Taper Tantrum 2.0: Rate Hike Hysteria

It was my suspicion since June, when I outlined some frightening similarities in gold to that of 2013-2015, that we were setting ourselves up for a similar fate.

The basic pattern of this was, down for all of 2013 the moment gold got a whiff of the Fed's intentions to begin tapering their QE program. (The "taper tantrum"). When the taper was announced in Dec 2013, we bottomed and rallied strongly for the next few months. (Buy the rumor, sell the news. Once the rumor set in of a taper, gold moved down strongly. When the news became fact, the fear had run its course and we rallied). We then resumed moving lower around March 2013, all the way to the final low in Dec 2015, which was when the Fed announced they were raising interest rates by 1/4 of 1%. Gold then rallied about 30% from 1050 to 1350, and the GDX rallied about 170% from a low of 12 to a high of about 32 in just 9 months.

As they say, "history doesn't repeat but it does rhyme" and indeed it did this time around. The moment the Fed hinted at a taper in June 2021, down went gold. Miners and silver began drastically underperforming, (a big warning sign I look for). Rallies were anemic at best and often non-existent. The opportunity to "sell on the bounce" almost never presented itself. That was the case for the next 4 months. The fed announced it would begin tapering 15b in purchases a month on Nov 4th and we bottomed 1 month before hand, presumably knowing that the taper was set in stone by that point.

GDX then rallied 20% over the next 6 weeks.  GDXJ and SILJ both gained about 30% in the same time. (Interestingly, the rally on this taper announcement lasted 6 weeks, exactly half the time as the 2013 taper announcement rally. 20% gain on GDX and 30% gain on GDXJ was also exactly half of the gains in 2013, 40% on GDX and 60% on GDXJ)

But one thing that was VERY different this time around, is how much we went down.

In 2013, Gold had tested support at 1550 3 times then broke down strongly to a low of 1180 by Dec. It was a loss of about 20%. Miners got slaughtered. GDX dropped from 40 at the beginning of the year, to 20 by the end of it. A 50% loss. GDXJ was worse, from 72 to 28, a 62% loss.

Things weren't NEARLY that bad this time around, but it was still an ugly 4 months for those who did not heed the warnings of the past. Gold tested strong support at 1680 3 times and HELD. GDX went from a high in May of 40, to a low of about 29, a 25% loss.  GDXJ fell from 56 to 38, a 31% loss. Both were almost exactly half of what we lost leading up to the taper announcement in 2013. Both of those are significant differences in the gold market this time around.

That brings us to today. Gold rallied from 1770 to 1870 over 2 weeks from Nov 3 to Nov 18th, then lost it all in 3 days. Needless to say, this is not what "dips" in a bull market look like.  In fact, what it looks strikingly like, is exactly what happened leading from the March low to the May high, and the drop in June after the FOMC.

After the consolidations on this chart (In the boxes) gold ripped higher quickly, topped out then lost all of the gains, going right back to the consolidation area before hand in both June, and now.

 

I hate to be the bearer of bad news friends, but it looks like this run is over.

It's no fun being the lone gold bug who is bearish, (the permabulls are relentless) but after last time around, I've gotten use to standing alone on my position. There seems to be a direct correlation between lonely opinions and accuracy of market calls. (Who would have thought?) I THOUGHT we had a little more room to run, and I thought if that wasn't the case, we'd have a little more time for planning and analysis on the market action if we began acting weak, but we didn't get that. We got an all-out plunge instead. (Again.)

I didn't exit some positions in time and remaining gains were evaporated. It's fine, profits were booked along the way and there is no use crying over spilled milk anyway, its in the past. So, what now?

Rate hike hysteria.

With taper out of the way and the fed clearly embarking on a tightening cycle, we know what comes next. Employment has improved, inflation is high and there is no way around raising interest rates now. 

Spare me all the explanations on why they are trapped and can't do it. People said the same about taper in 2013 and were wrong. Then they said, "Well, taper is a mistake and they'll be back tracking in 6 months."  They were wrong about that too.  They said the same about rate hikes in 2015 and were wrong. Then they repeated it was a policy mistake and they'd have to frantically cut again 6 months later and they were wrong yet again.  They said all the same arguments again 8 years later about taper 2021, and surprise, surprise, you guessed it, they were wrong.

