Gold Tailwinds: Don't buy a Bear Market and Don't sell a Bull

Quick update on metals here, because there are a few things worth discussing.  First of all, it’s worth noting the impressive weekly candle on gold here. From the amount of the drop Sun night to a reversal closing at highs for the week, its very hard to find a comparison of anything like this gold has done in the past (In a similar magnitude that is.) One of the closest, (on a weekly scale) I could find was Nov 2014, when gold reversed from a low of 1130 to close the week at the highs at 1179.  The next 2.5 months gold gained an additional $120 from there.  From a technical standpoint, this is definitely bullish.

Additionally, it proves the point I made in my last article that I published Sunday morning, Aug 8^th, BEFORE the plunge occurred later that night when futures opened. I wrote, regarding those who always use the manipulation argument to explain away their bad calls, trades and investments:

“Yes, all markets are (manipulated), in the short term. But if there was overwhelming demand to buy gold at 1850, investors wouldn’t pass up the opportunity. We wouldn’t be sitting here $100 lower. There are people whose sole job is arbitrage. They will buy 50m in Euros from a seller knowing they can offload it to a willing buyer 10 seconds later for 1/1000 of a penny higher and keep the difference. If gold was mispriced, they’d be buying it.”

When futures opened, gold dropped $80 from 1760 to 1680. Within 5 days investors saw the value in gold being “mispriced” and bid it back up to 1780, $20 higher than we started. Regardless of the reason why behind the drop, it was a complete BS move, plain and simple, and the market recognized that. In this instance, the crowd screaming manipulation was right, and it was proven by the reaction in gold in the days that followed. But beware, because they will scream manipulation on every drop and that won’t always be the case. This is what they did all the way down into a bear market from 2012-2015 that saw the GDXJ lose 90% of its value from the 2011 highs.

There are 2 other major tailwinds for gold right now, the first being COT positions, and the 2^nd being sentiment. Regarding the last COT report, we can see that large spec positions in gold are at their lowest in a year. These are about the same levels as the March lows as well, which is a good sign. A quick note on COT reports for those who may not be familiar:

Large specs are hedgefunds, essentially. Small specs are you and me, (retail investors), and commercials are the producers and hedgers who act like merchants to the large and small spec groups. If you look at COT reports, what you will find is, (Not always perfectly, but within reason) the large specs are essentially trend trading, momentum chasers. They buy what is going up. They typically, as a group, have their position sizes increasing as an asset moves higher, meaning they are most long at market tops, and least long or sometimes even net short at market bottoms. They’re positions move mostly in line with the underlying asset. Small specs often mimic this as well.  Commercials on the other hand are the ones selling to the large specs and small specs who want to buy. As a result, their positioning is typically INVERSE to the underlying asset. So, they are most SHORT at market highs and least short, and sometimes net long at market lows. This is why they are looked at as the “smart money”.

Below is an example of what I mean with current OJ futures. Notice how at the decline in price in Oct last year, Large specs (green line) went net short, right at the lows, while commercials (red line) were net long. OJ rallied and large specs chased price back up, then sold as it declined again. Now with OJ at 52 week highs, it should be no surprise that large specs have their largest long positions in it during the same time frame. Retail is also the most long in one year.

An important note though. Although they are typically wrong at major turning points, large specs are the group that drives markets higher. If you want to see a strong uptrend in an asset, you want to see large specs continuing to increase their positions as that asset moves higher. Without them, you rarely get good trending moves. So, in the situation with gold, we want to see them selling and have their positions dropping going into a low, and then increasing steadily as we begin moving higher, ideally continuing to increase to new highs on their positioning.

The tailwind for gold here is that large spec long positions are the lowest in 1 yr, and about equal in size to their long positions during the March low. This is a good first step to marking a low. From here we want to see their position sizes continue to increase as the market moves higher, indicating that they are buying strongly.

Here’s where it is problematic. While on surface value, “lowest large spec long positions in 1 yr” is bullish, digging a bit deeper as to the “why” behind that raises some concerns.  For instance, looking at large spec positions in gold over the last year we can see their positions near highs have been steadily decreasing, meaning they have been overall, less long than they have been previously, which indicates they are losing interest in buying this market. We can see the same looking at the small specs as well. The problem here is this, as a basic general rule of investing and trading,

Don’t buy bear markets and don’t sell bull markets.

And the reason behind that is simple. If you buy into a down trending bear market, expecting to nail the low because a rally should be coming soon, you will often find the asset continuing to head lower and by the time the rally comes, you are lucky if you are break even. Same with selling bulls, don’t sell expecting a top and a correction, because by the time it comes, you very well could be higher than you were when you sold. In short, don’t make things harder for yourself by trying to swim upstream. Stick with the trend, buy dips in bulls, sell rallies in bears.

This is why “lowest long positions for large specs in 1 yr” isn’t necessarily wildly bullish in the medium & longer term.  Here is a picture of gold and the COT positions from 2007-2016. The first thing of note here is that large spec long positions (green line) near the end of 2011, began declining to the lowest levels since 2009. There was a bit of a lack of interest by the large specs while gold was consolidating here.  The final rally to test that 1800 level saw a bunch of large specs “suckered in” right before the bear market decline started. You can clearly begin to see a “downtrend” in their long positions and thus, their interest in gold, prior to the downtrend and bear market in gold itself. During the 2013-2016 timeframe, large spec longs were SIGNIFICANTLY lower than during the bull market timeframe from 2009-2011. Even after big rallies higher, large spec longs peaked at less than half the number of contracts they had held at previous highs during the bull market.

So, the worry here is that “lowest long positions in 1 yr” may not just be a mark of a low in gold, but instead a complete lack of interest in the asset by the group that is very important for driving prices higher. The warnings to look for here would be if a significant rally were to happen in gold, and in turn we see much lower long positions for the large specs, indicating their continued lack of interest. They follow that simple ideology of “don’t buy a bear market and don’t sell a bull market” which is why long position sizes dropped significantly as gold moved lower. So, this is not what we want to see repeat itself if our bias on gold remains that it is in a bull market.

The other tailwind here is sentiment. Aside from the die-hard gold bugs, very few people are enthused about gold right now, and again, its large institutions buying that drive prices higher, so their interest is needed for a trending bull move.  Our opinion as retail investors, is of little significance if we are standing in front of billions in institutional money that is looking to sell. The daily sentiment index for gold (DSI) hit 8 this past week. That is incredibly low, possibly the lowest I can recall seeing, even in the 2 major lows in the bear market, 2016 and 2018. From a contrarian standpoint (and we all SHOULD be contrarians in the market if we expect to survive) this is INSANELY bullish. I believe the DSI for gold hit around 15 at the lows in March, so this would indicate nearly no one is left long in this market.

Now sentiment is not the most accurate indicator for price or timing. Incredibly low bullish sentiment like this can continue for a while and price can continue dropping for a while, but within reason, accumulating quality positions for the medium term when you see sentiment like this, is almost guaranteed to be rewarded. But the problem here that arises is basically the same issue we have with the COT reports.

