Taper Tantrum 2.0: Rate Hike Hysteria

It was my suspicion since June, when I outlined some frightening similarities in gold to that of 2013-2015, that we were setting ourselves up for a similar fate.

The basic pattern of this was, down for all of 2013 the moment gold got a whiff of the Fed's intentions to begin tapering their QE program. (The "taper tantrum"). When the taper was announced in Dec 2013, we bottomed and rallied strongly for the next few months. (Buy the rumor, sell the news. Once the rumor set in of a taper, gold moved down strongly. When the news became fact, the fear had run its course and we rallied). We then resumed moving lower around March 2013, all the way to the final low in Dec 2015, which was when the Fed announced they were raising interest rates by 1/4 of 1%. Gold then rallied about 30% from 1050 to 1350, and the GDX rallied about 170% from a low of 12 to a high of about 32 in just 9 months.

As they say, "history doesn't repeat but it does rhyme" and indeed it did this time around. The moment the Fed hinted at a taper in June 2021, down went gold. Miners and silver began drastically underperforming, (a big warning sign I look for). Rallies were anemic at best and often non-existent. The opportunity to "sell on the bounce" almost never presented itself. That was the case for the next 4 months. The fed announced it would begin tapering 15b in purchases a month on Nov 4th and we bottomed 1 month before hand, presumably knowing that the taper was set in stone by that point.

GDX then rallied 20% over the next 6 weeks.  GDXJ and SILJ both gained about 30% in the same time. (Interestingly, the rally on this taper announcement lasted 6 weeks, exactly half the time as the 2013 taper announcement rally. 20% gain on GDX and 30% gain on GDXJ was also exactly half of the gains in 2013, 40% on GDX and 60% on GDXJ)

But one thing that was VERY different this time around, is how much we went down.

In 2013, Gold had tested support at 1550 3 times then broke down strongly to a low of 1180 by Dec. It was a loss of about 20%. Miners got slaughtered. GDX dropped from 40 at the beginning of the year, to 20 by the end of it. A 50% loss. GDXJ was worse, from 72 to 28, a 62% loss.

Things weren't NEARLY that bad this time around, but it was still an ugly 4 months for those who did not heed the warnings of the past. Gold tested strong support at 1680 3 times and HELD. GDX went from a high in May of 40, to a low of about 29, a 25% loss.  GDXJ fell from 56 to 38, a 31% loss. Both were almost exactly half of what we lost leading up to the taper announcement in 2013. Both of those are significant differences in the gold market this time around.

That brings us to today. Gold rallied from 1770 to 1870 over 2 weeks from Nov 3 to Nov 18th, then lost it all in 3 days. Needless to say, this is not what "dips" in a bull market look like.  In fact, what it looks strikingly like, is exactly what happened leading from the March low to the May high, and the drop in June after the FOMC.

After the consolidations on this chart (In the boxes) gold ripped higher quickly, topped out then lost all of the gains, going right back to the consolidation area before hand in both June, and now.

 

I hate to be the bearer of bad news friends, but it looks like this run is over.

It's no fun being the lone gold bug who is bearish, (the permabulls are relentless) but after last time around, I've gotten use to standing alone on my position. There seems to be a direct correlation between lonely opinions and accuracy of market calls. (Who would have thought?) I THOUGHT we had a little more room to run, and I thought if that wasn't the case, we'd have a little more time for planning and analysis on the market action if we began acting weak, but we didn't get that. We got an all-out plunge instead. (Again.)

I didn't exit some positions in time and remaining gains were evaporated. It's fine, profits were booked along the way and there is no use crying over spilled milk anyway, its in the past. So, what now?

Rate hike hysteria.

With taper out of the way and the fed clearly embarking on a tightening cycle, we know what comes next. Employment has improved, inflation is high and there is no way around raising interest rates now. 

Spare me all the explanations on why they are trapped and can't do it. People said the same about taper in 2013 and were wrong. Then they said, "Well, taper is a mistake and they'll be back tracking in 6 months."  They were wrong about that too.  They said the same about rate hikes in 2015 and were wrong. Then they repeated it was a policy mistake and they'd have to frantically cut again 6 months later and they were wrong yet again.  They said all the same arguments again 8 years later about taper 2021, and surprise, surprise, you guessed it, they were wrong.

Once again, the same people or a new crop of them are reiterating the same arguments they and others were wrong about in 2013-2015. The fed will end Taper and increase QE. They're trapped and can't raise rates.  If  they raise rates, they'll will have to drop them again soon. Etc, etc. They were wrong then; they'll be wrong now.

They WILL raise rates, it’s just a matter of when. As of right now, the market is expecting June-Sept 2022 and I think that's about right. (Although I think it will be sooner rather than later). Until that point comes, Gold looks to be headed lower. (If history repeats like it did on this taper announcement, we will also likely bottom slightly ahead of a rate hike announcement).

I don't know how low, but I do know moves in gold almost always overshoot in both directions, so prepare to be terrified when it happens.  If I'm guessing, 1500 sounds like a reasonable expectation if gold breaks support at 1680 (which I think it will). Being that 1500 sounds "reasonable", I'm preparing for "unreasonable" and that could be 1400, which would retest the former resistance ceiling in gold during the entire bear market.