Once again, the same people or a new crop of them are reiterating the same arguments they and others were wrong about in 2013-2015. The fed will end Taper and increase QE. They're trapped and can't raise rates.  If  they raise rates, they'll will have to drop them again soon. Etc, etc. They were wrong then; they'll be wrong now.

They WILL raise rates, it’s just a matter of when. As of right now, the market is expecting June-Sept 2022 and I think that's about right. (Although I think it will be sooner rather than later). Until that point comes, Gold looks to be headed lower. (If history repeats like it did on this taper announcement, we will also likely bottom slightly ahead of a rate hike announcement).

I don't know how low, but I do know moves in gold almost always overshoot in both directions, so prepare to be terrified when it happens.  If I'm guessing, 1500 sounds like a reasonable expectation if gold breaks support at 1680 (which I think it will). Being that 1500 sounds "reasonable", I'm preparing for "unreasonable" and that could be 1400, which would retest the former resistance ceiling in gold during the entire bear market.

That’s down roughly 20% from here on Gold. You better believe that if the metal goes down 20%, miners will get murdered. I think GDX could drop 30% and maybe more over the next 6 months if 1680 gives way.

 

It’s important to understand a few things. First, my goals may not necessarily align with yours, and that can be the case with a lot of people whose work you may read or listen to interviews from, so keep that in mind.

 

My goal is to build JR gold and silver positions when they are cheap. These are long term investments that I do not believe are dependent on gold going to 3,000/oz to be profitable. They’re undervalued and have good assets. Additionally, majors will have no choice but to buy them as reserves continue to deplete. When the market makes a turn downward, like I believe it is doing now, I am hedging those positions by buying puts on ETFs and producers. We could go down 5% over 2 weeks, or 30% over 6 months, there is no way to know how long or how far, so I react on sell signals by protecting myself. When I believe we are turning higher, I take profits from my hedging positions and buy more Jrs, usually now at a good discount. I then add positions to leverage to the upside in the leading producers. Again, it could be a few weeks or much longer and higher so I react accordingly and ride till upwards momentum begins to stop. You never know how far or how long a move will last, but it’s impossible to profit from it if you’re not in it.

Lather, rinse, repeat.

If what you want to do with your investments is buy, hold and not look at them again for 5-10 years, most of this is probably irrelevant to you, and that’s fine everyone has different goals and styles that suit them.  But I would still believe it is missing opportunities to protect yourself from losses in the meantime.

For example, buying and holding 1000 shares of GDX from 2011 at 60 until after Aug 2016, when GDX rallied 170% from the 2015 low at 12, would still put you at down 50% over that period of time.  Even exiting the market at 40 in 2013 when GDX began breaking lower and underperforming metals would have allowed you many opportunities to buy back twice as many shares at half the price or less in the coming years. By Aug 2016, after that 170% rally from 12 to 32, you would actually be up about 7% instead of sitting on a 50% loss over the course of 5 years.

Miners lead the metals, and the bull market formula is: JR silver>Major silver ≥ Jr Gold> Major Gold ≥ Silver>Gold.

This is what I’m looking to see if price trend is to flip bullish or bearish. Miners have held up ok on this dive, but silver is really letting go.  It looks like the formula is about to flip backwards again and I expect miners to have lack luster rallies to sell into (again) over the next coming weeks. We look very much like we are repeating what happened in June.

Going to wrap this up with a couple of basic charts.

Weekly gold gave a buy signal when the moving averages crossed late 2018. That buy signal held through every correction until Feb 2021. In May it crossed higher again but was slammed down quickly, making it look like a fake out. On this last rally, moving averages “met” and LOOKED like they may cross higher again but suffered the same fake out fate as we’ve now slammed down again. RSI has been holding at 40, but being pushed back at 60, indicating no clear direction or control in the market as of yet. MACD crossed below the 0 line and has tried twice to push back above it again and failed as well.