Months ago when I was very bullish of gold and silver I was expecting a consolidation-breakout-consolidation type move. In moves like this, we see sentiment reach extremes during peaks, then slide downward as bulls get frustrated with the consolidation. So, for example, a fast rally in gold could see 90+% bulls at the peak, then slide for a while till bulls are more like 30-40% at worst, then repeat. You don’t want to see extreme low levels like this because it indicates everyone has left, and in a situation like that, you don’t see a resurgence of bullish momentum return at the drop of a hat. Usually, it is a long grind higher and consolidation that exhausts the bears and makes people begin to take notice again. That’s what occurs in a BULL case of seeing incredibly low sentiment.

In the BEAR case, we could easily see extreme lows in bullish sentiment on gold provide a fast rally that sends shorts scrambling.  Bulls jump in, getting excited and we could be much higher in a few weeks. After say, a $200 rally from lows, DSI could return to a level near 60…

And then see the selling resume.

Just as the long positions in large specs do not return to levels they were at in the bull market, because of lack of interest, we can easily see bullish sentiment peak at much lower levels as well, and stay declining at extreme lows that in a bull market, would be considered screaming buy indicators. DSI at 15-25 might be a great buy point in a bull market, like it was in March where we rallied $250 from the lows in 2 months. But in a bear market, a DSI at 15 could just be on its way to 8 again, and there could be a huge loss between those 2 points.

RSI is the relative strength index. It is not a sentiment indicator, so this might not be the best analogy, but on one hand, sentiment is a strength indicator in a way. RSI provides a reading of “Strength” on a scale of 0 to 100 which in that sense, is similar to bullish % sentiment indicators, so I believe it works for this illustration. Obviously, levels at 0 or 100 are rarely if ever seen, but in general, readings below 30 mean oversold, and readings above 70 mean overbought. But it is not as simple as saying “its oversold therefore we should rally soon.” In bear markets, oversold conditions STAY oversold for long periods. Bad can get worse, and buying a bear market because its oversold is usually a losing trade. The same is true in bull markets. Selling a bull market because its overbought will more often than not, see the asset keep going higher and remain overbought before a meaningful correction.

This can be especially true on longer term charts. The SPX monthly chart became “overbought” with RSI above 70 in Spring of 1995. RSI stayed above 70 for 3 yrs until a correction in Summer 1998, took it back below that level.  At the bottom of that correction, the SPX was still 100% higher than when it first became “overbought.”

Here are 2 examples of RSI that I had posted before in an article a few months ago but I am going to use again to illustrate my point on sentiment as well as COT long positions of large specs. One of a bull market and one of a bear market. 

Below is Macy’s chart from 2009-2016. Notice how as it rose from a low of $5 to a high of $75 in 2015, that in addition to maintaining the uptrend line, dips in RSI did not go below 40, and “overbought” conditions above 70 stayed there for a few weeks at times. In 2015, the uptrend was broken and RSI went “oversold” around sept at a price of 50/share. It stayed “oversold” for weeks while price dropped 30% down to 35, a more than 50% loss from the high. Rallies afterwards saw RSI top out near 60 then continue lower. Ultimately, by the low in March 2020, Macy’s was right back to 2009 lows at $5/share.

 

Next is Ford from 2013 to 2021. It peaked at 18/share in 2014 and began trending lower. RSI topped out at ~60 as it trended down and peaks in price were pushed back by the downtrend line. In early 2020, it was “oversold” at $8 a share and stayed there for over a month while it lost an additional 50% to $4/share. As it has rallied since then, pullbacks in price have been accompanied by much higher RSI levels which have not fallen below 50.

 

Focusing on the F chart, we can see a few occasions where oversold RSI saw a bit of a bounce, and if you timed it perfectly, you could catch 10% upside before it began rolling over again, but overall, this chart was better suited to be selling rallies where RSI pushed up to ~60. We can see the opposite with M. Buying dips near 40 was very profitable and trying to sell when “overbought” was far less profitable. It simply depends on correctly identifying if you are in a bull market or a bear market and not fighting the trend.

I saw somebody had posted the Gold miners bullish percent chart recently on twitter.  (Didn't see who and can't find it now. Not trying to call anyone out, just using this to prove a point.) While this is actually a breadth chart, it is often cited to give an idea of sentiment. It also works on a scale of 0-100, like DSI and RSI. It is currently at 33, which for reference, is higher than at the March lows when it bottomed at 24. So I did a little digging into this chart in the past and what it looked like in the bear market, and lo and behold, it EXACTLY proves my point regarding sentiment that I was attempting to illustrating with the Macy's and Ford RSI charts.

When miners began dropping in 2013 the Gold miners bullish percent started at about 33. Same as it is right now. It then hit lows at EXTREME levels near 0-5 as the HUI fell from 450 to 200, a 55% loss. On every rally afterwards, it never got past 60, and mostly topped out at 50 while the HUI spent 2.5 more years dropping ANOTHER 60% down to 100. A total of a nearly 80% loss from the time when the Gold miners bullish percent started at 33 and LOOKED like miners were a good buy due to "Bad sentiment" given the fact that we were in a bull market. (Which we weren't).

Don’t buy bear markets and don’t sell bull markets.

In essence, this is my fear with Gold, silver and miners here, and longer term I am not seeing any indication that this is changing. I think it is a very real possibility that we rally strongly, see sentiment improve, see large specs begin to increase their long positions a bit, then top out at lower levels on all of these things and head right back down again.  As I write this at 1pm NY time on Monday, Gold is up $10 at 1788, trying to push back above 1800. Silver is flat at 23.78 The GDX is down 1%. The GDXJ is down 1.3%, and the SILJ is down 2.3%.  Remember the formula we want to see in bull markets I wrote about last week.

JR Silver > Major Silver ≥ JR Gold > Major Gold ≥ Silver > Gold

It is still exactly backwards, with gold outperforming all right now. Early last week I had mentioned on twitter that I was beginning to buy in small amounts as the risk reward here looked good. I bought a few Jr silver miners, closed my GDX puts, and bought the following calls:

GLD 160s Oct expiration

SLV 21s Oct expiration

GDX 33s Oct expirations and

SILJ 13s, Nov expiration.

The results so far after almost 1 week are interesting and disappointing, but understandable given my longer-term expectation that we are likely in or entering a bear market in metals and caution should be taken here.  My GLD calls are up over 65%. My SLV calls are up 9%. GDX calls are up 4% and my SILJ calls are up 3.5%. My Jr miners are a mixed bag, some up a little, some down a little. Overall, pretty much a wash.  Silver and miners are not performing even in line with gold, let alone outperforming, and Jr miners are lagging majors. Gold is up over $30 from Wednesday’s highs and the GDX is down 50c from there.

On Nov 30^th a made a point of saying on Twitter that I think we were at a bottom in gold. We were, to the day, and we rallied $200 over the next 6 weeks from there. On March 2^nd, I said the same, that we likely hit a major low. We headed about $20 lower from that point over the next 6 days and bottomed at 1680, but it was the low to the day on the GDX. 2 months later we were up $250. On Tuesday, after being VERY cautious about metals and miners for 2 months and voicing my concerns of a possible bear market coming in multiple articles I’ve written and an interview I gave as well, I QUIETLY mentioned I was buying here simply because of the risk/reward being beneficial. I didn’t “call” a low this time and make a point of voicing that opinion loudly like I have in the past and there is a very good reason why.

Because I didn't want people to hear that and think "buy."

