Be Realistic

We’ve had a hell of a rally in Gold, Silver and miners, so I wanted to post an update without having to be constrained to Twitter’s character limits.

 

Let’s start with the Dollar, as that is what everyone has had their eyes on and has no doubt, been dictating all moves in the markets for some time now. After the Fed announcement where they raised rates 75bps (as expected), DXY attempted to rally back to highs near 114, but fell short. As I pointed out on twitter and in my previous article on Nov 6, the canary in the coal mine here for DXY was the failure at RSI 60 as price peaked at a lower high. Sure enough, within a few days we had a bearish cross over on the moving averages and the trendline break was soon to follow. DXY attempted to regain the trendline on Wed the 9^th, and to hold the RSI 40 level that it has been above since June 2021, but it closed below the trendline and then began cascading down, while also losing that 40 RSI level.

 

Weaker than expected CPI print didn’t help and today we got it again with a weaker than expected PPI print. Rather than a waterfall though, today DXY is fighting to hold at the 38% Fib retracement from the May 2021 lows to the Sept 2022 highs. We are now short term oversold with a deviation from the moving averages that is rarely seen, and when it IS seen, it typically means a rally back to meet them is coming soon.  Now it should be noted, that “meeting” the moving averages, which currently sit between about 109.25 and 110.25 can come in different forms. We could have a sharp rally in the next few days up about 3 points that tests those moving averages, OR we could simply consolidate for a bit and wait for them to catch up. But any way you cut it, the decline here looks like it’s, at the very least, ready to pause.

Looking over at the Euro for a mirror image of DXY confirms the same things. After a break of major support at around 105, an area that was a bottom from 2015-2017 and was tested 3 times and held, Euro broke below it falling to 96 in Sept. Today, we are retesting that major support level (now resistance level) at 105, which coincidentally, is also where the 200-day moving average sits. We are now starting to get some push back on that rally here, after a MASSIVE move higher. We have a deviation in the short-term moving averages in the Euro which typically indicates a pause, as well as a deviation in price from those moving averages that confirms this. Additionally, we have the highest RSI print on the daily chart in almost 2 years and the highest print on MACD in 2.5 years. We also have a massive divergence in MACD between its signal line and moving average, which again, has typically indicated a pause in the past.

Jumping to the weekly chart on Euro we see another concern here in the short term. RSI is nearing that all important level of 60, a level it typically peaks at during rallies in bear markets. Add that to the major resistance we’re at and faltering on a news event at the 200-day moving average and we are starting to paint a picture that is indicating a pause here. Again, a “pause” could mean a sharp pullback then back and forth consolidation for an extended period (like it did from 2015-2017), a tight consolidation while extended indicators “catch” up and overbought levels back down (like it did as it rallied all during 2020 after a big move higher from COVID lows), OR it could mean a bear market rally high, with eventual new lows to follow.

As everyone has already mentioned, this drop in DXY has been one for the history books but HASN’T been unique. We saw a similar drop after a similar rally from 2014-2015. A sharp move down after a lower high in April 2015 saw the downside catch right at the red moving average which, like today, also sat near the 38% Fib retrace from the low of its nearly 1 year move higher. What came next was a sharp rally higher that failed at a lower high with RSI topping at the 60 level on the weekly chart. It then consolidated for 6 months, eventually retesting highs before falling back to the consolidation lows again. It was not the high of a bull market, we broke to new highs a year and a half later. It was not the beginning of a bear market either, those lows near 93 held for over 2 years. That 7-point initial loss from highs at 100, when it finally did break down, did so after hitting new highs and only broke down an additional 5 points. The sudden drop from highs that came in just 4 weeks was the majority of the move lower for the next couple of years.

I mention this because it is remarkably similar from a technical standpoint to where we are today. I wouldn’t be surprised to see dollar bulls and dollar bears BOTH disappointed by the next few months of action in DXY. If history rhymed here, we could see a sharp rally up to around the 109-110 area on DXY (which would likely coincide with ~1-1.01 on the Euro) before trending sideways for a frustratingly long time.

 

It’s worth noting the correlation with Gold and DXY during this time as well. It may SEEM like the 2014-2015 period was not heavily correlated to gold vs today but there were a few interesting points that I think are similar. We can plot the big notable moves in gold over the last 2 years on the DXY chart and it makes perfect sense. I did so on the chart below. Low in DXY Aug 2020 coincided with highs in gold and silver. Lower low in DXY Jan 2021 saw a retest of silver at the $30 highs, but only $1960 on gold, then a fast reversal in both from those levels. (In hindsight, that was one of the first warning signs, failure to make a higher high with a lower low in DXY).

After a retest of Jan lows in June 2021, DXY exploded higher after the June FOMC meeting where the Fed first began planting the seed of “taper” in the markets mind, and ultimately the first steps in this tightening cycle. Proportionately, the move down in gold and miners after this was excessive vs DXY’s gains and another warning sign for precious metal bulls. (That was the warning sign I took that made me bearish on gold, citing similarities here with 2013 and advising caution.) A few months later, DXY began moving to new highs and gold, silver and miners began dropping to new lows. Now, as DXY looks to have peaked with a big move down, we are seeing a HUGE rally in metals and miners (and everything, really).