 

Now here is that same basic Moving average crossover signal from 2009 until 2013.  It’s virtually identical. Buy signal in early 2009 remained through all corrections until crossing lower in May 2012.  In Aug 2012, we got another “buy signal as gold tested 1800 for the last time, but it was again, a “fake out” and reversed lower again early 2013.  RSI also held 40 throughout that consolidation and was pushed back around 60 as well. (It did move slightly higher, to ~66 on the last tap of 1800 though) MACD had crossed below the 0 line the same time as the moving average sell signal, rallied back above, then reversed lower after about 3 months.

 

The next test of 1550, the floor gave out, and I expect a similar, although less drastic move if we break 1680.

Here is the same Moving average signal on GDX. It crossed lower 5 months before gold, then broke its floor at 50, down 20% to 40, which it also “led” gold on by about 9 months. We got the same fake out rally that quickly lost it again and it fell HARD, but the miners led and warned of this first. Additionally, RSI broke below 40 in mid-2012, 6 months before gold broke down. The last rally pushed it just above 60, then it tanked to incredible oversold levels as miners dropped over 50% in less than 1 year.

 

Now here is the GDX today. Moving Averages gave a buy signal late 2018.  They briefly crossed in the 2020 crash but corrected quickly. They crossed lower in Jan 2021, about 1 month ahead of gold. We got the same fake out cross higher in May, then they crossed lower again by July-Aug. Unlike gold, they have stayed lower on this rally, not even rising up to meet each other. Also, unlike gold, the GDX broke to a new low below its march low, while Gold has Continued to hold its low at 1680. This is exactly what it did in 2013 as well. Also similar to what happened 2012-2013, RSI on the GDX broke below 40, twice actually, in March and again in Aug-Sept. The May rally saw RSI top out at 60, but this last rally only made it to 56.

 

It seems to me, after this rally since early Oct got pushed back strongly, that the warnings in miners and metals that were there 2012-2013 are repeating again now in a strikingly similar fashion.

I think this is worth paying attention to. As always, this is not investment advice and all risks on positions you take are your own. Do your own research.

But while you’re doing it, it’s worth looking at some of these clues from the past.

-Jonathan Mergott

Is the Bottom in for Gold?

The last couple of weeks in Gold and Silver saw some pretty good gains. What was even better, were the gold and silver miners, and better still, the Jr miners. Anyone who's been following me for even a short period of time probably knows some of the things I like to repeat over and over, but for those that don't, I'll do it again. The first is my gold bull market formula:

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

And the second:

Watch the miners.

More often than not, moves in the miners give clues to what's coming next for the entire sector. We were able to identify underlying strength in gold and silver early in October, and relative outperformance in GDX was a major clue a bottom was in.

There was a similar situation almost one year ago. On Nov 30th 2020, looking at a few factors including relative performance of GDX to gold, I called for a low when gold was at 1760 and the GDX was at 34.  It was the low to the day in gold, and the GDX low was 33.22 only 3 days earlier.

Then again March 2nd. The outperformance of GDX to gold was a major clue there. The next day was the low in the GDX, by 8c lower than the previous day. Gold dropped another 1.7% over the next few days to 1680, then double bottomed at the end of March, but GDX made a higher low and rallied 33% over the next 3 months from my bottom call.

And it works the other way too. In June, when metals and miners plunged after the FOMC announcement, I had written an article outlining some parallels to Gold and the GDX today versus in 2013, giving some warning that things may play out the same. A week or 2 later I did an interview expanding on this with Palisades Gold Radio, in which this chart was a big point on my warning. 

Miners were significantly underperforming the metals, just as they did in the 2012-2013 consolidation which was a major reason for my caution. Adding in the Fed making comments of tapering QE, the similarities to 2013 "taper tantrum" were too much to ignore.

Many argued with me that my miners leading metals theory was wrong, because they were able to find 4 examples in 15 years where it wasn’t a perfect correlation. They were screaming to keep buying, as permabulls always do. Most of those people will never say sell, or take profits or even advise slight caution, because they have an interest in promoting PMs, (like a paid newsletter they will sell you for $100 a month.) I have an interest in profit and not losing my hard-earned capital. Period.