I don’t want people to read my “calls”, remember I was right calling the major lows in gold twice before and buy now thinking we're in the same situation, because I don't think we are. Don’t buy bear markets and don’t sell bull markets, and I’m increasingly believing this is a bear market. (I know, I just broke that rule on Tues, but 1) I bought very small amounts, and 2) I am well equipped to handle the risk, and bail if I need to whereas a less experienced investor might screw this up and have big losses.)

If you are looking at the markets here and you’re beating your head against a wall, frustrated at the fact that silver is still underperforming and miners are not following the metals higher, you need to revisit the points I have made in previous articles. Wall street is the most competitive industry in the world. There are more rocket scientists working for Goldman than there are at NASA. People who manage billions of dollars are selling. Do you really think they’re all wrong? Do you honestly believe you’re the smartest person in the room? You think they can’t do the same basic Cash Flow analysis you are, the same that every college student majoring in finance learns their freshman year? Perhaps the answer is that you need to stay humble, and not stubbornly dig your heels in on your thesis, but instead HONESTLY and without bias, examine where you could be wrong.

Past examples can offer some clues here. As the saying goes, buy the rumor, sell the news. If the news is bearish reverse that, sell on the rumor, buy on the news. Gold declined SIGNIFACANTLY on the RUMOR of a taper coming. By the time it was announced in Dec 2013, gold finally saw some relief and bounced 17% over the next 3 months, only to continue heading lower on the expectation of a rate rise.  By the time we got a rate rise, of a whopping 0.25% in Dec 2015, that was the bear market low. The rumors of a taper are here again, and gold has been getting whacked significantly. The Fed has talked about raising rates in 2023, about 2 yrs from now. The similarities in the precious metals markets to 2013 are too significant to ignore.

As I’ve said before, I think this rally we’re getting here will offer us a lot more clarity on the overall direction of precious metals. If we begin to see buyers coming in strongly on dips, that will be a good first sign. If silver begins catching up and outperforming, that will be another plus in the bull’s box. And as always, we want to see miners outperform relative to the metals, so we want to watch out for that.

Inversely, if silver continues to lag, if miners continue to underperform metals and not “believe” this rally, that would be a very bad sign. One that we have seen in the past from 2012-2013. Miners underperformed and trended lower while gold consolidated. The miners broke down first, and anyone thinking they were smarter than the market and bought into that believing they were undervalued, and the market was missing something very basic and fundamental here, saw a 70% decline from those levels in the GDX.

Listen to what the market is telling you. My view here could be wrong, and I continue to hold out hope that this is a consolidation in a longer bull market that has just gotten started, but I would rather wait to see some confirmation from these indicators before I buy, then to try and catch a falling knife. I will happily pay more for assets I want to own if we get this confirmation. It’s like paying for insurance, and it will help me sleep at night. I will be paying attention to sentiment, watching the miners, waiting to see if we get a resumption of our bull market formula, looking for a good increase in large spec COT positions on this rally and waiting to see if buyers come in on dips, or if sellers begin overwhelming us again. But for now, patience.

 

-Jonathan Mergott

How to make friends and influence people

I haven’t been making many friends the last few months with my views on gold and silver.  I know this because besides the blasting comments I get from people, I continue to get more twitter followers and yet my total follower amount has gone down. It seems gold bugs don’t like it when other gold bugs say, “Hey, gold doesn’t look so hot right now.”  Don’t kill the messenger, I’m simply reiterating the market’s price action.  If you don’t believe what I’m saying, why don’t you ask your own portfolios?  You don’t need to be a technical analysis guru to understand that when a market has 4 red days a week and 1 mild green day, and that action has been continuing for months, you are likely not in a market that’s trending higher. Sometimes interpreting the market direction can be as simple as that.

Gold reversed the entirety of its strong move higher on Wednesday and got murdered once again after the jobs report Friday. Silver has been acting weaker than gold for months and that is not what we want to see in a bull market.  Usually, silver should lead.  Silver also broke an important uptrend line last week but recovered quickly giving us a little hope. On Friday, it broke that uptrend again while gold tested its long uptrend line since the 2019 lows.  Perhaps silver is continuing to lead, just not in the direction bulls want.

As I’ve said before, in bull markets in precious metals, we want to see silver outperform gold.  We also want to see miners outperform the metals and additionally, juniors outperform the majors.  The formula should work like this:

JR Silver > Major Silver ≥ JR Gold > Major Gold ≥ Silver > Gold

If you’ve been paying attention recently, it has been almost exactly reversed. Junior silver companies have gotten beaten with nearly 50% losses on many. Major silver producers have been terrible performers as well, but mildly better.  AG has lost 30% since late May while CDE has lost 40%. Junior golds have performed similarly to major silver producers.  GSS lost 40% since late May and intermediate gold producers like IAG lost 35%. Bigger gold producers like NEM, (the only one I think is worth owning), after being the only major to break to a new high, corrected only 20% from that level. Royalty companies, which performed extremely better than miners in the bear market have also held in very well and FNV is currently just 5% from its all-time high. Silver is down 15% from May when it was 28.60 and gold is down half of that, only 7.5% in the same time frame.

For those that read my last article published on June 29^th or watched the Palisades Gold Interview about it 1 week later, I talked about the major silver producers (and the major and intermediate gold producers fall in the same category as this), being in essence, “directional trades on the metal.”  Sure, they have individual stories, and some have done better than others, but mostly they are a leveraged bet on the direction of the metals. Juniors are building value through expanding their assets. Additionally, very large majors who have significant cash flow and dividends can offer some “protection” to the downside and royalty has the added benefit of reduced exposure to the numerous issues that can arise for mining.

This was my thought process when raising cash and majority of the things I sold were major silver producers and intermediate and major gold producers.  I took some money off the table in some junior silvers and royalty, but for the most part, I kept the largest chunk in stocks like FNV, RGLD, NEM, WPM, SAND as well as small sitfolio stocks that despite short term extreme volatility, will continue to build and add value.  I sold heavily in the major silver producers and sold the entirety of certain positions that have continuously underperformed. Additionally, I added puts on the GDX to mitigate losses on my core holdings and add to my cash.  This is seeming now like it was the exact right method to go about this.

I recently had a person criticize my incorrect previous bullish “calls” from before while another person commended my “calls” for caution from more recently and wanted to say something regarding that too. 

I am not a psychic.  No one is. I don’t have a crystal ball on the desk in my office that I consult for market directions. To quote the name of a book by Bob Moriarty (that I highly recommend) “Nobody KNOWS Anything.” I don’t know what will happen tomorrow any more than Buffett or anyone else. Gurus’ “calls” are guesses, plain and simple. Granted, they may be very experienced in that industry, but they are guessing, that is it and anyone can do it with enough experience and have a similar accuracy track record in their “guess” work.

The only thing I am doing is watching the market action. Tape reading as the old timers would call it. From there, I am using my 13 yrs of experience in watching the “tape” every single day for 8 hours a day to interpret when things are generally acting bullish or generally acting bearish, and if a shift is taking place from one side to the other. Past that, the rest is just gut feeling, and other clues I’ve picked up over the years that I have previously shared with twitter followers and anyone who reads my articles or has seen my interviews. But like I said at the beginning of this article, sometimes it’s as easy as looking at a continued pattern of many weaker red days and a few mildly strong green days to notice something is wrong. I believe that is what we began to see going into the month of June. We witnessed massive selling that continued unabated. Buyers were nowhere to be found. That’s not a good sign after believing we had capitulated only a few months earlier.

