Analyze your personal risk and act accordingly

I wanted to quickly write something for anyone concerned with recent market action.  I have been saying for a couple of months that I was concerned with incredibly high sentiment in the stock market as well as the ridiculous volatility and YOLO trading in things like GME, TSLA and Bitcoin.  The world is leveraged to the hilt, which is why we have seen correlations of market dumps that have coincided with a ridiculous rise in one little stock, GME.  You would think the idea of 1 company taking the market down is ridiculous, but we've seen it happen, that is how leveraged it is out there.

Many have stated that if there is crash in stocks, that PM will likely NOT be affected, and instead see money flow into gold, silver and miners.  For the record, I do NOT agree with this in the short term. When investment funds get squeezed, they'll dump anything to get liquidity.  Consider how concentrated the money on Wall Street is these days.  This is not like the 1980s where there were actual "retail traders".  Most money on Wall Street are in funds of some kind managed by a few hundred institutions that comprise 90% of all the money traded in any given market.  In the longer term, I agree that as people continue to lose confidence in "the system" and markets, money flows will increase into Gold, Silver and miners.

Consider your own emotions and risk tolerance.  In the shorter term, if there is no risk to Gold in a market drop, you are fine.  But if I am right, a March 2020 like plunge could send your portfolio down significantly.  If you can stomach this, fine.  If it will make you lose sleep at night and run the risk of panicking and selling at lows when you look at your loses, you should keep some cash on the side.  Think of the cash like an anxiety pill incase of an extreme panic attack.  Just having a small cash position will do wonders for your mental health and give you the opportunity to buy at very low levels if we see them.

Please understand, I am not saying to dump gold and silver or miners.  I am also not saying you should cash out your 401k's or sell index fund and stock positions you are holding for the long term for your retirement.  I am simply saying to analyze your own mentality and emotions.  I used this analogy before, but if you are the type that usually buys the extra insurance on a rental car, maybe your risk tolerance is not suited for "All in" on a portfolio of call options.

The goal here is simple: Make it to pay day.  Do what you need to do for your mental health to get there.  I'd rather see people hold 10% cash (or more if that's how you feel) and make 5x your money on 90% of your gold and silver portfolio, then panic at the lows and dump everything and miss out altogether.

Here is what you should NOT do:

1. Do not own leveraged ETFs.  The perceived leverage is not worth it. I've seen them blow up and go to 0.  I've also seen them stop functioning properly, so a massive loss on a panic will never return to where it was no matter how much things go back up.

2. Do not use margin.  Sure you can use it responsibly and professionally, but most do not.  A March like panic, where gold miners dropped 50% in a few weeks could see you have to force sell positions at lows. Also the leverage there in a crash is not doing your emotions any favors.  It is not worth it.  (Very small amounts can be beneficial to use DURING a crash, but you can't do that if you're already leveraged.)

3. Don't buy out of the money short term calls.  If you prefer to have a portfolio of leaps because you can save capital and get better leverage to the stocks, that is your prerogative, just prepare for a hell of a draw down if things tank.  Again, your own emotions are your worst enemy so I don't think it's worth it, with the exception of using a small amount for extra leverage to your existing portfolio of stocks.

The bond market is in serious trouble here, and whether the FED steps in or not, in the long run I see a loss of confidence here and I see only one other asset that is a safe haven, that typically has a negative beta to stocks, and that gives you a better yield than negative yielding bonds for investors to go into with their money as they sell treasuries and that is GOLD.

In the short term, markets are freaking out right now over rates and it could get ugly.  It is better to have a life jacket and not need it, then to just HOPE your boat won't sink.