I have been pretty successful my career in the markets. Most of that success has not been due to accurately predicting what the market will do next, but quickly reacting and adapting to what price action shows me.  I’m a HUGE gold bug. I believe this system, these monetary experiments we are embarking on, are all destined for epic failure, EVENTUALLY.  But the moment price action disputes my fundamental thesis, I must stop and see why. The example in June was the taper fears prevailing over the bull narrative.

From June to a few weeks ago, miners continued underperforming, and the "bull market formula" JR Silver>Major Silver ≥JR Gold>Major Gold ≥Silver>Gold, was exactly backwards. Gold outperformed silver, silver outperformed major gold miners, major gold miners outperformed jr gold and major silver miners, and Jr silver miners got slaughtered, many 50% from their highs a few months ago.

Beginning of Oct things turned for the first time since June.  It is finally looking like a medium-term low may be here in the PM sector.

Note, I'm not saying it's THE low. History is rhyming a lot right now. In 2013, gold and miners tanked on fears of the Fed tapering. We broke the consolidation low at 1550 and moved down to 1175 by Dec, when the Fed announced they would begin tapering their asset purchases. Once the “fear” of the “rumor” became fact, gold ran up 17% over the next 3 months.  The GDX gained 40% in the same time. (And by the way, Gold didn’t bottom in 2013 until the last week in December. The GDX however bottomed the week before).

After a 3 month rally that sent the GDX to 28 from 20, (60% below the 2011 high) It then lost almost another 60% over the next 21 months to 12.50 in Dec 2015. The final bottom came when the Fed finally raised interest rates. But there was some good money to be made in the 2013 low as well, for those who were nimble enough to identify and catch it. (Watching the miners outperformance helped with that. The GDX/GLD ratio stopped declining in early Dec 2013, and was rallying decently by the time gold had bottomed)

GLD (White line) Didn't hit a low until the end of Dec 2013, while the GDX/GLD ratio bottomed early Dec and was breaking higher by Jan while gold still solidified its low.

Now that in 2 weeks time, the market seems confident the Fed will announce a taper to its asset purchase program, the “fear” seems out for gold now that the “rumor” is fact, and we look in a solid position for a good rally, similar to Dec 2013. But the risk of a future breakdown, that this is simply a rally within a larger bear market for gold still exists and should not be dismissed. With history playing out so similarly, I would expect a final low to occur when the Fed raises rates, which as of now, the market expects around Sept 2022.

A lot of things have occurred in the last couple of weeks that we haven’t seen in months, the first being a resumption of the Bull market formula, and the second being miners outperforming metals significantly. GDX not only broke above the downtrend line its held below since the May highs, but we also saw key moving averages begin to turn higher and crossover, which we haven’t seen since late March.  Additionally, since June, RSI has been capped on rallies at 60, and MACD was never able to push above the 0 line, both typical in bear markets and prolonged down trends. RSI now recently broke higher, hitting 70 and MACD is comfortably above the 0 line.

On a pullback here, I want to see RSI hold above 40 while MACD does not cross far back below 0. Below is an example I’ve used in a previous post showing this regarding RSI. Ford stock from 2014 to 2020. While trending lower for 6 years, RSI almost never made it above 60, and when it did, it was quickly pushed back.

 

Inversely, here is Macys. For a 6 yr rally, RSI held 40 on every dip. This is what we want to see with gold and miners. In 2009, before Macy’s hit a higher high and began its official “uptrend”, we saw dips in RSI hold 40, and moving averages cross higher. We already have 1 of those 2 in GDX.

Silver has followed suit as well. RSI rarely got above 50 the last 4 months, indicating even more weakness in silver than GDX or gold. That should be the case in a bear market downtrend, as we would expect GOLD to be the best performing asset and it was. We have now broken the downtrend, seen RSI push above 60, had MACD move above the 0 line, and have the same key moving averages turning higher and crossing over. We should see a pullback hold around the 23 level (or a bit lower) as well as RSI hold 40 before price eventually pushes to a higher high.  That would give pretty good evidence that our thesis that this is a tradeable low for the next few months is true. (Similar to the Macy’s chart in 2009).