By far my biggest concern though, the biggest “gut feeling” that has me worried right now is listening to gold bugs talk.  I wish you guys understood how much it is EXACTLY the same arguments, explanations, excuses and conspiracies I heard from 2012-2015. In the end it was only themselves who suffered.

“The market is manipulated.” Yes, all markets are, in the short term. But if there was overwhelming demand to buy gold at 1850, investors wouldn’t pass up the opportunity. We wouldn’t be sitting here $100 lower. There are people whose sole job is arbitrage. They will buy 50m in Euros from a seller knowing they can offload it to a willing buyer 10 seconds later for 1/1000 of a penny higher and keep the difference. If gold was mispriced, they’d be buying it.

Even if it was a successful scheme of suppressing prices for a long period of time, what difference does it make why? The only thing that matters is if your making money or not. If you’re not, you don’t need to know every detail of why, you just need to recognize that, and adapt. Maybe it is the market, maybe it is manipulation. But most likely, it’s just you who is wrong. Would you rather feel better justifying losses to yourself, or would you rather make money?  

“We’ve never seen this much debt or spending.” Every single year our deficits and debt increase without fail, so you can say that everyday and it would be true. Our debt just hit a new high since I finished writing that sentence.  I have a book on my bookshelf called “The Hyperinflation Survival Guide” by Gerald Swanson, written in 1989. On the cover there is a red line shooting higher.  It’s a prediction on the national debt, which he expected to be 10 trillion by year 2000. A number that at the time seemed unbelievable and would surely collapse the dollar. He was off by about 8 yrs, we hit 10 trillion in 2008. Here we are in 2021 closing in on 30 trillion and the US dollar index is rallying to 93 and is very much still the reserve currency of the world. These things are not perfectly linear with gold, clearly.

“The Fed is trapped; they can’t raise, or taper and inflation is too hot.” They are not trapped, nor were they 10 years ago when Yellen warned the market repeatedly, she was going to raise rates, and kept raising them while everyone screamed how it “couldn’t happen.” (Ironically, that was gold’s low. Buy the rumor, sell the news. When the news is bearish, sell the rumor, buy the news). The Fed is SUPPOSED to be independent, and while we all know that’s not really true (Especially after watching Powell fold like Origami on rates after being berated by Trump), the national debt is not their problem, and they don’t care if increased rates cause it to rise more significantly. That’s an issue that congress got themselves into, and its congress’s problem to fix it. (Good luck.)

Additionally, inflation is here, its not coming. Sell the news! Especially when looking at inflation data and seeing that one of the biggest causes has been the supply chain issues due to the pandemic. Those ARE transitory, and likely to ease, as input costs already have.  Are we going to see 10% inflation in the future?  We very well could, but I’m willing to bet, based on what the market is saying that we will see DISINFLATION first, dropping to closer to 3% year over year before we do. (Which by the way, is exactly what happened in the early 1970s. From 6% inflation to 3%.  It doesn’t necessarily derail a long-term multiyear gold bull thesis, but in today’s volatile environment, it very well could make you suffer devastating losses in the meantime.  Like the 90% loss in the GDXJ from 2011-2015, that will never return to its highs due to dilution of shares by Jrs just to stay afloat. And many didn’t anyway.)

“The Dollar is going to collapse.” Maybe, but if you think America’s situation is bad, have you even looked at Japan and Europe? If the dollar is going to collapse, I believe the Euro and Yen will collapse before it. And being that the dollar is free floating against those other currencies, that means it will go much higher first.

“The stock market is a Ponzi scheme, and when it collapses, we’re going into a depression like no one has ever seen.”  Everyone knows this probably won’t last forever, but I’ve watched 12 years of everyone disbelieving every tick higher the market has made, and yet here we are at 4400 from a low of 666. That’s a 560% gain in 12 years that most of the doomsday, Zerohedge readers missed out on entirely, and still refuse to believe they were wrong about. The more people disbelieve the rallies and wait for crashes, the more it rises on a wall of worry. It truly is the most hated bull market in history.

As for the “depression like no one has ever seen”, it’s highly unlikely. Why? Because the biggest issue in the depression that made it so bad, as opposed to a just really bad recession that bounced back, was an utter collapse of money spending. People lost their jobs, and their spending went to zero. Then they lost their homes, they went hungry, etc. This is the very purpose of social programs like housing assistance and food stamps, unemployment etc. I am not trying to get into a political debate about right or wrong here, it really has nothing to do with that. Whether you agree with these programs or not, the BIG PICTURE purpose of them is to prevent spending from going to zero and a depression on that level from ever happening again, and it has worked. (And when all else fails, mail out some checks). 

We just watched an economic collapse where some data points came in WORSE than the depression and some worse than we’ve ever recorded. I’m not saying the economy is good right now, but clearly, we are not in the same place we were in 1933. (And a large factor in that is because when unemployment hit 15% last April from 4.4% 1 month earlier, people's spending didn't drop to zero) Can things get worse? Absolutely. Could we see years of devastating inflation or deflation? Of course. But so far everyone who has bet on the end of the world has been wrong.

“Who is left to sell here? How much lower can these stocks really go?”  To address the first part, YOU... You are left to sell. And many who think similarly. As for the 2^nd part, another story: One time I thought my analysis was smarter than the market and confidently said to my dad the same thing, “How low can it really go”. He shared with me what my grandfather told him when he made the same mistake of saying the same thing early in his career.

“ZERO. AND DON’T YOU EVER F***ING FORGET THAT!”

He didn’t, I haven’t. You shouldn’t either.

Add to all this, the countless pie-in-the-sky, utterly ridiculous "technical analysis" I keep seeing as if it is some guaranteed prediction of 10,000% gains, from people who clearly have no idea what they're talking about. Technical analysis is about analyzing the probabilities of what a market is LIKELY to do, ideally using multiple factors to support one's point. Drawing some lines with massive percentage projections higher to support your own bias is NOT technical analysis, or any form of honest analysis.

Around 2012, everyone was looking at this chart below for silver. A 30 year long cup formation, from the 1980 high at 50 to the recent high of 50 in 2011, and a sharp correction of nearly a perfect 50% consolidating to form the handle.  A move to 100 was imminent. What actually happened was a loss of another 50% from the handle's low of ~25, to 14, and then 12 in 2020. We then rallied back to 30 and have continued to consolidate since then.  It has been a DECADE now since the "imminent" breakout of this cup and handle. Could it happen?  Absolutely, eventually.  But we only have so much time to save and invest for our future. So far waiting on silver has burned 10 of those years.  It could burn another 10 as well. I'm not trying to knock or downplay the massive potential silver has in the future. I'm trying to play devil's advocate and point out the other side of this.  I'm simply saying, I've seen some of the most perfect patterns and technical situations fail before. Beautiful cup and handles just completely drop, rather than break higher like you would expect. I've also seen ones like this, that continue on for 10 yrs without a breakout.  I'm just pointing out the opportunity cost that waiting for silver has already taken from people, and could easily continue to while they think that a breakout is imminent.  I thought a breakout was imminent as well a while ago, but back then, we were on fire, consolidating with good momentum and generally bullish sentiment. That is not the case any longer. We are now likely in store for some slow building from here rather than a rip roaring rally. That momentum and underlying bullish sentiment is unfortunately gone from the metals.