That’s down roughly 20% from here on Gold. You better believe that if the metal goes down 20%, miners will get murdered. I think GDX could drop 30% and maybe more over the next 6 months if 1680 gives way.

 

It’s important to understand a few things. First, my goals may not necessarily align with yours, and that can be the case with a lot of people whose work you may read or listen to interviews from, so keep that in mind.

 

My goal is to build JR gold and silver positions when they are cheap. These are long term investments that I do not believe are dependent on gold going to 3,000/oz to be profitable. They’re undervalued and have good assets. Additionally, majors will have no choice but to buy them as reserves continue to deplete. When the market makes a turn downward, like I believe it is doing now, I am hedging those positions by buying puts on ETFs and producers. We could go down 5% over 2 weeks, or 30% over 6 months, there is no way to know how long or how far, so I react on sell signals by protecting myself. When I believe we are turning higher, I take profits from my hedging positions and buy more Jrs, usually now at a good discount. I then add positions to leverage to the upside in the leading producers. Again, it could be a few weeks or much longer and higher so I react accordingly and ride till upwards momentum begins to stop. You never know how far or how long a move will last, but it’s impossible to profit from it if you’re not in it.

Lather, rinse, repeat.

If what you want to do with your investments is buy, hold and not look at them again for 5-10 years, most of this is probably irrelevant to you, and that’s fine everyone has different goals and styles that suit them.  But I would still believe it is missing opportunities to protect yourself from losses in the meantime.

For example, buying and holding 1000 shares of GDX from 2011 at 60 until after Aug 2016, when GDX rallied 170% from the 2015 low at 12, would still put you at down 50% over that period of time.  Even exiting the market at 40 in 2013 when GDX began breaking lower and underperforming metals would have allowed you many opportunities to buy back twice as many shares at half the price or less in the coming years. By Aug 2016, after that 170% rally from 12 to 32, you would actually be up about 7% instead of sitting on a 50% loss over the course of 5 years.

Miners lead the metals, and the bull market formula is: JR silver>Major silver ≥ Jr Gold> Major Gold ≥ Silver>Gold.

This is what I’m looking to see if price trend is to flip bullish or bearish. Miners have held up ok on this dive, but silver is really letting go.  It looks like the formula is about to flip backwards again and I expect miners to have lack luster rallies to sell into (again) over the next coming weeks. We look very much like we are repeating what happened in June.

Going to wrap this up with a couple of basic charts.

Weekly gold gave a buy signal when the moving averages crossed late 2018. That buy signal held through every correction until Feb 2021. In May it crossed higher again but was slammed down quickly, making it look like a fake out. On this last rally, moving averages “met” and LOOKED like they may cross higher again but suffered the same fake out fate as we’ve now slammed down again. RSI has been holding at 40, but being pushed back at 60, indicating no clear direction or control in the market as of yet. MACD crossed below the 0 line and has tried twice to push back above it again and failed as well.

 

Now here is that same basic Moving average crossover signal from 2009 until 2013.  It’s virtually identical. Buy signal in early 2009 remained through all corrections until crossing lower in May 2012.  In Aug 2012, we got another “buy signal as gold tested 1800 for the last time, but it was again, a “fake out” and reversed lower again early 2013.  RSI also held 40 throughout that consolidation and was pushed back around 60 as well. (It did move slightly higher, to ~66 on the last tap of 1800 though) MACD had crossed below the 0 line the same time as the moving average sell signal, rallied back above, then reversed lower after about 3 months.

 

The next test of 1550, the floor gave out, and I expect a similar, although less drastic move if we break 1680.

Here is the same Moving average signal on GDX. It crossed lower 5 months before gold, then broke its floor at 50, down 20% to 40, which it also “led” gold on by about 9 months. We got the same fake out rally that quickly lost it again and it fell HARD, but the miners led and warned of this first. Additionally, RSI broke below 40 in mid-2012, 6 months before gold broke down. The last rally pushed it just above 60, then it tanked to incredible oversold levels as miners dropped over 50% in less than 1 year.

 

Now here is the GDX today. Moving Averages gave a buy signal late 2018.  They briefly crossed in the 2020 crash but corrected quickly. They crossed lower in Jan 2021, about 1 month ahead of gold. We got the same fake out cross higher in May, then they crossed lower again by July-Aug. Unlike gold, they have stayed lower on this rally, not even rising up to meet each other. Also, unlike gold, the GDX broke to a new low below its march low, while Gold has Continued to hold its low at 1680. This is exactly what it did in 2013 as well. Also similar to what happened 2012-2013, RSI on the GDX broke below 40, twice actually, in March and again in Aug-Sept. The May rally saw RSI top out at 60, but this last rally only made it to 56.

 

It seems to me, after this rally since early Oct got pushed back strongly, that the warnings in miners and metals that were there 2012-2013 are repeating again now in a strikingly similar fashion.

I think this is worth paying attention to. As always, this is not investment advice and all risks on positions you take are your own. Do your own research.

But while you’re doing it, it’s worth looking at some of these clues from the past.

-Jonathan Mergott