On Tuesday, I said "I think were at a low in gold"  We've lost only $10 from that point so far, but all bets are off if margin calls start and there is a race to raise liquidity.  Keep in mind, gold went from 1700, to 1450, back to 1700 in only 12 days.  All you had to do was not watch for 2 weeks and you were right back like nothing ever happened.  But in that 12 days you could have blown up your portfolio if you were over margined or using leveraged ETFs.  Both DUST and NUGT and the GDXJ counterparts JNUG and JDST stopped functioning correctly and got "reformulated" to 2x ETFs after the crash.  JNUG went from an adjusted high before the crash of 1000 then dropped to 33.  At the Aug highs, the GDXJ was 50% higher than before the March crash, JNUG climbed back to 200.  Still an 80% loss from before the crash. It is now 78, a 92% loss in 1 year, during a bull market in Gold.

I can't say this enough, THE GOAL IS MAKE IT TO PAY  DAY! Do whatever you have to do for your own emotions to get there.

-Jonathan Mergott

Gold And Silver Update

I'm gonna try to do this quickly and just make notes on a bunch of charts regarding where things stand.

First, silver.  I posted this on Twitter earlier and said, all the smash after #silversqueeze has done is make a bigger cup and handle.  As GV pointed out, its a cup and handle in another cup and handle.  Price is currently just above 26, which is half way between the low at 22 and the highs at 30.  Nothing to see here.  Still looks great.  In the event of a selloff from here, I would say the most we will likely see down is to around 24.  

If silver was a standalone asset, that'd be it.  But we have to look at Gold as well.  As I had mentioned in my article last week, I wanted to see gold start moving with silver, pushing above the 1900 level.  Additionally I was concerned about the fact that the GDX has barely budged while we were seeing strong moves in silver, and absolutely insane moves in silver miners.  GDX was just dragging along very close to it's lows.  That kind of divergence between gold and silver miners I have never seen before on this kind of scale, but in the past, on less extreme scales, it has usually meant a fake out.

Sure enough, we came right back down.  And as silver started lower, gold joined in.  This is why I put a little more weight into Gold when analyzing both of their moves.  Gold has a tendency to be more precise in timing and price than silver.  For instance we can see, silver bottomed in Sept.  Gold bottomed Nov 30 and Silver double bottomed, but actually hit 15c lower in Sept than in Nov.  Silver also has a tendency to push above or below support, resistance and Fib retracements, making the chart a little more messy than gold, which usually respects those levels a bit more.

Looking to the gold chart, we are now inches from a double bottom at that 1760 area.  This was a downside level I had warned was a risk in an interview I did with Palisades Gold Radio 2 weeks ago.  (For anyone panicking about their portfolios right now, I suggest listening to it as there is some helpful stuff on how to make it through these corrections until pay day.)  For now it looks like a double bottom, but keep a few things in mind.  I have seen COUNTLESS plunge/reversals.  Stop hunts.  Gold gets down to 1760, pushes just below to 1757.  A wave of stop loss orders are triggered sending it down another 2-3%.  Then, by the end of the day, or within 2 to 3 days, it reverses and comes right back.  If a quick 2-3% below 1760 were to occur, we would be sitting around 1710, within inches of the next major support level at and 61% Fib at 1700.  This level was also the "Covid Plunge Resistance" point.  We hit 1700 before the March crash, struggled, crashed to 1450, then came back and struggled again at 1700.  Resistance becomes support.  

The point is, this is almost over.  Even in the worst case of the double bottom breaking and a plunge lower, we are likely within a few days of the cheapest you will see gold all year, so don't panic.

Looking to the GDX now, we can also see a double bottom, so far. And we also have perfect evidence of what I keep saying about "watch the miners".  The GDX didn't budge at all over the last few weeks despite the massive moves in silver and silver miners.  This was a clue that they were "calling bullshit" for lack of a better term.

We are sitting right at the 38% Fib retracement for the entire all time low and high of the GDX. (I'll show the weekly zoomed out version next to get the big picture here)  The downtrend line has been holding us back now in this incredibly long consolidation that has now gone on for 5 months.  We need to get above that line and above the previous highs near 39 and Fib retracement near 40.  We can see the June lows just below us at around 31.50, which is about 7% down from here.  Again, I would not be surprised if we see a "stop hunt" plunge and reversal here in a short time that targets just below this Fib line to the June lows.  If we have a similar move in gold that breaks below 1760, I would imagine the GDX stops dropping and turns higher BEFORE the metals.  That is what to look for to give us an indication the lows are in.