Jesse Livermore was a better investor and trader than me and he famously said, “Markets are never wrong, but opinions often are.” If it seems like you are butting heads with your own analysis and the market’s action for an extended period of time, guess what? It’s not the market who is wrong. You are. Be humble, admit it and move on. The BEST in this business are lucky if they’re right 50% of the time. It’s a matter of managing your investments more so than calling tops and bottoms. There’s only 4 ways an investment or trade can go, big winner, small winner, small loser, or big loser. If you cut the bad investments that don’t act right BEFORE they become big losers, your small winners and small losers even out in the wash and all your left with is the big winners you let ride.  Another great quote, from Bernard Baruch (which I particularly like because I majored in finance at Baruch College) is “Don’t try and buy the bottom and sell the top, it can’t be done, except by liars.”

You can stick to your guns and hope your view is right, but hope should never be part of an investment thesis. I’ve watched a lot of people go broke that way. You didn’t need to buy stocks at 666 or sell at 4400, or buy gold at 250 or sell at 2100, but taking a large chunk in the middle by identifying the trend and not fighting the market worked out very well.   I would rather wait, and risk paying more for the things I want to buy to get some confirmation the market is moving with the bulls, then to try and catch a falling knife HOPING it was the bottom.  Consider the extra cost insurance, like paying for an extended warrantee on your long positions. 

On a more positive note, there are beginning to be a FEW signs of hope though. Miners to metals ratios are improving, however it is mostly on the back of “less bad” performance and not outperformance in a higher trending market. But this less bad action could be signaling a low is near.  SILJ was down less than 2% on a day when Silver was down twice that. It put in a low nearly 3 weeks ago and is sitting 5% above that level currently. That’s definitely a good sign. However, many individual silver miners look significantly worse. AG is 10% below it’s March low and CDE is nearly 20% below while silver is 1% above its March low. This is not good price action for 2 stocks that led the charge higher earlier this year. EXK is at its March low and only HL is sitting higher.

In the Gold arena, we are still about 5% above March lows. (That’s that safe haven status for you showing through). That is actually exactly the same as the GDX currently, up 5% from the March low of 31.64. But a further drop in the metal though of 5% to retest that 1680 area and I’d be willing to bet the GDX drops 10% or more. The GDXJ is at March lows right now. Looking at the GDX/GLD ratio, we are getting some consolidation that is showing at least a slowdown in the underperformance of miners, which is a plus, but we can also see a massive underperformance in the Jrs to majors ratio which is not very encouraging. Individual gold miners are a very mixed bag, and hard to get any other clues from.  The major plus was that gold closed on trendline support and Fibonacci retracement near 1760 and silver also closed at an important Fibonacci level at 24.28. At the end of the week, that could spell a bounce next week, but I wouldn’t take that to the bank. We could easily hesitate for a day or 2 and continue to plunge.

At the end of the day, it comes down to trend, and the trend is clearly lower.  Where the low is, no one knows for sure, but I’d rather pay a little more to buy with some confirmation that things are acting stronger, than to try and “catch a falling knife” because things SEEM cheap. They may only seem cheap relative to what they once were. I watched a lot of people buy things they perceived as cheap in the bear market because they were comparing "cheap" to where they were in 2011, not where they were then or more importantly, where they were going. They can always get cheaper. (Like zero). Remember, a nice juicy chunk out of the middle is a great place to be.

I wanted to end on a more personal note. Around 2014 I started a Twitter account to watch real time news events and hear people’s ideas and thoughts from around the world.  I never posted or commented on anything until about a year and a half ago. I now have almost 6,000 followers.  It blows me away when I think about that. My website here has had 64,000 views, mostly all in that same year and a half.  I’ve given a few interviews now that collectively, have been viewed over 22,000 times.

Guys, I am absolutely FLOORED by this, and it means a lot to me that so many people find value in the things that I say. As I’ve said before, I’m not selling anything. No one has paid me a dime for any of this. I can speak my thoughts with no conflict of interest. I have tried throughout, not to tell people what they should do or buy or sell, but how to think. How to approach analyzing the market, how to manage and balance their portfolios and their risk. To look at themselves and their own risk profile honestly.  To understand that the risks with “all in” can be devastating and the reward may not be much better than a more conservative balance. How to deal with winners and losers mentally and financially. Not to focus so much on why the market is doing something, but instead the “what next?”  And of course, to “Watch the miners” and to “Listen to what the market is telling you.”

Maybe it’s because I’ve spent the majority of my 13-year career working for a non-profit fund that is dedicated to helping others, and not trying to be the most cutthroat trader on Wall Street, but I genuinely enjoy helping people. I’m glad that so many have found value in these things I’ve said, and hopefully can avoid some common pitfalls and mistakes myself and many others have made in the past. As they say, “You pay for your education on Wall Street.” The goal though, is to pay as little as possible. I hope I have helped with that.

So, for now remain calm and patient. We wait to see some confirmation of strength. We watch to see the if the miners are outperforming, preferably to the upside next. We'll look to the formula to try to see if silver begins outperforming gold, if miners begin outperforming metals, and if Jrs begin outperforming the majors. We’ll watch to see if sellers continue to sell strongly into any push higher, or if buyers are coming in on the dips. If we get an indication of that, don’t get married to the position. It shouldn’t be “till death do us part, through good times and bad.” No, through good times, and then “you’re out of here,” kick them to the curb and find something else when they stop performing for you. We could see a major bottom soon that we want to hold long term, or we could see a quick opportunity to make a good 30% that we will want to sell if recent bearish price action of heavy selling into rallies begins to continue shortly after.  I am not ruling out a very long, terrible correction here in a major, multiyear bull market, but for RIGHT NOW it looks bad, and it’s not worth trying to predict what tomorrow brings. If things turn for the better, great. Let’s take that big chunk out of the middle. It’s not about buying the low or selling the high. SPX at 1200 to 4400 did very well. So did Gold at 600 to 1800. Listen to what the market is telling you. Humble yourself, you’re operating in the most competitive industry in the world. You are NOT the smartest guy in the room. Don’t marry your thesis. Be adaptable. If you can’t bend, you WILL break. And as always,

“Watch the Miners.”

-Jonathan Mergott

Gold and Silver: What the hell happened after the FOMC?

 

I’ve been insanely busy last couple weeks.  I got back from Lake George and we have some friends staying with us for the next few weeks that have been traveling. We’re having a bunch of furniture moved and delivered, and then I get to top it off with a pretty severe cold of some sort in June.  (Go figure). I feel pretty crappy but trying to get my thoughts down on the metals here.  I’ll apologize ahead of the time for the sporadic jumpiness of moving from 1 thought to another, but I’m focusing on getting those thoughts down, not on writing a perfect master’s thesis.  Inevitably I’m gonna miss some points, we can hopefully fill in some blanks with a Youtube Q&A in a few days when I’m feeling better, but let’s get down to the meat and potatoes of it.

Gold and Silver got murdered after the Fed meeting.  It wasn’t pretty. Moves like this, when were at this stage of the game I believe require us to sit down and calmly, rationally, and OBJECTIVELY analyze our thesis.  All signs seemed to point that we were ready to break strongly higher and we didn’t.  Quite the opposite. So, the question is why, what to expect now, and where do we go from here.

