A couple of weeks ago we entered a short GDX position by buying March $28 puts at about $1.50. This was a 1/3 position, meaning the full amount we ultimately wanted to have was 3x this size, but we started small because the holidays have a tendency to be quite and not the best gauge on what markets want to do. The point of this was if we were wrong we could exit quickly with a very small loss. This loss on a 1/3 position would be negligible compared to the 160% we made on a full postion in Oct buying GDX calls. Our target looked to profit us ~100%, so this was a good risk/reward here.
It hasn’t worked out very
well as gold has been tearing it up last couple of weeks. But despite a 7% move
higher in gold of over $100 since then, we have seen Silver unchanged over the
last month and only a 14% rise in GDX in the same time frame. While that IS “outperformance”
it barely is in terms of what miners typically do when gold is on a tear. Had
we have bailed immediately, we could have dumped those puts for a 35% loss at
just under $1, but the lack of follow through with silver and begrudging “drag”
higher by miners with gold is still not giving me great confidence that the “low
is in”. From that standpoint, I thought it was worth waiting as a large part of
the damage was already done and further losses on the puts would be negligible.
What I mean by that is
this: If we’re managing a 100k portfolio of miners and other gold investments,
with a 10% cash position for hedging and leverage, our 1/3 position on these
puts was equal to ~$3,333. While gold did well, silver hasn’t and miners broke
higher leading to a quick 30% loss, then 50% a few days later. So, a $700 loss.
An additional 30% down from here would be a loss of $200, but we easily could
have just been early and have the chance to regain some of that. So, I found it
not worth bailing on here in an environment where gold is running into
resistance, silver is not participating at all and miners are barely
outperforming. We still have 2 months on those puts, after all. An opportunity
to add another 1/3 position here and a 10% correction in GDX brings those puts
back to $1 and eliminates the loss entirely.
So let’s look at some
charts and see how we’re shaping up.
Gold is running right up
to resistance at the 23% Fib retracement that is also right at the 2011 high near
1920. Additionally, its ascent began steepening
as it got there, deviating from short term moving avgs and long term moving
avgs, (as well as short term moving avgs deviating from each other). Now today,
we are having a reversal.
I’ve heard a lot of bull
arguments for gold, and its not that I necessarily disagree with them. In fact,
I agree with a lot of them. Especially the attractiveness of such an asset
during very uncertain times. The only part I disagree with is that this is
going to make it go significantly higher. We have high inflation, high rates, a
possible recession looming (again), and the SPX is down 18% in the last year.
Yes, gold is pretty attractive here, but maybe that’s why its holding in so well
versus other assets. At 1920, were down half of what the SPX is from all time
highs. So maybe rather than these reasons being why it will rocket to 2500,
maybe they’re why it isn’t collapsing to 1400.
As I’ve said before, gold
and silver are not equal and there is clear evidence here of that. If you want
insurance, if you want wealth protection, you want GOLD, NOT silver, and recent
price action (as well as countless times in history we’ve seen the same) is all
the evidence you need to prove that.
On to silver, we have
consolidated since Mid Dec while gold has risen $120. This is just pathetic,
and again, doesn’t support the “bull market” view in my eyes. Now, that could
change. It’s hard to look at silver and get a lot of evidence to support a drop
or an explosion higher, and anyone claiming it looks like that, well, check the
rest of their track record when saying such things and you’ll likely find all
you need to know there. (They’re guessing, as usual. But hey, maybe this one
will be right!)
GDX got 10% higher from
where it was when we thought we were going to get a deeper correction and left
a negative divergence in RSI along the way. We’re beginning to see it test
recent lows while gold is still above 1900 and only off about 1.5% from it’s
highs. Silver is down fairly significantly compared to gold as well. Even if we
are to continue higher, it looks like a pause here is likely and could retest
that 29-30 area we previously consolidated at. Even if we do not get a chance
to add the other 1/3 position to our puts, I think we can mitigate losses here
which are very insignificant as its 33% of a 10% cash position on a gold
portfolio, so 3% of the portfolio has dropped 60% while 7% in cash has done
nothing and 90% has gained ~10%. On that same 100k portfolio, that’s a $700
loss versus a $9,000 profit. And that is how an insurance policy should work in
the event we are wrong about it.
