Is the Bottom in for Gold?

The last couple of weeks in Gold and Silver saw some pretty good gains. What was even better, were the gold and silver miners, and better still, the Jr miners. Anyone who's been following me for even a short period of time probably knows some of the things I like to repeat over and over, but for those that don't, I'll do it again. The first is my gold bull market formula:

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

And the second:

Watch the miners.

More often than not, moves in the miners give clues to what's coming next for the entire sector. We were able to identify underlying strength in gold and silver early in October, and relative outperformance in GDX was a major clue a bottom was in.

There was a similar situation almost one year ago. On Nov 30th 2020, looking at a few factors including relative performance of GDX to gold, I called for a low when gold was at 1760 and the GDX was at 34.  It was the low to the day in gold, and the GDX low was 33.22 only 3 days earlier.

Then again March 2nd. The outperformance of GDX to gold was a major clue there. The next day was the low in the GDX, by 8c lower than the previous day. Gold dropped another 1.7% over the next few days to 1680, then double bottomed at the end of March, but GDX made a higher low and rallied 33% over the next 3 months from my bottom call.

And it works the other way too. In June, when metals and miners plunged after the FOMC announcement, I had written an article outlining some parallels to Gold and the GDX today versus in 2013, giving some warning that things may play out the same. A week or 2 later I did an interview expanding on this with Palisades Gold Radio, in which this chart was a big point on my warning. 

Miners were significantly underperforming the metals, just as they did in the 2012-2013 consolidation which was a major reason for my caution. Adding in the Fed making comments of tapering QE, the similarities to 2013 "taper tantrum" were too much to ignore.

Many argued with me that my miners leading metals theory was wrong, because they were able to find 4 examples in 15 years where it wasn’t a perfect correlation. They were screaming to keep buying, as permabulls always do. Most of those people will never say sell, or take profits or even advise slight caution, because they have an interest in promoting PMs, (like a paid newsletter they will sell you for $100 a month.) I have an interest in profit and not losing my hard-earned capital. Period.

I have been pretty successful my career in the markets. Most of that success has not been due to accurately predicting what the market will do next, but quickly reacting and adapting to what price action shows me.  I’m a HUGE gold bug. I believe this system, these monetary experiments we are embarking on, are all destined for epic failure, EVENTUALLY.  But the moment price action disputes my fundamental thesis, I must stop and see why. The example in June was the taper fears prevailing over the bull narrative.

From June to a few weeks ago, miners continued underperforming, and the "bull market formula" JR Silver>Major Silver ≥JR Gold>Major Gold ≥Silver>Gold, was exactly backwards. Gold outperformed silver, silver outperformed major gold miners, major gold miners outperformed jr gold and major silver miners, and Jr silver miners got slaughtered, many 50% from their highs a few months ago.

Beginning of Oct things turned for the first time since June.  It is finally looking like a medium-term low may be here in the PM sector.

Note, I'm not saying it's THE low. History is rhyming a lot right now. In 2013, gold and miners tanked on fears of the Fed tapering. We broke the consolidation low at 1550 and moved down to 1175 by Dec, when the Fed announced they would begin tapering their asset purchases. Once the “fear” of the “rumor” became fact, gold ran up 17% over the next 3 months.  The GDX gained 40% in the same time. (And by the way, Gold didn’t bottom in 2013 until the last week in December. The GDX however bottomed the week before).

After a 3 month rally that sent the GDX to 28 from 20, (60% below the 2011 high) It then lost almost another 60% over the next 21 months to 12.50 in Dec 2015. The final bottom came when the Fed finally raised interest rates. But there was some good money to be made in the 2013 low as well, for those who were nimble enough to identify and catch it. (Watching the miners outperformance helped with that. The GDX/GLD ratio stopped declining in early Dec 2013, and was rallying decently by the time gold had bottomed)

GLD (White line) Didn't hit a low until the end of Dec 2013, while the GDX/GLD ratio bottomed early Dec and was breaking higher by Jan while gold still solidified its low.

Now that in 2 weeks time, the market seems confident the Fed will announce a taper to its asset purchase program, the “fear” seems out for gold now that the “rumor” is fact, and we look in a solid position for a good rally, similar to Dec 2013. But the risk of a future breakdown, that this is simply a rally within a larger bear market for gold still exists and should not be dismissed. With history playing out so similarly, I would expect a final low to occur when the Fed raises rates, which as of now, the market expects around Sept 2022.

A lot of things have occurred in the last couple of weeks that we haven’t seen in months, the first being a resumption of the Bull market formula, and the second being miners outperforming metals significantly. GDX not only broke above the downtrend line its held below since the May highs, but we also saw key moving averages begin to turn higher and crossover, which we haven’t seen since late March.  Additionally, since June, RSI has been capped on rallies at 60, and MACD was never able to push above the 0 line, both typical in bear markets and prolonged down trends. RSI now recently broke higher, hitting 70 and MACD is comfortably above the 0 line.