Another point I wanna add on the GDX chart.  It looks like crap.  Yeah I know, many have been saying it.  It almost looks obviously bearish.  The thing with sentiment is, its not a precise indicator for timing.  In the very short term, the crowd is usually right.  In the medium to long term, the contrarian is right.  Real money isn't made in the short term though, which is why I am a contrarian investor.  If this GDX chart looks like it is "obviously" gonna drop, guess what?  Everyone else in the world is looking at the same thing you are and coming to the same conclusion.  Which is why I said, we could get a quick drop, some obvious stop hunting by the vultures looking to push us around a bit.  But past more than a few days I don't see much further weakness here.  Why?  Because were in a bull market.    Because the miners are incredibly undervalued compared to the metals and any other fundamental earnings or cash flow metric.  Because we have been consolidating for nearly 6 months.  Because despite that undervaluation, we've already declined 25% in that 6 months.  If you are looking at this chart and thinking bearish thoughts about gold miners, like buying puts or shorting for a quick buck, the risk/reward is absolutely not in your favor.

Quickly I want to add 2 more charts for correlations with Gold.  They are not perfect, but are often looked at as headwinds for gold rallies.  First up, I'm putting the Euro, which I am using as an inverse proxy to the dollar index.  (For the same reason with gold vs silver, I like to look at the Euro vs the actual USDX).  The Euro broke above a 12 yr downtrend in July, retested the trend line twice then headed to major resistance at the 38% retracement of the highs and lows of the last 20 yrs in the Euro near 1.25.  We have now pulled back to test the 23% retracement of the move higher from the march lows, which is also right at the summer-fall consolidation highs.  While we can see, this correlation is not perfect,  Gold and Silver topped out when the Euro broke above the 12 yr downtrend in Aug then continued for 4 months.  But a rising dollar can be a headwind for the PMs, and it looks like the rally (decline in Euro) is nearing an end.  Even if we were to test a lower level here, we can see there has been little correlation for almost 6 months, so it may not be meaningful for metals.

Here is the 20 yr weekly Euro chart for bigger context.  After a break above 1.25, I am eyeing 1.40, which coincides with about 80 on the USDX.  Keep in mind, in the Fiat game, everyone is going to zero but relative to each other, we have some "perceived value".  Low in the USDX last Gold bull market was 70.  Don't be surprised to see mostly sideways currency action and to see Gold and Silver do a lot more with a lot less dollar weakness. 

Additionally here are 10 yr notes.  You can see we have been declining in lockstep with gold since Aug and are now at the lowest "post covid crash" levels, indicating 10 yr interest rates are at their highest levels.  Again, testing the 23% retracement of the move from the lows in Oct 2018, to the recent highs.  This also looks to be testing a strong support level that is likely done correcting.  This has correlated much closer to gold since they both made their lows in 2018, so a bottom here in 10 yr notes is certainly a tail wind for the metals.  

Finally, I will share with you my Gold cycle chart, for the purposes of timing. Since 2006, it has nailed every major cycle low in gold within a reasonable time frame.  It is certainly not always to the day, but waves higher and lower in markets are like tides in the ocean; They usually follow a similar rhythm and timing.  We are right on a major cycle low.  The exact bottom date for the cycle is Jan 3.  Our Nov 30th low was 1 month early.  Our current move is 1 month late.  Regardless of what price was, buying dips in this 2 month time frame will reward you.  Just like it has in every other cycle low for over 15 years.

So in conclusion, we are right there. We could see a reversal very soon that sends us much higher.  If a further plunge were to occur, it will likely be short lived capitulation.  This is not something to worry about nor is it something to trade.  It can be very fast and then it's over.  If you think you can get clever and sell and jump in at lower prices later, you will lose your positions.  Money isn't made buying and selling, money is made waiting, so sit tight.

