Regarding my Gold & Silver Price Targets

I’ve been getting a lot of flack the last few days regarding my gold and silver price targets, but especially my targets on the miners, so I wanted to take a min and explain why. 

Sentiment in Gold and Silver is terrible right now.  Price action in gold reminds me of lows we saw in 2016 and 2018.  Sentiment and bearish talk like “Gold has failed” articles that have floated around recently remind me of 2006 and 2008, where we saw similar articles talking about "gold is on its way out as an investment asset".  Gold had broken higher in 2006, highest level in decades.  There was no financial crisis… yet.  Nobody knew why it was going higher.  Bob Pisani, in all his wisdom and certainty, proudly proclaimed, “Believe me folks, gold is going nowhere” (after almost tripling from its low a few years earlier and would go on to nearly triple again a few years after.  So far, we have doubled from the 2015 lows amist similar sentiment).  

No one saw the housing market bubble around the corner, the same as they never saw the tech bubble a decade earlier.  By 2008, it became apparent there was a problem, and gold broke to new highs at 1000/oz.  The market crashed, and margin calls took everything down with it, including gold which dropped 30% from 1000 back to 700, near the highs in 2006.  As the world as we knew it was literally melting down, Maria Bartiromo said on CNBC, “Why is gold going higher, jewelry sales are plummeting?” 

80 years after the Great Depression and 30 years after the Great Inflation and gold buying frenzy of the 1970s, we had a generation of people who had no idea what gold’s purpose was.  Interestingly, investors still did, which is why it rose rapidly as panic ensued.  We find ourselves in a similar situation today.  The world began to melt down due to Covid and gold broke to new highs in Aug 2020 on the back of stimulus, 0% interest rates, fed balance sheet expansion, and general fear.  It has since had a long correction, which has frustrated gold bulls as bullish news throughout this correction about inflation expectations, deficits, stimulus, and continued Fed balance sheet expansion have had zero effect on price. 

This is again, similar to 2008-2009.  Bailout packages, TARP, Cash for clunkers, trillion-dollar deficits, and Fed balance sheet expansion all had zero effect on gold as it struggled to climb back to 1000/oz.  Since March of 2020, the market has rebounded from a 30% loss in 4 weeks, to incredible new all-time highs.  This has only solidified the idea that all you need to do is buy the dips in stocks and you will be fine.  Gold serves no purpose.  In the early 2000s, my father was a broker advising his clients to begin buying gold miners, much to his boss’s dismay, who said to him, “Who needs gold when you can just buy puts on the S&P?”  The simple fact of the matter is, Gold moves when it wants to.  All the news you are seeing now that is frustrating people expecting gold to move higher on it, was already factored in.  If you are an investor in gold, are you surprised by inflation expectations?  Are you surprised that Powell is going to leave rates at 0 for the rest of the year no matter what?  Are you shocked at deficit levels or additional stimulus from the government?  Was ANYONE actually surprised that the Fed said they will likely never sell off their nearly $8 trillion balance sheet?  Neither was the gold market. 

I realize I am deviating from the point of my targets on gold and miners, but I’m trying to set the background for what we are dealing with: A world where nobody cares about gold or mining companies despite making greater profits now at today’s prices than ever before in history.  We have seen this before prior to, and even during the financial crisis, and we are seeing it again today.  The PE ratio for NEM and ABX are 19 right now.  The PE on KGC, AU, and GFI are 9.  If I said there is an S&P 500 company in an industry that’s currently in a bull market, selling for a 19 PE ratio, with a 3.5% dividend, you would expect some interest from investors.  Tell them that company is Newmont mining, and they go back to looking at TSLA and Bitcoin.  Value investors do not care about gold miners, and momentum investors do not care that, or believe that we are in a bull market.  You would expect in a bull market a typical expansion of multiples, as investors begin a buying frenzy and get more and more greedy.  We are not seeing that.  While I believe it will occur in the future, we have to analyze things as they are today with those future expectations in mind.

Many have questioned, if I expect gold to increase to highs roughly 10% higher than Aug, and silver to double from here, why my targets on many gold miners are only back to Aug highs or slightly higher, and my targets on silver miners are up 100-150% from here.  It is simply that we do not see the bull market greed and enthusiasm to buy that many are expecting... YET.  If this begins to change, so will my expectations and my targets will be adjusted accordingly.  I expect it to change at some point, and I believe there is a good chance this next bull run will be that very catalyst. If so, we will begin to see miner’s prices begin to run ahead of their fundamental metrics as metals prices move higher.  In that situation, we can begin to look at my higher price targets for some miners which could be much higher, but this analysis will have to be done “on the fly” as and if we see it occur.

I believe my targets are conservative and realistic given this environment.  I am confident most will be achieved, even if my timing expectations are a little bit off.  It is easy to call for higher prices and even give a target of a specific price. Adding in a timing target for these prices compounds the difficulty of your analysis exponentially.  Give a price target, and on a long enough timeline, you may be right, but that doesn’t make it a great investment opportunity.  In 1999, when the Dow was 10,000 there was a book written calling for the Dow to go to 36,000, right before it fell to 7,200.  In a few more months, the writer of the book will be able to proudly proclaim, “See, I was right!”, 22 years later.

I just want to make a note here.  I have no subscribers on my website, all my content is free to all.  I write what I believe, and I write when I feel it is relevant to do so.  I am not beholden to newsletter subscribers to post content weekly simply because they have paid me to do so, even if I don’t believe there is anything for me to say to give value to them.  There are no advertisers sponsoring my website.  I am not being paid by any company to sponsor content and promote their stock. I am not out here saying “Gold is going to 50k/oz tomorrow!” for clicks or to excite people so you will subscribe to something and pay me to tell you why.  I spent my 12 year career as a gold and silver equity analyst and portfolio manager for a private equity firm.  I also spent about 5 years during that time as an investor relations consultant for gold and silver companies, where I worked closely with Jim Sinclair for years.  Today, I manage a half a century old 501c3 nonprofit investment fund that donates its proceeds after expenses to various charities, mostly focused on helping sick children.  Additionally, I manage my own investments and advise and manage the investment accounts for some friends and family.  I make money one way, by being right on my analysis and investment choices.

So, this is the reason for my targets, because they are realistic and attainable.  I am not trying to sell the illusion of grand riches to people claiming 10 bagger returns in 6 months.  I want people to be able to make some money.  On a portfolio of gold and silver miners, I fully believe you can double your money.  I think by most metrics, that’s a fantastic expectation and an amazing return in the time period I expect.  There are 10 baggers out there, and I believe we can see that when sentiment changes.  Investors will enter a buying frenzy and major producers will frantically begin buying junior companies to replace quickly diminishing reserves.  As I mentioned, I fully expect and believe these targets can be reached and ideally begin to be raised on this next move higher, but for now here is where we start because everybody HATES gold.

This is the BEGINNING of the bull market.  We haven’t even begun to see what’s coming, in terms of inflation, government spending, deficits and debt, and gold and silver prices. Nobody knows why anyone would want gold and silver, after all, the stock market is soaring and so is Bitcoin.  They will find out, the same as they did from 2009-2011, and from 1978-1980. Old money will panic into gold, as they always do.  Momentum chasers will buy into the frenzy at the exact top.  We will be there to sell it to them.  Hold on and be patient.

-Jonathan Mergott

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