There are two things I’ve learned over the years in metals and mining and markets in general.  The first, as I’ve said many times before, is “Watch the miners”.  Gold rallied nicely to 1920 after my call for a bottom on March 2^nd at 1705.  The actual low was 6 days later and a whopping 1.7% lower, but March 2^nd was the low to the day on the GDX.  We rallied $250 from there, or about 15%.  The GDX rallied double that, about 30% to a high of 40 then stopped.  A 100% outperformance by miners may seem great, but I would have expected more, and the rallies to be broader based among the miners.  NEM did tremendously, breaking to a new high. SAND and FNV did great and made up a lot of lost ground in the correction. Miners like ABX and AU were more disappointing, as were the Jrs and the GDXJ, which we would have expected to outperform the majors.

This first clue of underperformance by miners, and jrs to majors made me a bit uneasy for a little while, but in the past that can be the case for a few weeks.  What you DON’T want to see is a constant impending breakout being pushed down or have no buyers wanting to follow through and buy at higher prices for much longer than that though. Everyday we didn’t breakout was a ticking clock making the odds that we will breakout that much less.  We had a lot of hurdles, so it seemed like there was just a few obstacles to overcome, be it options expiration, jobs reports or FOMC meetings.  In hindsight, I believe I should have placed a higher emphasis on this then I did.  It would have led me to de-risk a bit and saved me some money from this last crash, and hopefully would have done the same for anyone who followed that advice as well.  The lesson I have learned in the past remains true over a decade later.  When miners start turning higher while metals are dropping, a low is likely near as was the case in March. This was a major factor I used to call that low in March as well as the low on Nov 30^th at 1760 which I nailed to the day.  (Ironically, here we are right back where we were 7 months ago.)  But when metals are rallying strongly and miners SHOULD be breaking out and aren’t, watch out below.

Regarding this drop, I want to make some notes on some things that other people are saying about it.  I’m not trying to call anyone out directly, but I see things floating around and the same narratives from different people being said.  First is the “This was clearly manipulation” argument.  Let’s just start by saying no one of us lowly peasants has the ability to see enough information from our computers to KNOW what is manipulation and what isn’t.  All markets are manipulated.  Gold and Silver especially.  I don’t KNOW that the 500 million ozs sold in 60 seconds at 7:34 EST on a Sunday evening was manipulation.  Sure, it could be a panicked whale who didn’t care about execution, or a fat finger, etc.  But as they say, the simplest explanation is often the correct one, and the simple answer is that it’s more likely some banker is trying to create a momentum waterfall effect that trigger the algos to jump in and keep selling to benefit their own positions, rather than someone willing to lose millions in their execution by dumping rapidly at an illiquid time.

Now on the flip side, you can do that tick by tick, hour by hour, day by day, and see the effects last for a relatively short period of time.  What you CAN’T do is CAUSE or CHANGE a trend.  If manipulators had the power to cause a bear market or prevent a bull market, gold would have never broken above $50/oz after Nixon ended Bretton Woods.  It never would have rallied nearly 8 fold in 10 yrs from 250 in 2001 to 1920 in 2011.  They simply would have prevented it.  Sometimes it’s just investors wanting to sell.  I watched people stamp their feet and scream manipulation as gold plummeted in 2012, citing that QE is still continuing and the Fed saying they are looking to raise rates in a few years means nothing today. Also, that the Fed CAN’T raise rates, no matter what they say because it would cause our debt to go insane.  That wasn’t the case, and those people rode their positions down 80% in some cases in that time frame.  So the point here is this: Could it have been manipulation?  Absolutely. But be careful blindingly applying the manipulation argument to every down move. Sometimes investors sell.  Calling every time the market moves against you “manipulation” makes people lazy and complacent and does nothing to help your analysis or portfolio.

Markets are FORWARD looking.  If you are investing based on what’s happening right now you are behind the 8-ball.  In 2015, The Fed DID raise rates a few years after they originally began talking about it and a few years after gold began crashing lower. (Although not much by historical standards.  And the debt skyrocketed and continues to. People thought 10 trillion was inconceivable. We’re approaching 30 trillion now. Don’t think we can’t make it to 50 trillion.) If you look at the Fed’s balance sheet over the last few decades, the fastest increase occurred around 2012, right as gold was breaking support at 1500, and on its way to a low of 1050 three years later. So, this is not causation, as I’ve seen many point out. As I have said before, the correlation with QE and gold comes from the loss of confidence in the Fed and the system.  The increase in their balance sheet and the rise in gold is a symptom of the same disease.

The next point is BASEL III, which everyone in the gold camp is talking about.  “This drop was a manipulated, planned attack before it’s implementation.”  First, I hate to say this, and maybe I have been beaten down in the gold markets too much after 13 years doing this to see any “light at the end of the tunnel” in terms of a change in how things are done, but it makes no sense to me why a group of financial elite would impose a system that would cease the very profitable games played in the metals markets that have benefited their buddies for so long.  I don’t think this is a paradigm shift or frankly, anything that will make 1 iota of difference in our regular 8 am attacks or Sunday night manipulation events.  In fact, I’d take the opposite side of that.  The Hopium being built into this by gold bulls I think leaves us vulnerable to a further sell off.  Basel is a nonevent, and again, markets are forward looking.  This was introduced back in 2009.  If you are expecting a magic change overnight, you’re going to be disappointed because there is nothing “new” here.

Now, I want to highlight 2 gold charts that I think bear a resemblance from a technical analysis standpoint to where we are now.  The first is 2008-2009, the second is 2011-2012.

In 2008-09, we had started with a similar downwards channel correction after 1^st hitting new highs at 1000/oz on the heels of the financial crisis.  Gold topped in March and bottomed 8 months later in Oct.  It was the only correction in the 10 yr bull market where the moving averages crossed lower, until the top in 2011. It rallied strongly and fell back after retesting 1000 down 15% to 850.  We then began to coil tighter. The channel breakout morphed into a longer-term inverse head and shoulders consolidation and finally broke out to new highs about 6 months later. 

Today, in 2021 we saw gold hit a new high at 2100 in Aug on the heels of the global pandemic.  It corrected in a channel downwards for exactly 8 months, bottoming in March.  It has been the first time since we began rallying in late 2018 that those moving averages have crossed lower. We broke strongly higher and have now fallen back hard to retest that breakout area of the channel.  Looking at this drop now, we can see how this could also be forming a big inverse head and shoulders consolidation. The similarities are very striking. 

Back in March, we were looking at bullish sentiment at extreme lows, the kind you typically see at bear market bottoms, not during bull market corrections.  Articles were floating around saying “Gold has failed” as Bitcoin hit 50k+.  We are right back at dismal sentiment that reminds me a lot of the lows we made in 2018.  From that standpoint, this is a big positive.  As an investor, it is a great time to begin buying positions or adding to them for the long term, but don’t expect instant gratification.  To make exploding moves higher, we need the momentum driven by large specs and retail investors and you can’t expect the “gold has failed” crowd to turn around and buy a few months later after a move of couple hundred dollars higher.  We need explosive breakouts to new highs that create FOMO for them to jump in, and we need time to grind down their thesis and prove it wrong. From this standpoint, there are a lot of similarities with 2009, but it could spell out a lot more grinding back and forth before we breakout, wearing out all the weak hands.