Hold on, don't panic.  Turn off the computer if you need to and walk away.  We're almost there.

-Jonathan Mergott

Withholding Production and PM Dividends Part 2

    Before getting into part 2, I want to look at where we stand in the PM markets after a very interesting week.  We had a spectacular move in silver and some silver miners on Thurs and Fri, specifically First Majestic on the back of the short squeeze movement in GME and AMC.  Silver moved up on Fri to nearly touch the 28 level it dumped from earlier this month.  The silver chart technically, looks beautiful, and is sharing the “cup and handle” formations I’m seeing across the entire silver complex.

    

    What I am concerned about right now is how far ahead of gold silver has run.  The 28 level on silver is where we dumped from earlier in Jan.  On gold that level is 1960.  Currently silver is $1 below that level and gold is $110 below that level.  That is a pretty big divergence, and we can see it in the plunge the GSR took below the consolidation it has been holding since Aug at around the 70 level.  In the long run, silver has a lot of catching up to do with gold and a massive outperformance is what I am expecting, but this kind of divergence in the past has led to fake outs. 

    In addition to the Gold/Silver divergence we have the GDX divergence.  While many silver miners have been killing it recently, the GDX is dragging across the bottom.  The “dump” level on silver is $1 away, which is roughly 4%.  For gold its $110 away which is 6%.  For the GDX, that level is about 39, which is about 13% higher from here.  That’s a VERY big underperformance, and that typically isn’t what happens during strong trending moves higher.  Looking at the GDX/GLD ratio, we can see miners are continuing to underperform vs the metal, which has been the case since Aug.

    Here is what I want to see.  As silver is now just under 28, I want gold to start gaining ground towards the 1960 level.  At least pushing above 1900.  Meanwhile, the GDX needs some very strong moves to begin the typical outperformance we can expect from long trending moves higher. I want a push back towards 38-39 and I want to see the GDX/GLD ratio, currently at 0.20, push above 0.21.  While this is happening silver consolidating under 28 would be typical bullish behavior while gold catches up a bit.  This also gives us the typical back test of the consolidation break down in the GSR that we would expect.  If we get something like this in the coming days and weeks, it will definitely look like we are entering a strong multi month move higher for PMs and miners. Perhaps it is the chronic contrarian in me, but for now my outlook regarding the last 2 days of moves in silver and silver miners is still “cautiously optimistic”.

    In addition to the chance that silver maybe faking us out for now, I have been saying for weeks that insane movements in all assets, bullish sentiment and complacency in the market have been worrying me a lot.  This short squeeze stuff with GME taking down funds that now must sell many other assets, bonds, other stocks, PMs, etc, could spiral into a fast move down in all assets and into the dollar as people raise liquidity.  Don’t take this the wrong way, I am not predicting a crash, I am not advising selling anything and trying to buy it back cheaper or shorting stocks, gold etc.  I am simply saying the environment right now is very risky so plan accordingly. Now is not the time to be holding leveraged ETFs or a margin balance. Unleveraged portfolios only need to hold, and you will be fine in the long run. Gold corrected from 1700 to 1450 back to 1700 in 12 days last March.  A liquidity panic is not something that changes a trend or stops a bull market, its just a panic event.  I am just simply saying, the likelihood of us experiencing something like this is more elevated, so acknowledge the risk.

 

Now on to part 2.  Precious Metal Dividends.

    I’m going to start with another story that my grandfather and father originally told me, and also heard Jim Sinclair talk about 10 years ago when I worked with him doing investor relations.  During prohibition, National Distillers Products Corp was no longer able to sell alcohol for public consumption, so they shifted their attention to producing chemicals and industrial alcohol.  All the whiskey it had in its warehouse was forced to just sit there and age. (Horrors!)  When prohibition was repealed in 1933, National Distillers had already been operating in the chemical and industrial sector and had changed their name to Quantum Chemical, so they weren’t about to jump back into the whiskey game.  But here they are, with a warehouse full of now 14 yr. aged whiskey which is legal to the public again.  So, they decided to pay a dividend in whiskey.  For every 5 shares of the stock you had, you got a receipt to pick up a case of whiskey from their warehouse.  Naturally, the stock skyrocketed because everyone wanted in on a dividend paid in whiskey.

