Quick Update

I'm about to head out on vacation for the next week, hiking around the Blue Ridge Mountains, and will likely have spotty service so I wanted to post a quick update on gold before I leave.

 

Gold is up almost 100 from its low 1 week ago, managing to not have a daily close below 1800. We ran right up to resistance ~1870, that we failed at in Nov last year.  It is also the 23% Fib retracement from the 2018 low and is currently right where the 30 day EMA sits. Now it appears we are weakening a bit.

 

I am not enthused about this price action. Gold chugged higher after an extreme drop and being very oversold but only managed to claw back less than 100 of the 300 its lost in the last 3 months. I would have hoped to see closer to 1900-1920 before a pause and pullback. This weak price action I think is a warning here to proceed with caution. Very oversold conditions have pared off a bit, and while this might be slowly building a low, it equally could be getting ready for another drop.

 

Although the price action in Gold is not enthusing to me, I am even less enthused about silver and miners here. For 2 years, Silver consolidated above 22. There were only 2 times it traded below that level, Sept 2021 and Dec 2021 and in each instance, it bounced back above within 24 hours.  It’s now been 2 weeks that we’ve held below 22 and have now bounced back to test that level, and we are beginning to roll over. Support becomes resistance, resistance becomes support. This is not a good look for silver right now.

We can see something similar in SILJ as well. The area around 11-12 has held as support at the worst parts of the correction that began last June, and now we have broken below and held below for a substantial period of time. We have bounced to retest that previous support area and are failing here, which is also right near the 13 Day EMA, (substantially weaker than gold which was able to claw back to the 30 day). Additionally, we have 2 big gaps down from this plunge. The nearer of the 2 is at 11.50 to 12. The last few days we have topped out near 11.50, unable to fill the first gap. There is virtually nothing on this chart that is instilling me with the confidence to buy right now.

GDXJ is similar. Although it was able to bounce back within a few days of breaking the major support it held after last summers weakness, it too has 2 gaps to fill, the first at 40-41 and is stopping dead at that level, unable to find buyers over 40.

GDX looks the best simply because it did not even flirt with breaking support near 29-30. But on the flip side, the 1^st gap in GDX at 33.50 to 34 it still has not reached unlike GDXJ and SILJ which are at least ATTEMPTING to fill them. This price action in miners is almost identical to what we experienced last summer to winter, except then it took 4 months for GDX to drop 30% from its high of 40, and this time around we had a 30% loss in just 4 weeks. If I am being honest and objective about my analysis, and following the same rules and cues that made me cautious last summer, then there is little difference in price action today to make me wildly bullish right now.

I’m not here to tell you what to do, simply to point out what I see, how I interpret that, and what I myself am doing. So from that standpoint, I don’t think this is a good time to be trying to buy producers, and I will be holding off on doing that for the time being. There are a lot of Jrs that have gotten very cheap recently that are worth nibbling on here, but I am not trying to spend all my cash reserves just yet as I have a feeling all markets will continue to get worse and it may last for a good amount of time.

Markets are overleveraged. If SPX continues to grind lower, it WILL affect PMs and miners, as well as crypto, commodities, etc.  Best case scenario is a crash. In that event, we all know what to do, we have been conditioned by it from witnessing what has happened post 2001, 2008 and 2020. That being said, the fact that everyone is waiting for a crash to buy is a major reason I think we may not see one. Instead, we may actually see a bear market for the 1^st time in 40 years, and by that I mean, grinding lower while everyone tries to pick a bottom and is forced to bail as we break to new lows over the course of maybe a few years.

Everybody has an opinion on the economy here and looking at price action in markets, I think it supports mine, and that is this: The biggest factor contributing to the weakening economy right now is inflation. I know many have expected 1970s style inflation peaking into double digits, but the fact of the matter is that since 1977, cumulative inflation is ~370%. At the same time, adjusted for inflation, median income in America is down 5% and household debt is up 35%. The middle class simply have no room in their paychecks and no room on their credit cards to continue to pay higher prices for the same goods and services. The result is a decrease in spending and a contraction in the economy.