 

In the 2014-2015 rally, DXY peaked at 100 in March 2015. At the same time Gold was 1140. DXY dropped sharply and gold took that cue to rally over $150 to 1300 in just 3 weeks. 9 months later, DXY is retesting highs at 100 and gold is falling to new lows by another $100/oz. That was the bear market low for gold. Despite the fact that DXY made a higher high 1 year later, gold rallied strongly for the first 9 months of 2016 as DXY was weak and did not break to new lows while the dollar hit higher highs. In fact, comparably, it gave back very little in relation to new highs in DXY. The next 2 years is what is interesting. DXY hit lower lows in early 2018 but gold did not hit higher highs. As DXY rallied back to near the highs at 100 from 2015, gold rallied too, seemingly uncaring about what the dollar was doing at that point. As DXY retested 100, the 2015 high in mid-2020, Gold tested 1750, a 35% gain from the 1300 level where it was in 2015 when DXY hit 100 the first time.

 

Now that we’re on the subject of Gold, lets take a look and then circle back to the dollar and what this could mean for gold going forward if history does indeed rhyme with that 2014-2015 period.

 

We have a lot of similarities with Gold as we do with the Euro. We rallied $170, or about 10% since the lows 2 days after the Nov FOMC. That gain came in just 9 trading days. Currently, we are testing just below the important 1800 level, which also near where the 200-day moving avg sits at about 1765, and today, we’re starting to see gold struggle. This area between 1760-1800 is a big floor that held gold prices for most of 2020-2022 with a couple exceptions, until we broke down to new lows this year. That “floor” of support is now a “ceiling” of resistance and bears seem to be pushing back, with bulls getting exhausted in the short-term here. Much like the Euro, (and inverse to the DXY), we are seeing a very large divergence in price from the short-term moving averages, and a large divergence between the moving averages themselves. Again, same as the Euro, this typically, at the very LEAST, indicates a pause is coming while either price declines to “meet” them or the moving averages increase to meet price while it consolidates. We also have the highest RSI and MACD levels in 9 months, with another big divergence in MACD signal line vs it’s moving average.

Silver is similar, with the exception being it has exceeded it’s 200 day moving average. It’s testing its former “floor” of 22 and seeing a big pushback today after initially rallying on a weaker than expected PPI number. Again, RSI is at the highest level in 9 months, as is MACD. MACD however, has seen this level only twice before in the last 2 years. Both instances saw a sharp drop follow. (It’s also worth noting, after outperforming gold most days since it began rallying, we are seeing a SIGNIFICANT underperformance in silver today, down over 2% while gold is essentially flat. 

On the note of miners, you may begin seeing a theme here. GDX is testing near the 29 level “floor” it held all of last year. Again, testing the 200-day moving average and struggling. Again, seeing a huge divergence in price from short-term moving averages, and a huge divergence between those moving averages themselves. RSI turning down after highest level in 9 months, MACD at areas it has failed at before and has only exceeded once in 2 years. Additionally, we have a big gap at 27 that is begging to be filled, and strong support (former resistance) near the 26-25 level that I think needs to be tested. I could say the same points for GDXJ but will instead just post the chart. Everything is the same for both. Same warnings we are seeing in the Euro as well and the inverse signs we’re seeing in DXY.

Now here is my major concern, and here’s where we take it back to the DXY rally from 2014-2015.

 

I know the perma-bulls have been calling for “The FINAL low in gold” for 2 years now and been completely wrong so far, all seem to think this is finally it. This may come as a surprise to some of you (sarcasm), but I disagree and think they are probably wrong yet again.

 

I think what we are seeing here in DXY is going to rhyme a lot with the 2014-2015 rally, and what happened after as it began to break the uptrend (by that I mean a consolidation, no new highs for the bulls, no bear market decline to appease the bears. Just boring back and forth). Equally, I think gold could act similarly to what it did then as well.

 

As I mentioned that breakdown in DXY in April 2015 sparked a big, straight up rally in gold. After consolidating at around 1140 for a few months, we rocketed up 150 to 1300 as DXY broke down. Majority of that move came in 12 days (We’re up 170 and it’s been 9 days so far this time). We saw a massive divergence between the 2 short-term moving averages, a huge divergence in price and those moving averages and the highest RSI and MACD levels in 6 months. A lot of this move higher in gold is identical to the rally in early 2015. Additionally, the catalyst for the move higher (a break down after a long and strong uptrend in DXY) is identical to back then.

Now again, if history were to rhyme, what this may mean is we are not done declining in gold, but we may be very close in both price and time. In terms of time, the final low in gold came 1 year later after the DXY broke its uptrend. In terms of price, it was about 10% lower than its previous low before the rally to 1300 started at 1140. So that COULD indicate a final low in gold coming Fall-Winter 2023, with price bottoming near 1450 (10% below previous low at 1620).

 

Some of you might remember that 1400ish was a target of mine for a final low for quite a while. I elaborated on many reasons why in my article “Cost” from July 2022.  For the “too long, didn’t read” crowd, the answer is the name of the article. I am looking for price and cost to meet at an area that makes profit margins razor thin for producers, which historically, (like in the 2015 low), was an incredible time to buy miners with multi bagger returns in the years that followed. I HAD been expecting, as gold is a volatile market, for price to decrease at a speed that was faster than the increase in the cost of major producers, but that hasn’t been the case so far. (It’s not easy to hit 2 moving targets with one bullet). But the idea of it is sound, and playing out pretty accurately (so far). ABX and NEM both just reported AISC at about 1275/oz last quarter, and with inflation still higher than 0, it continues to increase. A decline in price within around a 12 month period into the 1400 range, should certainly see costs within the 1300 range, even if they increase from here at a “slower rate” than they have been.

 

Interestingly, this long-term chart on gold could support that view, as 1400 was major resistance all throughout the bear market from 2013-2018, and 1440 was the 2020 Covid crash low. This area around 1450 is also a confluence of Fib levels. But perhaps most important is a major uptrend line that began at the 2006 lows, connecting the 2008 crash lows, 2015 bear market bottom and the 2018 low. If we were to extend this out about 1 year from now, it intersects that area right around 1450 in late 2023.