    Now there’s another aspect of this story I want to highlight.  During the time of the great “whiskey dividend”, whiskey was in very short supply.  It had been illegal so there was no one producing a large amount of it.  One reason for the skyrocketing of the stock was so people could get their hands on good whiskey, because it was impossible to find.  Not unlike gold and silver bullion is today.

    For anyone who doesn’t know the technicalities of it, when you are selling a stock short you are borrowing it from someone who owns the stock, selling it today at the market price, and hoping you can buy it back cheaper later.  You MUST return the same amount of shares of stock you borrowed, no matter what the price is.  Ideally, the stock goes down and you can buy it back cheaper, return the shares and pocket the difference.  If the company pays a dividend in that time frame between when you borrowed and sold the shares and when you returned them, you as the short seller are responsible for paying it to the person who’s shares you borrowed.  This gives an added cost to shorting companies that pay good dividends, and paying a dividend in the first place is often enough of a deterrent to make a short seller pick another target in the sector he is bearish of.

    In the situation with National Distillers, nobody was short that stock.  The extra complication by paying a dividend that was not cash would be incentive enough to make short sellers stay away, but whiskey was impossible to find.  They used something that was in very short supply to pay as a dividend that nobody else was able to get their hands on, effectively making trying to short the stock absolute suicide.  If a precious metals miner were to take up a dividend policy that paid in bullion, ALL short sellers would exit their position.  The stock could trade freely based on value, not games played by big guys who pound it down to make a quick buck.

    As PM investors we have a few common beliefs among us.  One is a generally agreed upon notion that physical supply of gold and silver is unbelievably small.  Even the smallest rebalancing of portfolios by SOME wealthy individuals to include physical gold and silver would absorb ALL existing supply.  In fact, a friend who exclusively invests in bullion contacted Kitco in December looking for Gold Pandas.  They had a “whopping” $400k of them.  A moderately wealthy upper-middle class person looking to diversify their 4m in retirement savings to a 10% physical gold position would take all of it, and there’s nothing left for you.  There has been much debate over the years as to the methods to invest in Gold and Silver.  Some prefer bullion only, some prefer shares with more leverage to higher prices.  Many want a balance of both.  We all also understand that after physical supply is gone, the only thing left is the miners.

    When you’re holding your bullion in your hands, there is nothing standing between you and it.  No middleman.  But in the course of acquiring that bullion you had a miner, a mint, a dealer, a coin store, a pawn shop, etc between you and your gold and silver.  As shareholders in mining companies, we are owners of the companies pulling it directly from the earth. The only middlemen are the company’s management, who are obligated to act in the best interest of us, the shareholders.

    In Part 1, I talked about mining companies being in a position now to withhold a percent of production for not only higher profits, but to constrain the physical supply market and constrain those “players” that like to “play games” with PMs.  A move like this would take bold management to pull off, but it is not impossible.  However, the idea of a PM dividend is much less risky for the average miner to do.  Right now, #silversqueeze is trending worldwide.  I encourage these efforts to buy up bullion so there is not enough for these “players”, but I have bad news.  There is not enough for us either.  However much bullion you have now, if I asked you how much do you want to have, you’re probably going to answer “more”.  How will we get more physical when the dealers, pawnshops and coin stores are plumb dry?

    Easy.  We are the owners of the companies pulling it out of the earth.  We deserve the right of first refusal on their production of gold and silver BEFORE it is sold to the rest of the market.  If a miner is going to pay a dividend that costs them say, $10m a quarter, that value worth of the metal should be set aside for the dividend to shareholders that want to opt into a bullion dividend.  After that, it can be sold to the market. Remember the cabbage patch kids and tickle me Elmo crazes?   Flew off the shelves, no one could get their hands on them.  You really think the owners of the companies manufacturing them had to disappoint their kids Christmas morning because they couldn’t get one, or do you think special exceptions were made to give some to the owners before selling to the rest of the market? Now picture that we’re talking about something actually important, like gold.