The holdout here is Gold. We have not broken the downtrend line yet, we have not seen RSI push above 60, in fact it stopped right at it when it hit 1800 and fell lower. MACD is still below the 0 line and while the Moving averages are beginning to cross over, they have not done so decisively. If I was looking at this as a lone asset, it would give me pause on my theory that we have made a low here.  But I am not, I am putting a higher weight in miners, Jr miners and silver, all of which are performing well and doing what they should. However, in the PM world, gold is still captain of the ship, and these points should not be ignored.

On that note, there is absolutely the chance this is wrong. We are not making a low, this is simply an oversold bounce after 4 months of weakness. Gold will not break higher and miners and silver will turn lower and make new lows. If that is the case, I will be ready to exit newly entered positions I am buying to leverage to the upside here in the event the key conditions I am looking for are violated. If we are right, I am not trying to make any predictions on how high “up” is, I will simply hold my longs for as long as the trend keeps going, as long as RSI holds 40 on dips, as long as moving averages continue higher without a cross lower, etc.

There is also the chance that the theory of this being a good rally in an overall bear market is also wrong. Perhaps the Fed reverses its actions, perhaps gold keeps rallying to new highs. Again, as long as conditions remain good for the long side trade, (bull formula, miners outperforming, RSI>40 moving averages continuing higher etc) we will hold and ride that train until it decides to stop. The next major pullback, which may be starting now, should give us a better indication. We are looking for higher lows to hold and buyers to come in strongly.

I wanted to make a note about the bitcoin “flash crash” that’s been in the news today. People got stopped out of their positions on a certain exchange when bitcoin flash crashed to 8,000 from 65,000.  That is a devastating loss on your investment.  I have never used a stop loss in my life, either static or trailing. This is exactly the reason why. Stop losses are mostly for trading positions, you should never use them on investment positions. In the 2010 flash crash, many had stops on one of the most widely held stocks in the world, Apple, that got triggered due to a “fat finger”.  In the morning, they saw their Apple stock down. By the afternoon, it was significantly higher, but they didn’t own it anymore.

Even for trading I find them unnecessary. If I am entering a position for a shorter-term duration, I make sure I am there to monitor it and exit if I need to. If I can’t do that, I don’t enter the trade. In June I went to Lake George, NY and knew I’d be driving for a while through the FOMC statement, and have bad Wifi and phone signal while I was there, so I exited positions ahead of time. In this volatile, algo driven market, I am not leaving my exits in the hands of a binary computer command. As I've mentioned before, price is important, but so is time. A 30% loss doesn't mean much if it bounces back in 2 days. Any loss, no matter how big, is completely meaningless over a few seconds or minutes. It's a terrible thing to not take both time and price into consideration and lose a position at a significant loss over a minor, short term blip.

The market today is very volatile and PM and crypto is the most volatile of the bunch. Keeping stop losses on investment positions is a sure-fire way to lose your position in a volatile move.  If you’re worried about losses, take profits when you have them and don’t risk more than you can afford to lose.

I mentioned on twitter a thread or article on bitcoin miners soon, and I hope to get to that within a couple of weeks, but also want to make a point about this in regard to the flash crash.  Many of these exchanges are completely unregulated and they’ve blown up before, or taken off with people’s money and bitcoin (anyone remember Mt Gox?) Part of the reason I am looking at bitcoin mining companies (Besides the leverage to bitcoin prices) is because they trade on NYSE, NASDAQ and OTC markets, markets I am both familiar with and that are regulated by the SEC. 

That is all for now. Patience, as always, while we wait to see how things hold up. It's been a good week for metals and miners. I have a very unscientific theory that states, when something is strong Mon- Thurs, traders will sell Fri to exit positions ahead of the weekend (and reverse can be true as well) so with any luck, we get a decent pullback to end the week. I will make notes on twitter of any buying (or selling, if things turn ugly.) 

*This is for educational purposes only of course, this is not investment advice. As always, do your own research and assume your own risks.

Keep watching the miners.

-Jonathan Mergott

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