Obviously, it is a much better investment to buy producers when profit margins are 100/oz on their way to 500/oz, then to buy them when profit margins 500/oz HOPING that a moonshot up thousands of dollars in the gold price will give you profit margins of 1500/oz (and the triple on your investment that SHOULD logically follow that). Unfortunately, that’s not what most people do, as we can see few were buying miners into 2015 as profit margins dropped to about 50/oz, but plenty were talking about “to the moon” in Aug 2020 after gold had already rallied 50% in the last 6 months and profit margins for major miners we at nearly 1000/oz.

 

Now down to brass tacks. As always, this is NOT financial advice, always do your own research and all decisions you make on investments are your own, I can simply tell you what I am doing and what I WOULD do in certain situations.

 

If you were like me, and buying when I outlined that “the boxes are being checked for a rally” on Oct 25^th, this is a good place to take profits, which is being confirmed by my model as a “logical profit taking opportunity” and that’s exactly what I am doing this morning.  Jan calls on SLV, GDX and GDXJ (All in or near the money at the time of purchase) have doubled since I said this on Oct 25^th, and all 3 have more than tripled since the Friday Nov 4^th lows after FOMC.  To me, it seems obvious and logical to take this opportunity to cash out on a little more than half of these calls. This takes my initial cost off the table and a little bit of profit. The remaining calls are all on “the houses money.” If we continue higher, I profit more. If we take a sharp, quick decline, it is all still profit, just less of it then before. I can then decide if the pullback is acting in a way that warrants adding back more of these calls or taking the remaining profit off the table, but from here on out, it’s a ZERO risk position.  (I should mention, as I talked about very similar setups that were screaming for a pause in gold and miners that are identical in the Euro right now, that I am also shorting the Euro here).

 

Note, I’m NOT selling long term investment positions. What I’m selling is from the cash portion of my gold portfolio that I have been using for hedging for the last year and a half while we declined and adding to those long-term positions with the profits from those hedges. Then, using that cash position as leverage when we identify incoming rallies by buying calls on the ETFs. This method has SIGNIFICANTLY mitigated my downside risk on my portfolio during the declines and given me the liquidity to add to my positions at great opportunities, as well as emphasizing the upside when we are gearing up for a rally and continued to build yet a bigger cash position for those opportunities and for future hedges if and when we begin acting weak again. I am not suggesting selling long term investments, especially if you believe in them.

 

Whether we pullback in a way that looks like we want to buy again, or whether this rally is done for now will entirely depend on what I said in that Oct 25^th tweet, “the reaction after a big move.” We just had a HUGE move. Up 20% on GDX since that call. If this rally has another leg to run higher left in it, then I want to see buyers coming in on pullbacks. They can be sharp and decline quite a lot, but I want to see those moves get supported if they occur. This would mean I want to see gold hold 1700 min, Silver ~20/oz, GDX 25-26 and GDXJ 30-31. We will likely see some gyrations beyond those levels on a few of them if we pullback strongly from here, but we will have to analyze that as it comes and make the decision then as to whether this still looks good or not. I will certainly update as to what I am doing when that determination is made.

 

In conclusion, be realistic. I know the “to the moon” crowd is out again, proudly exclaiming their victory in calling this low (that makes their records 1 in 423 by my count) and predicting 3,000+ for gold in the coming months. It is certainly possible, I’m not gonna say it WON’T happen, but I am also not gonna BET my positions on it. I’m buying and selling on what is LOGICAL and PROBABLE. I’m not treating the market like a Powerball ticket.  Since my call on the 25^th, you got +8.5% on gold, +15% on silver, and +18% on GDX and GDXJ. Since the lows after FOMC, it’s +10% on gold, +20% on silver and over 25% on GDX & GDXJ.  All in 3 weeks if you were buying on my signals! We’re making a profit, and that is good!

Now take some.   

-Jonathan Mergott

BOOM!

It’s been a boring few months in the gold market, up until recently. It’s actually been a boring few months in most markets. The basic theme has been, Dollar up, everything else down. If the Dollar is correcting, everything else has a nice little rally, then the “everything bear market” resumes again.  But there have been some signs of life recently in a few things, and as most know, the signs of life I am paying closest attention to of course, is gold.

 

While Gold itself has been a bit shaky recently, testing back to its lows and even briefly exceeding them on Thursday after the Fed rate hike, we haven’t seen a new low in Silver since Sept 1^st, over 2 months ago. Miner’s kept underperforming for another few weeks though, with GDX, GDXJ and SILJ making lows on Sept 26^th. Then, all 3 rebounded pretty nicely only to fall back down again, but like silver, they did NOT make new lows.

 

Now, to an extent, this could be expected. After all, silver and miners had underperformed gold drastically over the last year and a half or so. The Gold/Silver ratio bottomed in Jan 2021 at 62 and was still at ~68 in June 2021 when I first became bearish and issuing warnings. Two months ago, in early September, it reached 96. The only other time in almost 25 years that it was higher than that was the Covid Panic in March 2020, when it reached 125 but only stayed above 100 for 3 months.

 

It's worth noting, while that was the highest the GSR has ever been, it did reach nearly 100 in both 1991 and 1941 as well, so this is the 4^th time in over 100 years it’s ever been at these lofty heights nearing 100:1. (You don’t necessarily need to be wildly bullish silver to see the benefit of favoring silver vs gold here. Additionally, you don’t need to see the ratio drop to 20:1 to profit from it. 1 oz of gold now could buy you almost 100 ozs of silver. At a 65:1 ratio, where we were just 18 months ago, you could trade back 65 silver ozs for your 1 oz of gold and keep 35 ozs of silver for free. My site is called “Alchemy Financial” because I like the idea of turning “paper” into gold. The only thing more appealing to me then turning paper money into gold, is to conjure free metal out of thin air.)

