’t. You shouldn’t either.

Add to all this, the countless pie-in-the-sky, utterly ridiculous "technical analysis" I keep seeing as if it is some guaranteed prediction of 10,000% gains, from people who clearly have no idea what they're talking about. Technical analysis is about analyzing the probabilities of what a market is LIKELY to do, ideally using multiple factors to support one's point. Drawing some lines with massive percentage projections higher to support your own bias is NOT technical analysis, or any form of honest analysis.

Around 2012, everyone was looking at this chart below for silver. A 30 year long cup formation, from the 1980 high at 50 to the recent high of 50 in 2011, and a sharp correction of nearly a perfect 50% consolidating to form the handle.  A move to 100 was imminent. What actually happened was a loss of another 50% from the handle's low of ~25, to 14, and then 12 in 2020. We then rallied back to 30 and have continued to consolidate since then.  It has been a DECADE now since the "imminent" breakout of this cup and handle. Could it happen?  Absolutely, eventually.  But we only have so much time to save and invest for our future. So far waiting on silver has burned 10 of those years.  It could burn another 10 as well. I'm not trying to knock or downplay the massive potential silver has in the future. I'm trying to play devil's advocate and point out the other side of this.  I'm simply saying, I've seen some of the most perfect patterns and technical situations fail before. Beautiful cup and handles just completely drop, rather than break higher like you would expect. I've also seen ones like this, that continue on for 10 yrs without a breakout.  I'm just pointing out the opportunity cost that waiting for silver has already taken from people, and could easily continue to while they think that a breakout is imminent.  I thought a breakout was imminent as well a while ago, but back then, we were on fire, consolidating with good momentum and generally bullish sentiment. That is not the case any longer. We are now likely in store for some slow building from here rather than a rip roaring rally. That momentum and underlying bullish sentiment is unfortunately gone from the metals.

Jesse Livermore was a better investor and trader than me and he famously said, “Markets are never wrong, but opinions often are.” If it seems like you are butting heads with your own analysis and the market’s action for an extended period of time, guess what? It’s not the market who is wrong. You are. Be humble, admit it and move on. The BEST in this business are lucky if they’re right 50% of the time. It’s a matter of managing your investments more so than calling tops and bottoms. There’s only 4 ways an investment or trade can go, big winner, small winner, small loser, or big loser. If you cut the bad investments that don’t act right BEFORE they become big losers, your small winners and small losers even out in the wash and all your left with is the big winners you let ride.  Another great quote, from Bernard Baruch (which I particularly like because I majored in finance at Baruch College) is “Don’t try and buy the bottom and sell the top, it can’t be done, except by liars.”

You can stick to your guns and hope your view is right, but hope should never be part of an investment thesis. I’ve watched a lot of people go broke that way. You didn’t need to buy stocks at 666 or sell at 4400, or buy gold at 250 or sell at 2100, but taking a large chunk in the middle by identifying the trend and not fighting the market worked out very well.   I would rather wait, and risk paying more for the things I want to buy to get some confirmation the market is moving with the bulls, then to try and catch a falling knife HOPING it was the bottom.  Consider the extra cost insurance, like paying for an extended warrantee on your long positions. 

On a more positive note, there are beginning to be a FEW signs of hope though. Miners to metals ratios are improving, however it is mostly on the back of “less bad” performance and not outperformance in a higher trending market. But this less bad action could be signaling a low is near.  SILJ was down less than 2% on a day when Silver was down twice that. It put in a low nearly 3 weeks ago and is sitting 5% above that level currently. That’s definitely a good sign. However, many individual silver miners look significantly worse. AG is 10% below it’s March low and CDE is nearly 20% below while silver is 1% above its March low. This is not good price action for 2 stocks that led the charge higher earlier this year. EXK is at its March low and only HL is sitting higher.