In the 2^nd scenario, 2011-2012 we can also see a lot of similarities.  Gold moved parabolically higher to 1920 then suffered a big slam down to 1550.  We consolidated, rallying twice to 1800, making a double top then falling back down to 1550.  Moving averages crossed lower in 2012 and after a long consolidation at the lows, we made one more stab at 1800, moving very fast to get there.  During this time, miners frustratingly underperformed. Not reaching levels they were previously hitting the last time gold was 1800.  This was gold’s last hurrah and the miner’s underperformance while the metal consolidated at these high levels (which should have been great cashflow for producers) was a clue it may have been over. 1 year later gold was down 30% and still dropping.

Today, Gold moved parabolically higher to 2100 then suffered a huge $250 slam down back to 1850. We rallied up to 1960 and came down hard again, hitting new lows.  We shot up to 1960 again and made a double top in Dec and reversed down hard once more.  After some consolidation at the lows in March, we ran up close to that double top once again moving very fast to get there.  Miners had been underperforming while consolidating at record highs (which again, should have been great cash flow for producers).  This also was a clue as the metal has now dropped down hard since then.

From a fundamental standpoint, in 2012, QE was alive and well.  The Fed’s balance sheet was expanding, and rates would not rise for another 3 years.  Deficits were still enormous, and nothing was stopping the expanding debt, and nothing has since.  Very similar to where we are now.  The fears of hyperinflation never occurred, the stock market kept chugging higher and the loss of confidence from the financial crisis subsided. 

Today, we are seeing inflation, much higher in CPI and PPI then we did then, even though we all saw prices rise and products shrink in that time frame.  The question now is, do we see inflation continue to increase?  Will the fed lose control?  Or is it more logical that the next step is a paring off of inflation along with commodities that have pulled back substantially.  When the inflation we've predicted is here now, and everyone is talking about it, what next? As someone said, maybe it's time to "zig while everyone else zags."  Do the deflationary forces in our economy overwhelm inflation, as they did in 2012? We can see no rise in the velocity of money despite fed printing post financial crisis.  The money simply was not going out into the economy enough to cause runaway inflation.  We can see the same thing in the velocity of money today.  There is one key difference, however.  Every fed chairman from Bernanke to Yellen and now Powell has said in almost every congressional hearing, “We will continue to keep monetary policy accommodative to reach our desired targets on our dual mandate of monitoring inflation and unemployment…blah blah blah… BUT WE WOULD LIKE TO SEE MORE FISCAL STIMULOUS FROM CONGRESS.”  (Because pushing on a string of bond buying and 0% rates won’t save the world on its own.)  Today, we are getting a big amount of that fiscal stimulus, and that is very different from before.  $800b stimulus package and $3b in cash for clunkers is NOTHING compared to the money we’re throwing around today, and that is VERY significant.  Additionally, with economies “opening back up” and vaccinations happening, there is an argument that can be made that the “loss of confidence” is subsiding. This loss of confidence has been a never-ending underlying theme since 2008 from what I believe, and is not “over”, but is not in “fever pitch” as much anymore and that I think is something to note.

There is another point I want to hit. Paul Tudor Jones was on CNBC a few weeks ago proclaiming he was buying “Everything inflation”.  Gold, commodities, and bitcoin.  He really sold that narrative.  This worries me because guys like him aren’t freely giving retail investors their advice, their talking their book.  In 2009, when gold was around 1000, Maria Bartiromo was interviewing George Soros in Davos.  It was after market hours, but he had said “I think gold is the biggest bubble in history.”  Gold slammed down about $40 instantly.  Fast forward 3 months later, Soro’s fund filed their holdings and it showed a massive increase in GLD and GDX holdings.  He was creating a selling event so he could buy into it. He probably had traders working at that moment, snatching up gold being sold in a panic.  Similarly, if Paul Tudor Jones is telling you to buy “everything inflation” what it means is he already did 6 months ago.  Now he’s trying to sell and wants to drum up some demand, so he doesn’t overwhelm the market while he dumps it all.  Make note of these things and pay attention when big names do this in the future. When you keep seeing fund managers in the news and on CNBC talking about buying, it’s a bearish sign.

I said at the beginning of this article that there are 2 major things I’ve learned over the years. The first, in terms of gold is “watch the miners.”  Here’s the 2^nd, paraphrased from a line in the movie “The Departed”:

“You don’t have to understand why, just listen to what the market is telling you.” 

Some of the worst mistakes I’ve made I didn’t listen to what the market was telling me and blindly followed my own analysis which ended up being wrong.  Ignored the obvious, and was pompous enough to think I was smarter than the rest of the market, and the other fund managers making 10s of millions a year. I’m reminded of a mining stock I had bought 10 years ago.  My analysis said it was worth 3x what it was.  As gold and silver rallied, it underperformed when my analysis said it should be outperforming.  About a year or so later, and probably around a 30% loss, I finally threw in the towel.  It wasn’t a huge investment so it didn’t devastate me but had I have listened to what the market was telling me as it continuously underperformed, I could have gotten out earlier with a smaller loss and been able to do something more productive with that money. 

Wall Street is the most competitive industry on earth.  You should assume you’re probably not the smartest person in the room.  I’ve made this point regarding Barrick vs NEM.  Sure, basic cash flow and earnings analysis might tell you at 2000 gold, Barrick is a better buy.  But guess what? Everyone who took Finance 101 can do that same basic math, so it’s safe to say that if the guys out there making 50 million a year are buying NEM instead, while Barrick continues to languish, there is a reason why.  You don’t have to fully understand why, you just need to listen to what the market is saying.  

I’m still trying to understand what the market is “telling” us here, and I don’t necessarily know for sure.  What I do know is this was a BAD slam down, and we have not recovered from it.  Metals have been flat lined ever since.  I expect a bounce here, but we haven’t gotten one yet, and it’s certainly not improbable for ugly to get uglier and oversold to get more oversold. 

In short, I’m neutral on the metals right now.  My targets for 50 silver, 2300 gold by Aug/Sept will likely not occur in that time horizon.  I am NOT Bearish, simply neutral in the shorter term.  I do believe my targets will occur and the rises from miners that come with it, because I remain long term bullish for now, but based on price action and sentiment, it is unlikely we turn on a dime and break higher, there will have to be some grinding out and slow building first I believe.  There remains the chance however, that the bull market in gold is done, and I think we need more time to look at this to determine if that is the case.  We should be able to tell more based on the next rally higher.  How high does it go, and how the miners act should give us some clues as to if this was just a sharp correction in a longer than expected consolidation, or if this might be the end of the road and worth derisking significantly more.

Funny thing is, so many people gave me a lot of crap for expecting ONLY 100-150% returns on silver miners if silver doubled.  I cited their unexciting performance so far as the reason, and that would need to change first before raising targets.  In hindsight, I’m glad I was the guy calling for 50 silver at 26, and watching it go to 29 and back again to 26 than the guy calling for $1000/oz Silver any day now, and giving people massive false hope.  I have said many times, I’m not here to get clicks and make money off subscriptions saying $20,000 gold and $1000 silver, “Subscribe to find out why!” Nobody pays me anything for this, my views are my own. I'm not paid to promote any individual stocks, I have no sponsors for my website. I share this to all of you for free and ask nothing.  I make money by being right, plain and simple.  Those people are mostly scam artists.  My targets I believe to be realistic, and I’d rather undershoot than say ridiculous numbers only to be made a fool of.  I come from 4 generations of gold bugs and investors in gold bull markets from the 70s to today.  It’s what I know, it’s in my blood.  But I am NOT a PermaBull or Bear on anything. Those people typically don't survive long term. If the situation changes, you must change or you drown, plain and simple.  Rule number 1 of making money in the market is “don’t lose money.”  Sometimes its fine to not MAKE money, but if you lose it, you’re out of the game.