 

So, it was overdue for gold to play “catch up” and begin underperforming versus silver for a bit. From that standpoint, nothing unusual there, right? No, nothing unusual per say, except that historically it is much more common that silver is outperforming gold because the tides are shifting, then it is just because gold is “catching up” to silver and miner’s weakness. That was the first bell to ring for me.

 

The next bell was when we take a closer look at the technicals in gold. As we started to make a double bottom in gold around Oct 20^th, RSI was significantly higher this time around then the first low at 1620 nearly a month earlier (36 vs 26, and higher again on the 3^rd test on Thursday, holding 40). In fact, RSI had stayed above 40 since the beginning of Oct, only dipping below that level for 2 days, Oct 19 and 20^th, then moving back above it sharply on the 21^st. Nothing is ever picture perfect in technical analysis, but that is close enough for me to consider it “holding above RSI=40.”

If the short-lived dip below RSI 40 that quickly rebounded wasn’t convincing enough, looking at silver helped solidify that “close enough” RSI view. As Silver consolidated, bottoming repeatedly at 18, RSI, which was 28 in early Sept, had been holding above 40 on corrections ever since then, twice as long as it had been for gold. Both GDX and GDXJ had poor price action, testing nearly back to their Sept lows, but both also saw RSI stop DEAD at 40 on corrections and bounce higher, holding above that level ever since those lows were printed. SILJ fared better than silver, GDX or GDXJ. RSI held closer to 45 on dips over the last few weeks and there was noticeable positive divergence in RSI as well, going back to May. We can also see higher lows in MACD on Gold, silver, GDX, GDXJ and SILJ building for months, coming right up to the 0 line then dipping back down.

As well as having positive divergence in MACD on silver and miners, and holding RSI above 40, we can see 2 “fake out” moving avg cross overs on silver, one in Aug that fell back down, another in Oct that collapsed as well and a 3^rd now. Other than those 2 previous fake outs, this is the first moving average cross higher since February. Silver gained $4 in the next 5 weeks after that. We can also see those moving averages have met on GDX, GDXJ and SILJ, all looking to cross higher as well. Again, this is the first time in all the miner ETFs since Feb. After that cross over happened, GDX gained 30%, GDXJ gained 27% and SILJ gained 25%.

I will apologize for some redundancy to long time readers and followers, but I want to reiterate and explain a few things for those who may not have heard me talk about them before, or anyone who may not be familiar with a few key things I look at and some of the technical analysis jargon.

 

First, In my observations in Gold over the last 14 yrs, and the history of it’s market action that I have studied beyond just my experience, I have found a formula that typically exists whenever precious metals are trending higher. What we typically see is silver outperforming gold, gold miners outperforming silver, Jr gold miners outperforming majors. (Silver miners typically should perform inline with Jr gold and quality silver jrs have a tendency to outperform all of them). So the formula is:

 Gold<Silver<Major Gold Miners<Jr Gold Miners

 

If you look back at most times when gold was trending higher, you will find this to be the case. Inversely, at times when metals are doing poorly, it is typically the exact opposite. Jrs perform the worst, majors, especially the ones who pay dividends do a bit better, silver outperforms the miners, who are leveraged to metal prices, and gold performs the best, as it is the “safe haven asset.” When we see this formula begin to shift one way or the other, it’s likely the trend is changing as well. This is why the outperformance of the last couple weeks in miners and silver vs gold is significant to me after such a horrid decline for many months.

 

Another thing I mentioned is RSI “holding above 40”. In assets that are in bull markets, or are generally trending higher, it is typical to see RSI hold above, or bottom at 40 on corrections. At extreme points it can get very overbought. In bear markets it holds below, or tops at 60 and can get very oversold for periods of time. Here are 2 past examples I’ve shown before, a bull market (Macy’s) and a bear market (Ford).

Another note is MACD. While many like to focus on the MACD signal line crossing the moving average as a “buy” sign (Or a sell sign when it crosses below) the cross above or below the 0 line is what provides the best, long trending entries. Note, on this GDX chart going back to 2020 if you were to buy or short simply on the cross of MACD above or below the 0 line. Look at how long and consistent the trend higher or lower was vs trying to jump in every time in made a moving avg cross. Buy at the cross above 0 line, hold so long as it stays above. Short at the cross below 0 line, hold so long as it stays below. Take profits on extreme spikes and drops.

In addition to 0 line cross over buy and sell “signals” from MACD, it can also present us clues on trend changes in terms of “divergences”, which is when price makes a higher high, but MACD does not, or price makes a lower low, and MACD does not. There are 2 negative divergences (red lines) on MACD here that signaled the uptrend was going to break down and both times it did. There are also 2 positive divergences in MACD (green lines) that signaled the downtrend was about to turn and a rally was building. Both times that’s exactly what happened. Right now, we are building a much bigger positive divergence in MACD than either of those two last ones, that is going all the way back to May this year after a nearly 50% loss in 6 months.

 

So, take all of those points and add them together. That is actually exactly what the model I spent the better part of 10 years building does. It analyzes all of those points (and a few more) and weights them in accordance to what I feel is their importance in predicting a bottom or turn in gold and miners. Then it gives a value between 0-100.  When that value has been ranging below 50 for a period of time, and then begins to consistently start showing values above 60, then we are beginning to see an indication a bottom is forming. For reference, 2 weeks ago it showed values above 60 multiple times for the first time in 6 months. On Friday, it jumped to 76. THAT is significant.