In the Gold arena, we are still about 5% above March lows. (That’s that safe haven status for you showing through). That is actually exactly the same as the GDX currently, up 5% from the March low of 31.64. But a further drop in the metal though of 5% to retest that 1680 area and I’d be willing to bet the GDX drops 10% or more. The GDXJ is at March lows right now. Looking at the GDX/GLD ratio, we are getting some consolidation that is showing at least a slowdown in the underperformance of miners, which is a plus, but we can also see a massive underperformance in the Jrs to majors ratio which is not very encouraging. Individual gold miners are a very mixed bag, and hard to get any other clues from.  The major plus was that gold closed on trendline support and Fibonacci retracement near 1760 and silver also closed at an important Fibonacci level at 24.28. At the end of the week, that could spell a bounce next week, but I wouldn’t take that to the bank. We could easily hesitate for a day or 2 and continue to plunge.

At the end of the day, it comes down to trend, and the trend is clearly lower.  Where the low is, no one knows for sure, but I’d rather pay a little more to buy with some confirmation that things are acting stronger, than to try and “catch a falling knife” because things SEEM cheap. They may only seem cheap relative to what they once were. I watched a lot of people buy things they perceived as cheap in the bear market because they were comparing "cheap" to where they were in 2011, not where they were then or more importantly, where they were going. They can always get cheaper. (Like zero). Remember, a nice juicy chunk out of the middle is a great place to be.

I wanted to end on a more personal note. Around 2014 I started a Twitter account to watch real time news events and hear people’s ideas and thoughts from around the world.  I never posted or commented on anything until about a year and a half ago. I now have almost 6,000 followers.  It blows me away when I think about that. My website here has had 64,000 views, mostly all in that same year and a half.  I’ve given a few interviews now that collectively, have been viewed over 22,000 times.

Guys, I am absolutely FLOORED by this, and it means a lot to me that so many people find value in the things that I say. As I’ve said before, I’m not selling anything. No one has paid me a dime for any of this. I can speak my thoughts with no conflict of interest. I have tried throughout, not to tell people what they should do or buy or sell, but how to think. How to approach analyzing the market, how to manage and balance their portfolios and their risk. To look at themselves and their own risk profile honestly.  To understand that the risks with “all in” can be devastating and the reward may not be much better than a more conservative balance. How to deal with winners and losers mentally and financially. Not to focus so much on why the market is doing something, but instead the “what next?”  And of course, to “Watch the miners” and to “Listen to what the market is telling you.”

Maybe it’s because I’ve spent the majority of my 13-year career working for a non-profit fund that is dedicated to helping others, and not trying to be the most cutthroat trader on Wall Street, but I genuinely enjoy helping people. I’m glad that so many have found value in these things I’ve said, and hopefully can avoid some common pitfalls and mistakes myself and many others have made in the past. As they say, “You pay for your education on Wall Street.” The goal though, is to pay as little as possible. I hope I have helped with that.

So, for now remain calm and patient. We wait to see some confirmation of strength. We watch to see the if the miners are outperforming, preferably to the upside next. We'll look to the formula to try to see if silver begins outperforming gold, if miners begin outperforming metals, and if Jrs begin outperforming the majors. We’ll watch to see if sellers continue to sell strongly into any push higher, or if buyers are coming in on the dips. If we get an indication of that, don’t get married to the position. It shouldn’t be “till death do us part, through good times and bad.” No, through good times, and then “you’re out of here,” kick them to the curb and find something else when they stop performing for you. We could see a major bottom soon that we want to hold long term, or we could see a quick opportunity to make a good 30% that we will want to sell if recent bearish price action of heavy selling into rallies begins to continue shortly after.  I am not ruling out a very long, terrible correction here in a major, multiyear bull market, but for RIGHT NOW it looks bad, and it’s not worth trying to predict what tomorrow brings. If things turn for the better, great. Let’s take that big chunk out of the middle. It’s not about buying the low or selling the high. SPX at 1200 to 4400 did very well. So did Gold at 600 to 1800. Listen to what the market is telling you. Humble yourself, you’re operating in the most competitive industry in the world. You are NOT the smartest guy in the room. Don’t marry your thesis. Be adaptable. If you can’t bend, you WILL break. And as always,

“Watch the Miners.”

-Jonathan Mergott