    I mentioned in part 1 that a production withhold would likely be easier right now for a silver miner than for a gold miner, and I believe the same for a PM dividend.  Say a gold miner pays a 2% dividend.  On a $100k investment, that is $2,000 a year.  Which is enough to get 1 gold coin a year from.  On a silver miner with a 1% dividend yield, a $25k investment would get you $250 a year, enough for 10 silver coins.  I personally would much rather earn 10 silver coins on $25k then 1 gold coin on $100k, but that is also in general why I favor silver right now and why I expect a much lower Gold to Silver ratio.

    Now I know what everyone is thinking.  Logistics.  Are companies really supposed to mail bullion to shareholders?  The costs, the time to do it, the paperwork, insurance, etc.  It would be a nightmare.  But there is another way.  Some mining companies have a bullion store where you can buy coins and bars directly from the miner’s website.  I’ve bought from both First Majestic and Great Panther before. Now picture this… As a shareholder, you choose to opt into a PM dividend.  You signup with an account at the miner’s online bullion store.  You include information to verify the shares you hold.  Every dividend cycle, a virtual gift card is replenished with funds you can use to buy bullion with and pay for shipping and insurance on bullion that has been withheld from the market and earmarked specifically for shareholders first.

    There would have to be some restrictions, of course.  This is not 1933, 5 shares will not get you a whole case of whiskey.  In Sprott’s PSLV fund, you can redeem the silver you just have to own a significant amount of the fund to do so.  Perhaps not that constraining, just enough to eliminate those that only hold a few hundred shares for instance.  I know I certainly would not mind paying the shipping and insurance costs out of pocket to have bullion sent to me if I was even offered the opportunity to be paid a dividend in PMs, and I imagine most would agree.  Additionally, National Distillers stock went significantly higher, from about 19 to over 100 largely based on people buying it only for the dividend.  How much money would you pour into a miner that offered bullion as a dividend?  Additionally, if your cash right now is tapped, how many other mining stocks would you sell in favor of buying the only one that pays a PM dividend?

    There is a significant opportunity here to be a leader in the PM space by paying a dividend in bullion, and it doesn't need to be as complicated as it sounds.  I have never met a PM investor who's eyes didn't light up at the idea of a dividend paid in gold and silver.  It is something nearly all shareholders of PM miners want.  Physical metal is something we all know will be impossible to obtain for most people if there is any significant money moving into PMs and bullion that drys up supply.  We are already seeing it.  Bullion dealers are increasing premiums since this morning, some are out of stock.  Others are refusing to sell until they see where prices open tonight.  There is only one place left to acquire physical bullion from when supply runs dry and that is directly from the companies pulling it out of the ground. 

    Contact the companies you are shareholders in.  Push them to withhold production for higher prices.  Push them to sell bullion direct to the public and to offer a dividend in bullion.  Tell them as a shareholder, you want right of first refusal for their gold and silver, BEFORE it is sold to the market!

    On a final note, I just wanna say I am blown away by the #silversqueeze movement and everyone that has been working so hard to push this thing into the public light.  I've been in this industry for a bit and everyone in it knows how incredibly small it is.  1% of the market cap of Microsoft, Amazon and Apple could buy NEM outright.  10% of their combined 5 Trillion market cap could buy nearly every gold and silver miner on the NYSE.  Gold and Silver have never been mainstream investments, so when I see #silversqueeze trending on twitter in NYC that is HUGE!  I don't know if this is what ends up blowing the lid off or not, but it is very clear, something is brewing.  For decades, Gold and silver bugs have been waiting for the day the PMs begin to fairly represent their true values as hard assets against the US dollar and other fiat currencies, and many have not lived to see that day.  We are witnessing history.  We are part of it.  Push forward.  #Silversqueeze.