 

If you’ve been following and reading for the last few years, the model has been remarkably accurate at timing the major bottoms and pretty good at signaling to get out of the way as things turned lower. We got “buy” signals Nov 30^th 2020, March 2nd 2021, Oct 1st 2021, and Jan 27th 2022. We warned “all is not well” and got bearish late June 2021, Early Dec 2021, and May 2022. (All of which is documented, and time marked on tweets, articles and interviews, feel free to audit it all for yourself.) The model is not built to “predict” tops and has done a poor job doing so, but it is built to give logical profit taking points. 

For example, one such instance came on March 10^th 2022. As gold and miners moved very strongly higher, we got very high values in the model that suddenly “slipped,” which is a strong indication to take profits. That was 2 days after gold peaked. GDX was 38. Over the next 6 weeks GDX kept climbing, but the values in the model never returned to their peaks. GDX peaked at 41 then collapsed. You had a period of time of strength to continue to periodically sell into, but in terms of “logical profit taking opportunities,” as opposed to “calling a top,” that was about as good as it gets. (We also saw DSI levels on gold and silver reach 93 and 95. Add that into the mix and you can feel pretty confident selling at those points.)

 

There are a couple of other points I want to mention. First, back to the Gold/Silver ratio. After breaking October’s low last week, it is now back to levels last seen in April, at 80. More importantly to me, the moving averages here on the weekly chart are crossing lower, the first time this has happened since July 2020. At the time, the GSR was about the same level it is now, around 80. Over the next 7 months it dropped to 62.  Looking at the daily chart, once again we can see the importance of markets that are trending higher and RSI staying above 40. It did so while it trended up from March until September. Then, it broke sharply below 40. The moving averages on the daily chart gave a bearish cross lower, price made lower lows and on this final rally higher in mid October, (a rally that reached a higher high than the late September rally) RSI moved up to 60, stopped dead, reversed and is now below 40 again.  This has all the markings of an uptrend that has peaked and is about to turn lower. And GSR heading lower has a close to perfect correlation with a general uptrend in Gold, silver, and miners.

On the subject of ratios, there is also the GDX/GLD ratio. Which is currently consolidating at level that we have only seen it go below twice: The 2015 bear market bottom, and the Covid crash in March 2020. Now of course, that doesn’t mean we couldn’t test these levels again or even break them, but it SHOULD make you begin to consider, “Where does the higher risk and higher reward lie?  In being long here or being short here?” On the weekly chart we can see price consolidating at the 78% Fib retrace from the March 2020 low to the Aug 2020 high. Additionally, we can see a SIGNIFICANT “gap” between the 2 moving averages. In 7 years, the deviation between these two moving averages has only been this large 2 other times. The March 2020 Covid crash and the 2015 bear market bottom. Looking at RSI, we are recovering from oversold levels, slowly creeping higher as price consolidates, in a very similar fashion to how it did in the 2015 bear market bottom. In fact, those “oversold” levels on RSI were only hit 3 times before, 2015 bottom, 2018 bottom and the 2020 covid crash.

Flipping over to the daily chart, there are a few other interesting points. First, we see the same action as we do in GDX and GDXJ regarding RSI. We have held the 40 level since late Sept. It has been held back on rallies when it reaches 60, but breaking 60 is step 2. Step 1 is that we are holding above 40 on pullbacks which it hasn’t done in some time. Something else the ratio may be clueing us in on is that we have the first moving avg cross higher since February. We had a strong drop after the cross, but also a strong rally Friday that puts price back above both moving avgs which will keep them trending higher. (Should also mention, we had pitiful performances from ABX and NEM after earnings announcements last week, which put a very big hinderance on GDX, so underperformance for a few days there when looking at the GDX chart or the GDX vs GLD chart, should be taken with a grain of salt as those 2 stocks make up 23% of the GDX.)

Looking at the orange box on the daily GDX/GLD ratio chart, we can see some similarities to now. We consolidated at the 50% Fib retracement from the March 2020 low to the Aug 2020 high. Today we are consolidating at the 78% retracement.  We got a moving average cross over in late Oct, (Same as this year), then came back down to retest lows and consolidate some more. The already quiet market got quieter and more ignored during the holiday season as it bounced around, then it took off. If history rhymes here, we may be a bit early in getting bullish, but I’d rather be a couple months early than a couple weeks too late. We could see lows retested and this quiet, ignored market stay quiet for a bit longer, but in terms of quiet consolidations, this is exactly the type that you see at major lows.

I have been looking at Christmas as a likely time for a bottom in metals and miners for a few reasons. One, is tax selling, which we are bound to see this year after such a poor performance. Another reason though is because all through the bear market from 2013 to 2018, we saw 2 major lows each year and they were very consistent from a cycle standpoint. One major low each year came around early July and one came around the end of the year. Last year, GDX hit a low Dec 15 and retested it in late January this year. We took off in February. We also got a small bottom and rally that occurred right at the beginning of July this year. Note this Gold cycle chart below from 2013 to 2018 and how closely major lows aligned to those periods in July and around Christmas. Then note the lows in Jan and July this year on the current chart. Perhaps history continues to rhyme, and this bottom cycle is one that gold likes to play out when its in a bear market.

One final point, and it may very well be the most important of all of them. Two weeks ago, the dollar sold off HARD and all the bears were there to claim victory and pronounce its death for the 10 thousandth time. Within days it was ripping higher and then the bulls were back to being complacent with the trend they have come to rely on all year, DXY up, everything else down. In such a short order it seemed like everyone, no matter bull or bear on DXY, got a big surprise. There is a good chance there is about to be another one. This time for the bulls, again. 