I can’t tell anyone what they should do, (legally, but also everyone has individual unique situations and risk profiles.  There is no 1 size, fits all.)  But I can say this.  I see 3 types of investors that are my peers and friends when I talk to them and it usually goes something like this:

Type 1: “I’m 35 years old, I’ve worked hard all my life, I’ve managed to save $50,000 and I don’t want to lose it.  I know it’s not much, but I don’t want to take too much risk.  If there is a chance of a downturn, I want to pull out and save my capital.

Type 2: “I’m 35 years old, I’ve worked hard all my life, I’ve managed to save $50,000 and I don’t want to lose it.  I know markets fluctuate, I’m not afraid of short-term slam downs, but I don’t want to be in a position where I have no cash to take advantage of it. So, if there is a chance of a downturn I'd like to raise a small cash position so that I have the opportunity to buy.

Type 3: “I'm 35 years old I've worked hard all my life, I've managed to save $50,000. I've done the math and I figured out that if I continue to save money at the rate that I've been doing and I invested in the S&P 500 at an average return of 8% a year, by the time I retire I will not have enough money to live off of or provide for my family.  If I need $1,000,000 to retire, and investing conservatively will get me $600,000, then I won't have enough money.  So, it doesn't make a difference weather I have 600,000 or 300,000 it still won't be enough money. So my only option is to take on a much more risk now, buy buying calls or meme stocks to try and make a huge return now so that I could compound that in the future and be able to have the retirement that I want and provide for my family.  If I lose it all, it won't make much of a difference in the longer term, I still will fall short of where I need to be for a decent retirement, but it's my only shot of building something and getting ahead.”

Many people want to be type 3.  The renegade who does the impossible and triples their money in a few months.  But the reality of the situation is most people aren't cut out for it.  A few months ago, GV told his “origin” story on twitter.  It went something like this… he started out with $50,000 and bought call options on SLV and AGQ in 2010.  He managed to turn it into around $20 million.  He is a true hero. 

But that is not most people. Let’s be clear about this, this is a story of point A and point Z, and the entire alphabet in-between was left out.   At some point in time, that $50,000 doubled.  At that point most people would probably cash out thinking they've doubled their money and would walk away happy. At the very least, they take out their buy costs, and run the rest on the house’s money.  Somewhere in the middle, his 50k, turned into 2 million.  And I’m sure he’d be the first to tell you, that shortly after, within a few days or weeks, he watched it get cut in half.  Imagine taking 50k, holding on until 2 million, then losing a million dollars in a few days.  Any logical human would likely think, “This is more money than I’ve ever seen.  Sure, I just lost 1 million, but I can still walk away with 1 million now if I sell everything, and that is life changing.”  Somewhere between 50k and that point, 99.9% of people would have walked away, and been happy about it.  This is why he’s an absolute hero, because he held on and did the impossible.

But that is not most people, and it is likely not you or me.  The fact of the matter is most people who “bet the farm and leverage to the hilt” will blow up entirely.  The few that make money will take a decent return and walk away.  The average person will try something like that, quickly lose half of their portfolio, panic, then sell everything and walk away.  This is why I’ve said, you need to look at yourself honestly, and see who you are and what your risk tolerance is.  If you’re the type that buys the extra car insurance when you rent a car on vacation, you probably shouldn’t be “all in” on illiquid JR miners and call options.  I don’t know what it takes for you, you’ll need to figure that out yourself, but if these sell offs are making you lose sleep, if they're making you panic on how you're going to pay for things in the future, then you need to take money out of the market. Maybe you need to diversify and have 40% SPY, with some royalty companies and some junior minors while holding a 10% cash position at all times. Maybe a balance between producers, junior miners and royalty with a 20% cash position is what makes you comfortable.  I can't tell you what the answer is, you need to figure that out for yourself.  I’ve said this before, I’d rather see you make 500% on half your money in the long term, and be able to stick with it, then go all in, panic and sell at a 30% loss.  Find the balance that works for you. The goal is to make it to payday.  Sure, the payday would be better with leverage, but if you can't hold on, it's pointless.  Theoretically, you can drive to your destination in half the time going 150 in a Ferrari as well, but if you can't handle that speed, and it will cause you to crash, then who cares?

I will tell you what I am doing. The day before the FOMC meeting I got an uneasy feeling. Being that I was going to be leaving for vacation the next day during the announcement, I didn’t want to worry about it too much, so I sold 85% of my leveraged portfolio of call options I had been buying from March-April.  Cashed out with a small profit, about 15% or so.  The remaining 15% of that portfolio has gotten decimated since then, and the losses on that have probably entirely wiped out the 15% gains on the 85% that I booked.  Total wash for 4 months of planning and effort.  Lesson learned.  I bought them at lows expecting a breakout was imminent and it did not occur.  I probably gave up half of my profits by not cashing out about 3 weeks earlier.

I’m expecting a bounce soon, but so far, we’ve been flatlined on metals with zero buying interest.  A logical target would be around 1800 at first, then possibly up to 1840-1850 area, and around 27ish on Silver. From there I would be looking to lighten my positions in major producers slightly, which I view as “directional trades”.  (Around a 10% cash position) Some stocks have individual good stories.  EXK and HL have done great, but FSM and PAAS have been terrible.  As a whole, the SILJ has been flat.  In essence, buying these producers is a bet on the direction of silver and gold, so as metals have failed to breakout over the last 10 months or so, they have not really gone anywhere. 

Conventional wisdom would say, in a correction in the metals you would want to hold onto multi-billion-dollar companies with cash flow and dividends.  But the fact is, GVs sitfolio stocks and Gold Fever Jrs have killed it versus majors during this correction.  The SILJ has been flat for the last 10 months.  The GDX is down 25% since Aug.  An equal weight in the top 10 Sitfolio stocks has netted you 100% gain in the same time frame.  These companies are in a position to produce value through drilling and development of their properties, and I believe they will continue to do well, so long as metals prices remain “economical.”  By that I mean, when most silver majors are producing for a cost of 14-15/oz, anything over 20 in silver is very economical and attractive as takeovers for the majors. I will be looking to use my cash to add to these if given the opportunity, as well as using it for other opportunities I may see that are outside of the metals and miners.

At the end of the day, metals need more time, so I am going to position myself in a way where I can be occupied by doing something else in order to give them the time they need and alleviate the boredom.  Figure out what type of investor you are and what you need to make you sleep at night and weather the storms in metals and miners.  The goal is to make it to payday. Do whatever you need to do to ensure you can hold on long term.  It seems the market for now is determined to grind us down with time more so than price, and that can be more difficult sometimes to deal with mentally.  Don’t use margin, don’t invest money you will need to spend anytime soon.  Stick with the leaders, you don’t need to understand fully why they are outperforming, just listen to what the market is telling you, and humble yourself. You are not the smartest person in the room.  The market will show you if your analysis is correct or if you're missing something. Watch the miners, and they’ll clue us in to the next moves in metals.

 -Jonathan Mergott