Don't panic to book profits just because you have some.

It’s been two and a half months since I called for a low in gold on March 3^rd at about 1705. We dropped about 1.8% lower to 1673, but that day was the exact low in the GDX.  Now, gold and silver are finally breaking higher. Gold is up $200 from that low, miners are screaming, with the GDX up 30% from that bottom call, and gold bugs are happy for the first time in months. Are we a bit over extended? Is enthusiasm too high? Could we pull back a bit? Absolutely! A few thoughts though before you rush to take profits now that you have some…

Jesse Livermore is widely regarded as the best trader and investor of all time.  He was also a business partner with Bert Seligman, Jim Sinclair’s father.  (I’ve mentioned this before, so as many of you may know I worked for Jim Sinclair for half a decade starting in 2011 as an investor relations consultant, advising him and management of what shareholders want to see, so I’ve been privy to some stories about Livermore’s life and their experience with him, as well as some of Jim’s own, often wild tales, straight from the horse’s mouth.)

Livermore famously said, “Be right and sit tight”. But to expand on that, he also said “Do more of what’s working, less of what isn’t” sounds kind of obvious, right? But you’d be surprised how many people do the opposite, so let’s break that down. It goes hand in hand with an old trading adage, “kill your losers fast and let your winners run”.  There’s only 4 possible outcomes of a trade or investment: you make a small profit, you make a small loss, you make a big profit, you make a big loss.  Theoretically, if you dump your underperformers before they get a chance to be big losers, then the only outcomes you're left with are a small profit, a small loss and a big profit.  From an accounting perspective, the small profits and the small losses all even out in the wash and at the end of the day all you’re left booking is the big profits.

“Do more of what’s working, and less of what isn’t.”  In other words, if your positions are making you money, your analysis was correct.  It makes no sense to exit positions that are confirming your thesis.

Another word of caution.  Do not put too much faith in correlations.  If you’re worried about a dollar rally, don’t be.  It usually means nothing when gold is in bull mode like it is now.  If the dollar is going higher, it’s just a loss of confidence in another fiat currency in the race to 0 for all of them. Two months ago there was an article that perfectly marked the gold bottom, called “Gold has failed.” In reality, bonds have failed. There are 2 safe havens left, and that is cash and gold. I absolutely can see a situation where both rally strongly together.  As I’ve pointed out before, in 2010 the dollar rallied 20% from around 73 to 89. Gold dipped initially, but by the time DXY was 89, 9 months later, gold was actually UP, from 1220 to 1250.

The caution carries over to underlying assets.  If you think a $50 pullback in gold is possible, amounting to around a 3% correction, TYPICALLY, you would expect about a 6% correction in the GDX. There is no guarantee that will be the case however.  Miners are waking up and dips are being bought. A short-term pullback in the metal means nothing in the grand scheme of their quarterly profits when the trend is clearly higher. A 3% pullback in gold could be a 1.5% pullback in the positions you sold.  While you’re waiting for the next 5% down on the miners you sold, they go 5% up and you panic and buy them back for more.  Now you have less shares than before and you’re eroding your wealth.

Another point, and a lesson from my own mistakes with silver during the 2011 moonshot.  Somewhere around 25-30/oz, we were quite overbought and extended, more than we have been in a very long time.  I expected a pullback, likely to retest the 21 area high from before the 2008 liquidity panic/margin call crash that sent everything down.

It never happened.

I took some profits on some silver miners that went up significantly, very quickly, expecting to buy them back during a good pullback that never came.  I had cash on the table that I wanted in silver miners, but I was short sighted and tried to micromanage a massive parabolic move higher. I can be a bit of a perfectionist at times and I had screwed up my plan, and it infuriated me that I was so stupid and short sighted.

Don’t cry for me, I did just fine.  But I could have done much better. Silver’s nature is to scream when it starts moving.  It won’t make sense, the typical expected pullbacks never come.  It’s a momentum chaser’s dream.  Consider the advancement of algo trading systems today vs 10 yrs ago and how quickly they operate, as well as the percentage of the market they make up. It could be much more violent and much faster. I’ve said repeatedly to expect volatility to increase as time goes on and that’s exactly what’s happened and it will continue.

One final point.  Gold Ventures, or GV as we all know him, nailed this perfectly in his thesis when he developed his positions a long time ago.  It’s the SIT-folio.

So SIT.

You MIGHT get a chance to make some adjustments on a pullback if you’re lucky, but don’t count on it.

Don’t make the mistake of trying to micromanage this.  If you’re exclusively a trader, it’s fine take logical profits. If things move higher, it doesn’t matter you’re on to the next thing.  Your goal is income. 

That’s not what I’m doing, and it’s not what I think anyone should do in this PM bull market. This isn’t a trade. I’m buying incredibly undervalued assets with extreme leverage to a massive bull market in precious metals. I expect to make multiple times my money when this is all said and done, and set my foundation up in a place where it can sustainably continue to donate to charities worldwide for centuries to come. In terms of that great big picture of hundreds of percent returns, a 3% pullback in gold is absolutely meaningless.

The safety bar has come down and is locked in place and the roller coaster is moving.  You’re in it now, so get ready for some lightning.

 

-Jonathan Mergott

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