DXY has been another great example of uptrends holding RSI 40 on dips. Notice, there was no clear trend in DXY from Fall 2020 to Summer 2021, just sideways action. Simultaneously, RSI ranged from 70 to 30 and back again, no clear indicators of a trend there either, but as soon as the dollar began making higher lows and higher highs in Summer 2021, we also saw dips holding at 40 on RSI and reaching very overbought levels at peaks. It’s kept that up for 18 months. The drop that had bears so excited didn’t push below 40 on RSI, nor did it break this uptrend line, but it’s the rally that followed that had alarms ringing to me, (and why I have said before to pay attention to the “reaction after a big move”.)

RSI stopped DEAD at 60 and turned lower.

We haven’t broken the uptrend line yet, we haven’t broken 40 on RSI on the downside, but that reversal at 60 may be the canary in the coal mine for DXY. Now, does this mean new lows for DXY, or just a consolidation in the uptrend, or a pause and correction? I don’t know and neither does anyone else, contrary to what they may try to convince you of. What does matter to me though, is that even if this is just a pause and consolidation here, it could give enough space for gold and miners to have a very nice run in the coming months. One more factor to weight with all the other positive signs for metals right now. And it could be a very big factor as well.

On a quick personal note, I want to thank everyone for their kind words and well wishes when about a month ago I had mentioned I was in the hospital and was having some significant health issues. The last few months have been a very difficult time in my life and continues to be, but things are improving. I am not one to typically share personal things, so when I do it is usually significant. Although it is often said sarcastically, I truly do appreciate everybody’s “thoughts and prayers” and it is great to be back writing about the gold market again, especially as it now looks like it’s about to get fun!

In closing, everyone is always asking me the same question, so I’ll address it yet again.  Is this THE bottom? I don’t know and neither does anyone else, no matter how much of a Guru they claim to be or how many twitter followers they have. No one has a crystal ball, myself included. Will this rally send gold to 2,000, 3,000 or maybe just 1750? It doesn’t matter too much. We all have our thoughts and reasons why behind them, but it is mostly a waste of time pontificating too much on “how high is up?” in my experience.  We get the indications to buy and that’s what we do. When we get the indications to take profits, we will do that too. When we get the indications to get out of the way, we will. It’s what we’ve been doing, and it’s worked quite well. The moral is the tide is turning so we’re positioning to catch the wave and ride it for however long it carries us. That’s the signals we’re getting TODAY. Let’s worry about tomorrow when tomorrow comes. Till then, stay safe and out of leverage. This market storm may not be over, we may just be in the eye of it.

-Jonathan Mergott

Large Spec Net Shorts Does NOT Mean We're at THE Bottom

A few weeks ago, gold and silver bugs were cheering at the silver COT report, which was showing large specs going net short silver for the first time in over 3 years.  The narrative went like this: “Last time this happened in May 2019 at $15/oz, Silver doubled in 15 months.” There is nothing false about that statement. The last time this happened was indeed in 2019 at 15/oz, and silver did double from there 15 months later hitting $30/oz in Aug 2020. The question isn’t if the statement is false, its “is this relevant to where we are today?”

 

Let me back up, as I am sure there are some people who either have no idea what COT reports are telling you or why they’re relevant, or worse, they’ve been sold on the incorrect narrative gold perma-bulls have been shouting for literally decades, about how “J.P. Morgan/Deutsche Bank/Bank of America etc, silver shorts about to be squeezed any minute now” and how that will send silver prices to the moon. (Spoiler, it’s never happened, and it never will.)

 

COT reports, or the Commitments of Traders, is a report that comes out every Fri afternoon that shows the position sizes of 3 major “groups” of traders: large specs, small specs and commercials. Large speculators are essentially hedge funds.  As a group, they are momentum chasers, meaning they have a tendency to add to long positions as price is moving strongly higher until their net longs are at very high levels at the market peak, and inversely, sell their positions as a market goes down until they, as a group, have very little longs or are even net short at market bottoms. For this reason, they are often given the nickname “the dumb money”. Small specs are retail traders. They are basically you and me (but with deeper pockets). Their positions in a market are typically not very significant and rarely important in terms of analyzing the COT report, so for the most part we are going to ignore them.

 

That brings us to the commercials. Commercials are the banks. Their positions have a tendency to be exactly inverse to the large specs, as well as price. As a market moves higher, they typically are increasing their short positions and as a market moves lower, they begin to decrease them or even go net long into major lows. This chart below of Soybeans over the last 5 yrs is a perfect example of what I mean. The large specs (green line) were net short soybeans from the end of 2018 until the end of 2019, when price was ranging between 800-1000, while commercials (red line) were net long 145k contracts in May 2019 at 800. 1 year later, price had doubled, and large specs chased it all the way up, going from net short 123k contracts at 800, to net long 250k contracts at 1600. The commercials on the other hand, were massively net short at the top.

 

Now here is where the misinformation in the gold and silver sector come from. All the talk of commercials (banks) being massively net short as price is moving higher, and a short squeeze that will send prices skyrocketing any minute now, is a fundamentally incorrect analysis on how the market operates. There is a very simple reason why we have never seen this “J.P. Morgan silver position short squeeze” and why we never will. Because the commercials are not taking a position in the market betting on price direction either way.

 

The commercials are essentially opportunistic merchants. If people want to buy, they want to be there to sell it to them and vice versa. They are not racking up a massive short position in silver because they are betting on lower silver prices, they’re short position is simply the other side of the large specs who are eager to buy. They profit from the transaction.  That is it. Banks don’t make “bets,” they invest in “sure things.” What you don’t see regarding their “massive silver short positions,” is derivative holdings that zero out all exposure to the market in any direction. If prices skyrocket, they profit and lose nothing. If prices collapse, they profit and lose nothing.