On a pullback here, I want to see RSI hold above 40 while MACD does not cross far back below 0. Below is an example I’ve used in a previous post showing this regarding RSI. Ford stock from 2014 to 2020. While trending lower for 6 years, RSI almost never made it above 60, and when it did, it was quickly pushed back.

 

Inversely, here is Macys. For a 6 yr rally, RSI held 40 on every dip. This is what we want to see with gold and miners. In 2009, before Macy’s hit a higher high and began its official “uptrend”, we saw dips in RSI hold 40, and moving averages cross higher. We already have 1 of those 2 in GDX.

Silver has followed suit as well. RSI rarely got above 50 the last 4 months, indicating even more weakness in silver than GDX or gold. That should be the case in a bear market downtrend, as we would expect GOLD to be the best performing asset and it was. We have now broken the downtrend, seen RSI push above 60, had MACD move above the 0 line, and have the same key moving averages turning higher and crossing over. We should see a pullback hold around the 23 level (or a bit lower) as well as RSI hold 40 before price eventually pushes to a higher high.  That would give pretty good evidence that our thesis that this is a tradeable low for the next few months is true. (Similar to the Macy’s chart in 2009).

The holdout here is Gold. We have not broken the downtrend line yet, we have not seen RSI push above 60, in fact it stopped right at it when it hit 1800 and fell lower. MACD is still below the 0 line and while the Moving averages are beginning to cross over, they have not done so decisively. If I was looking at this as a lone asset, it would give me pause on my theory that we have made a low here.  But I am not, I am putting a higher weight in miners, Jr miners and silver, all of which are performing well and doing what they should. However, in the PM world, gold is still captain of the ship, and these points should not be ignored.

On that note, there is absolutely the chance this is wrong. We are not making a low, this is simply an oversold bounce after 4 months of weakness. Gold will not break higher and miners and silver will turn lower and make new lows. If that is the case, I will be ready to exit newly entered positions I am buying to leverage to the upside here in the event the key conditions I am looking for are violated. If we are right, I am not trying to make any predictions on how high “up” is, I will simply hold my longs for as long as the trend keeps going, as long as RSI holds 40 on dips, as long as moving averages continue higher without a cross lower, etc.

There is also the chance that the theory of this being a good rally in an overall bear market is also wrong. Perhaps the Fed reverses its actions, perhaps gold keeps rallying to new highs. Again, as long as conditions remain good for the long side trade, (bull formula, miners outperforming, RSI>40 moving averages continuing higher etc) we will hold and ride that train until it decides to stop. The next major pullback, which may be starting now, should give us a better indication. We are looking for higher lows to hold and buyers to come in strongly.

I wanted to make a note about the bitcoin “flash crash” that’s been in the news today. People got stopped out of their positions on a certain exchange when bitcoin flash crashed to 8,000 from 65,000.  That is a devastating loss on your investment.  I have never used a stop loss in my life, either static or trailing. This is exactly the reason why. Stop losses are mostly for trading positions, you should never use them on investment positions. In the 2010 flash crash, many had stops on one of the most widely held stocks in the world, Apple, that got triggered due to a “fat finger”.  In the morning, they saw their Apple stock down. By the afternoon, it was significantly higher, but they didn’t own it anymore.

Even for trading I find them unnecessary. If I am entering a position for a shorter-term duration, I make sure I am there to monitor it and exit if I need to. If I can’t do that, I don’t enter the trade. In June I went to Lake George, NY and knew I’d be driving for a while through the FOMC statement, and have bad Wifi and phone signal while I was there, so I exited positions ahead of time. In this volatile, algo driven market, I am not leaving my exits in the hands of a binary computer command. As I've mentioned before, price is important, but so is time. A 30% loss doesn't mean much if it bounces back in 2 days. Any loss, no matter how big, is completely meaningless over a few seconds or minutes. It's a terrible thing to not take both time and price into consideration and lose a position at a significant loss over a minor, short term blip.

The market today is very volatile and PM and crypto is the most volatile of the bunch. Keeping stop losses on investment positions is a sure-fire way to lose your position in a volatile move.  If you’re worried about losses, take profits when you have them and don’t risk more than you can afford to lose.

I mentioned on twitter a thread or article on bitcoin miners soon, and I hope to get to that within a couple of weeks, but also want to make a point about this in regard to the flash crash.  Many of these exchanges are completely unregulated and they’ve blown up before, or taken off with people’s money and bitcoin (anyone remember Mt Gox?) Part of the reason I am looking at bitcoin mining companies (Besides the leverage to bitcoin prices) is because they trade on NYSE, NASDAQ and OTC markets, markets I am both familiar with and that are regulated by the SEC. 

That is all for now. Patience, as always, while we wait to see how things hold up. It's been a good week for metals and miners. I have a very unscientific theory that states, when something is strong Mon- Thurs, traders will sell Fri to exit positions ahead of the weekend (and reverse can be true as well) so with any luck, we get a decent pullback to end the week. I will make notes on twitter of any buying (or selling, if things turn ugly.) 

*This is for educational purposes only of course, this is not investment advice. As always, do your own research and assume your own risks.

Keep watching the miners.

-Jonathan Mergott