Everyone seems to think Powell is going to rush to print again as the economy contracts because that’s what the FED does, but when the economic contraction is caused by inflation which was a result of printing, more printing now will do more harm than good. He royally screwed up by not acting fast enough and now he must maintain his course continuing to tighten while the economy takes a nosedive. The problem is we now have a similar situation to 1980. When inflation peaked at near 20%, the Fed had to hike aggressively to 20% to fight it. But it didn’t just go away because of that. 2 years later, inflation was still 6% and the Fed funds rate was 9% all while GDP was -1.8%. I think it is likely we can still see presistant inflation, a weak economy, and higher interest rates then we have been use to over the last 15 years for some time. After a decade of inflation in the 1970s that hurt the middle class and benefited the rich, we had a decade of high interest rates in the 1980s that hurt the middle class and benefited the rich. The result of which is the massive wealth gap we see today. And now we’re doing the same thing again.

I fear the policies we enacted after covid were America’s nail in the coffin. The economy will never recover fully, debt is too high, and we are now destined for a stagnant economy with little to no growth and at the very least, low but persistent inflation that we will never recover from. Essentially, we are embarking on the path Japan has been on for decades now.

But I digress. Let me wrap this up with something positive. Sentiment in Metals has taken a major turn from overly bullish, to very bearish over the last 2 months, and that is very positive from a contrarian standpoint. Additionally, COT reports on Silver and Gold have seen large specs rush to sell their longs which is something we typically see at major bottoms. The issue here with these 2 things is that sentiment and COT positions are relative to whether we are in a bull market or a bear market. I shared the chart below on twitter before, showing Gold DSI and how it differed in it’s peaks and lows when gold was trending higher and when gold was trending lower. Bearish sentiment is not always a buy. You can see that DSI levels went to near 0 bulls many times, had small bounces then right on to new lows when gold was in a bear market. Below that chart is the Gold miners bullish precent index which shows the same thing. Currently now it is ~20, which has basically marked all major lows since the bull market began in 2018. IF we are in a continued bull market, it is likely this is also a major low.

However, if we are transitioning into a bear market, it’s likely we can continue to see sentiment drop with price for long periods of time. Long term, I am a gold bug at heart and therefore bullish, but short term, price action is not encouraging. I THINK this is likely pressure being put on gold that is related to all markets which are experiencing selling across the board, due to an oncoming recession. But I would be remiss if I didn’t take into consideration the similarities in the economy right now to what we saw occur in 1980 when inflation peaked and the long and difficult battle the Fed had hiking rates to fight inflation while the economy contracted. In THAT situation, gold had already peaked and was grinding lower and would continue to for a significant period of time. (20 years actually, which I do not think will be the case this time around, but we could see a stagnant period like from late 2016-2019.  After the massive rally in gold and miners early 2016, we corrected from those highs significantly and just grinded sideways for over 2 yrs, dropping 1 more time in 2018 before we began moving higher. This also occurred during a Fed tightening cycle.)

To sum up, I’m looking here to add small amounts to cheap Jrs with good assets and good management who will be able to expand those assets and shareholder value, regardless of the direction of the metals. Producers I will not be buying till they can “show me” something good here. I’m in no rush to spend all my cash as I expect either a crash to buy heavily into, or continued grinding lower for some time where I can keep picking up small amounts over the coming months. There are some positives with metals here, mainly in sentiment after a brutal drop, but I will repeat something I said when this happened in June. Violent moves down like this are rarely isolated incidents that just reverse back and break to new highs shortly later. If the lows here do hold, we likely have a few months of back and forth range bound action till we’ve shed off every hopeful long that we can, and then we can resume moving higher.

There is a lot up in the air right now in markets and the economy. No matter what your view on a market is, it’s a good time to be skeptical about everything and consider opposing points of view. Times like these, uber bulls or bears can get wiped out, Cash is a good thing to have so don’t be too quick to dispose of all of it.

 

-Jonathan Mergott