 

Wall Street is the most competitive industry in the world. The most intelligent minds on earth don’t work for NASA, they work for Goldman and Citigroup. These are organizations that have trillions in assets and the smartest people in the world managing them, with a goal to take as little risk with them as humanly possible and still profit. Why on earth would an entity like J.P. Morgan, be stupid enough to leave themselves open to blowing up their entire firm over a bad directional bet on silver? Of course those short positions are hedged! Sure, it’s not impossible that someone could leave themselves open to such a risk (Lehman Brothers), but it is not very probable and is simply not how they operate in the futures markets, or how commercial COT positions are supposed to be interpreted.

 

So, the next time you see a self-proclaimed “gold and silver expert” and “professional” in the market talk about commercials or a major bank about to be “squeezed” due to their silver or gold short positions, promptly disregard EVERYTHING they are saying. They are either ignorant of how the market works and therefore no expert or professional in any capacity, (in which case you shouldn’t pay attention to what they have to say), or they DO know better and are trying to profit in someway off of the “doom” narrative of a collapse of a major banking firm and a precious metals “moonshot” (in which case you shouldn’t pay attention to what they have to say.)

 

Ok, so where is the problem here? If large specs, or “dumb money” always chase price higher and lower and are always heavily on the wrong side at the wrong time, how is this not spelling out a major low for silver and possibly gold as well? It’s simple. Because as a rule of thumb, large specs don’t sell bull markets.

 

Yes, the last time large specs went net short silver was the last dip in 2019 down near the lows, anticipating either a retest of 14, the low from both 2015 and 2018, or a break below it. They were wrong and were forced to cover and chase price higher as it doubled over the next 2 years. But is that an accurate comparison to where we are now?

 

From 2009 to 2011, silver went from a low of $8, to a high of $50. 2 years of higher highs and higher lows, exactly what an uptrend or a bull market is. From 2011 to 2013, silver corrected from that parabolic high and consolidated between 25 and 35. In 2013, silver began breaking down, making lower lows and lower highs and this continued for 2 years until 2015, bottoming at $14/oz. From 2016 to 2018 silver spent 2 years going sideways, retesting its lows as it consolidated at a major bottom. Then, from 2018 to 2020, it spent 2 years going higher again, and from 2020 to 2022, another 2 years consolidating.

From 2009-2011 as silver made higher highs and higher lows, large specs NEVER went net short silver. From 2011 to 2013 as silver consolidated going sideways from 25-35, large specs NEVER went net short silver. In fact, for the total of those 4 years, the position size of the large specs never fell below 6k contracts net long. The first time large specs positions dropped below that (and were nearly net short) was in June 2013, as silver began making lower lows. Their position size dropped to 837 contracts, down from 41k contracts 7 months earlier.

 

Over the next 6 years, as silver continued lower, their long position sizes decreased significantly versus the previous years when silver was moving higher and consolidating after a big rise. In March 2018, they were net short 13k contracts at ~16.50 an oz. In November 2018 they were net short again by 11k contracts. In May 2019 they went net short a 3^rd and final time at $14.50/oz. That is a total of 3 times they went net short during the consolidation at lows in a bear market, and one time where they were nearly net short as silver began its decline in 2013, breaking down from its consolidation and beginning a trend of lower lows and lower highs.

Today, we have a silver market that was moving higher from the lows in fall 2018 to the highs in Aug 2020. In one instance in May 2019, they were net short. They quickly flipped that wrong position and 2 months later, they were net long 64k contracts. From 2020-2022 as silver was consolidating between 20-30/oz, they were NEVER net short silver. Now, as silver has started to decline, making lower lows and lower highs, surprise, surprise, large specs have gone net short again.

So, you tell me, does where we are today sound like the final low after a long, brutal decline in price over a period of 2 years, and a long basing consolidation at those lows for another 3 years? Or does it sound more like that initial drop in long positions that large specs had in silver in 2013, that was almost net short as price BEGAN making lower lows and lower highs?

 

Yes, large specs going net short a few weeks ago is likely piled too far on the bearish side and A low is likely to occur, as it has in the past when they’ve gone net short or reduced their long positions significantly. In fact, that is exactly what happened, and I pointed out that I expected we were making A low in silver on July 13^th, and that we could rally up to 21, but this low was not a good idea to go long on and a better opportunity would be shorting the rally after it occurs. Silver bottomed the next day on July 14^th and 1 month later hit $20.85. That was just 2 weeks ago and we are now at 17.40, a 17% loss and a new low.

 

But much like in 2013, it was just A low, not THE low. I know many are interpreting this as the end of this decline being near, but I see it exactly opposite.

 

This isn’t the bottom or the end of the decline, it’s confirmation that we are indeed in a bear market, and likely still the early stages of it.

 

I know that’s not what people want to hear, but that is the reality, and I’ve been warning of this risk for 15 months, since June 2021. I said miner’s underperforming is a big warning sign, like it was in 2013 and it has been again. GDX has lost 36% and GDXJ has lost 42% since then. I said miner’s lead the metals and they are leading them lower today like they were in 2013 and they have continuously made lower lows, just like they did then. GDX, GDXJ, SIL & SILJ all broke to new lows long before silver followed. Gold has yet to break 1680, but I think that time is very near. I said sentiment will get very bearish and stay there for long periods like it did from 2013-2015 and it has again. I’ve pointed out COT positions in bear markets can drop much lower like they did from 2013-2015 and they have again as well. I’ve said price can get very oversold and stay there for long periods like it did from 2013-2015 and we have also seen that repeat again. All while perma-bulls accused me of “selling at the low,” shouting the most dangerous words in investing in response to my analysis: “It’s different this time.”