There is one interesting
development I am paying attention to here which may indeed give a signal that
the low is in. I have mentioned before I
think gold and bonds will correlate decently here and instead of looking for
the FED to pivot, I am looking instead for the bond market to pivot and the Fed
to move against the bond market. This is what we saw in the 2018 low. Gold and
Bonds bottomed in the Fall and the Fed hiked rates 1 more time in Dec, moving
against the market while rates dropped, and gold rallied. 7 months later they
were cutting rates again. I think in this rate hike cycle, we could see
something similar. Inevitably, the Fed will act too late, as they always do,
whether it’s hiking to much and moving against the market, or holding rates too
long and moving against the market.
Everybody is expecting a “run
of the mill” mild recession. There is a reason we haven’t seen those in 30 years.
Everyone is overleveraged and in such a situation, eventually something
unexpected breaks and there is contagion. Everybody likes to look at the same
issues it was in the past, but likely it will be something entirely different that
no one will see coming until its too late.
Looking at the 30 yr
bond, we can see it bottomed late Sept/Early Oct, around the same time as gold.
The cycle on bonds has been pretty consistent, and that was too early for the cycle
low. We then made a higher low and are now retest Dec highs. What’s most
interesting to me about that higher low is that RSI stopped dead at 40. But
here we are retesting highs and RSI is right at 60 and right about at the 200
day MA as well. So there does seem to be a bit of indecision here, and it is
not impossible to take another quick leg down and have a slightly “late” low in
terms of the cycle. But if that was the peak in rates, and the Fed doesn’t seem
to be done hiking yet, just slowing the pace of their hiking, then we may be
set up for that same 2018 situation. AND
we did see gold bottom at the exact same time AGAIN.
This is definitely
something to pay attention to in the coming weeks IMO. We don’t have another
FOMC meeting until March, so a lot can happen between then and now. So far,
unemployment is not doing what the Fed wants to fight inflation, but that is a
lagging indicator that by the time it changes, could be too late for them to
react in a meaningful way as to prevent a “hard landing.”
Wanted to give an update
on the Patreon site as well as some signals from the models. I REALLY want to
launch this Feb 1, but still don’t feel like I’ll be up to it. Additionally, I
have some personal matters to attend to that I don’t want to distract me from
the site, so I’m going to push it back again to March 1 now, which I’m hoping
will be more than enough time to get some things settled. Until then, I will
continue to post signals from the models, articles and when we’re entering or
exiting positions as a sort of “free preview” of it on twitter an on this site
until we launch it.
Now as for the models. The trending model is reading a 74 now and
has continued to be above that 40-50 area that indicates an uptrend. We flashed
some signals that it was beginning to reverse 1 month ago but recovered. This
in addition to the profit-taking model signaling a peak, and the thought
process of this being a bear market rally was our reason for buying puts. Important
to note, the trending model confirms we want to hold a position, long or short
AFTER we get a signal to enter it, so it lags. It confirms later, so the fact
that it is still indicating an uptrend now that we are reversing is typical.
The profit-taking model
however is showing 88 after this reversal. This indicates with a good level of certainty
that now is a good time to take profits on positions you entered recently. It does
NOT indicate a top. It also does not indicate a time to take profits on long-term
positions you have a multi year time horizon on. But it is indicating that we
could be instore for a correction here. How deep, and if it turns into a
significant down trend from here is undetermined so far, but is enough for us
to want to hold out on those puts.
That’s it for now, keeping it short because I have a lot to do and still not feeling great. I will keep updating though if something significant happens.
-Jonathan Mergott