 

Ladies and gentlemen, there is nothing new under the sun. History doesn’t always repeat verbatim, but it does rhyme, and this time has rhymed near perfectly with 2013. The macro doesn’t matter. PE ratios don’t matter. Fundamentals don’t matter. The only thing that matters, is the human emotions of greed and fear. That is what makes up day to day price action, and that is why we can see so many similarities in price action in the gold and silver sector today, with what happened in 2013.

 

Ironically, many of the same people shouting “it’s different this time” are the ones who have shared comparison charts of the S&P-500 today versus in 2008. Was the macro not different then? Even the S&P components were different then! But human emotion is not, and we can see that play out in nearly identical price action. The Macro in the 1600s in The Netherlands was very different from the United States in the 1990s. The fundamentals of tech stocks and tulip bulbs were different as well. Yet, the chart of price action in both is identical, because price action is not dictated by fundamentals or macro-economics. It’s greed and fear. That’s it.

 

Before I wrap this up, I wanted to mention a few more things regarding the environment in the precious metals sector versus 2013.  It continues to be remarkable to me how similar the things people are saying and doing today versus back then. It truly is identical, and people don’t even seem to notice they are doing it. For those who didn’t live and trade through it, I will give you some examples of what I saw happening then. You decide how similar it is to today, and whether that is as worthy of serious concern as I have thought (and continue to think) it is.

 

First, everybody was in disbelief that it was happening. When the Fed hinted at taper in 2013, the gold perma-bulls crowed that they could never do it, that the entire economy and financial system would collapse if they even decreased their printing by even just a little. When they did, they said “they’ll reverse and start increasing their printing again within a month or 2”.  Then it was that they could never raise rates, for the same reasons, an immediate collapse. When they did, they said, “one and done” and that they’ll be cutting again (from 0.25%, lol) in months. They screamed about the national debt, and how rates at just 2% would increase our interest payments on the debt by “X” amount, and the Fed would never allow that to happen. (That was 15 trillion dollars ago). Everyone was waiting for the “pivot” that would certainly send gold much higher when it came. It wouldn’t come for another 4 years, and when it finally did, gold had already rallied 25% from the 2018 low, so the idea of buying gold when the fed pivots, was a misguided plan of action to begin with.

 

People were talking about poor sentiment that continued to get worse, sharing charts like the Gold miner’s bullish precent index at levels below 10, which MUST mean we are at a bottom. It stayed below 10 for 6 months in 2013. (Today, the gold miners bullish precent index has been below 15 for 2 straight months). Many were talking about how miners were trading at the same levels that they were when gold was 1300, but yet it was north of 1550. They thought that in the most competitive industry in the world, there was a free lunch being left on the table for any idiot who can look at a chart and see a discrepancy between miners and the metal to gobble up. Easy money buying miners here, right? Miners didn’t revert back to pricing gold at north of 1550 and have huge gains, instead gold fell to 1300. I’ve seen a lot of people saying in the last few days, that GDX and GDXJ are trading like gold is back at 1400. That does not mean an easy money opportunity, just as it wasn’t then. It’s a warning that gold is likely going to fall to 1400.

 

People were already on the edge. By the time gold was ABOUT to break support at 1550, GDX had already lost 50% from its 2011 peak. (Currently, at 23, GDX has lost 50% from it’s 2020 peak of 46, and again, gold has not broken it’s support at 1680, yet.) If history repeats from this point, we have a dark future ahead for us. Many are already on edge again today but are holding on because they know it is foolish to sell when miners are already down 50%. They’re about to witness the worst losses in a single day that their portfolio has ever suffered. When gold broke support at 1550, it was a total of $500 down to get to our final low at 1050 2 years later. Half of that $500 in losses came in just 2 back-to-back days once support broke. Major silver producers were down 20% in 1 day. Major gold producers were down more than 10%.  Jr’s got obliterated. Many suffered such extreme losses, (and later forced dilution at extremely low prices) that it rendered it nearly impossible for most investors to get back to even, let alone to ever see a profit on those investments. 

We did see a bottom about 1 month after that and a decent rally following, but then it was back to making lower lows in what ended up being a market that started as a bullet to the chest, and ended with “death by 1000 paper cuts” 2 years later, for an ADDITIONAL loss of nearly 50% from those break down lows on GDX (From 67 in 2011, to 35 in 2013 BEFORE gold broke support, to 22 in 2013 AFTER gold broke down, then to 12 in 2015 when it finally bottomed).

Being that miners had already been so weak before the breakdown in gold, everybody thought it must be a flush out, capitulation bottom. It wasn’t. They’ll say the same again when gold breaks 1680. It won’t be capitulation this time, same as it wasn’t last time. It won’t truly be capitulation until most of these talking head, perma-bulls in gold just disappear entirely. When NOBODY wants to talk about gold at all. (Here’s an example. A PM analyst I knew in 2015 left his job to go become a dentist, because the sector was that bad. THAT is what you see at capitulation lows, not moderate depression amongst an ever-stubborn group of perma-bulls. What we need is epic and total despair, and we unfortunately are not there yet.)

The break is coming, and very soon, I fear. Time is up. With a long weekend ahead of us, I wouldn’t be surprised to see gold open next week down $50-100. And then do it again the following day. No, I am not kidding or exaggerating. I think we breakdown hard and very soon. I’ve done all I can to warn as many people as possible for the last 15 months, to try and help people from making the same mistakes I saw so many make back then that bankrupted them. If you haven’t taken any actions to protect yourself, you are now at the mercy of the market. The only thing left to say is, “Good Luck.”

-Jonathan M Mergott