Bull State of Mind

Jan FOMC played out exactly the opposite of the Dec FOMC meeting. In Dec, gold was breaking down, silver was hanging on to the 21 area by a thread and GDX was threating to break to new lows again. We got a strong reversal that flushed out some bears and gave metals and miners time to pause. Fast forward now to Jan FOMC, and gold is at 1850, testing the downtrend line its failed at 6 times before, silver gets a jolt of energy, surging up to nearly 25, and miners start looking like they want to join the party as well, shooting up quite a bit in just a few days.

But alas, it was just a dream.

Miners unwound pretty quickly while gold held in and silver still looked fairly bullish. If you’ve been following me for a while and reading my articles or listening to interviews, you know I put a higher weight on the performance of miners vs the metals. The fact that miners unwound while metals stayed looking pretty decent was more likely a bearish sign then an opportunity for miners to “catch up.” 

After any major move up or down, we want to watch the counter move afterwards. Do we lose all our gains, or see buyers come in strong at a higher low? Does a move down from highs rip back upwards, or begin to fail at a lower high, indicating an opportunity to short? Miners couldn’t hold their gains on a pullback, so that is that. No legs to that rally.

In June I advised caution in precious metals and miners, citing the Fed’s hinting of a tightening cycle and the similarities to the gold market in 2013 as my reasoning. We’ve talked for months about hedging risk on investment positions in Jr miners by buying puts on ETFs like GDX & GDXJ. Of course, my analysis was ridiculed by perma-bulls who screamed about buying every dip because “this is it.” That the Fed couldn’t taper, or the world would implode. That they would never raise rates in the face of 7% inflation because it would kill the economy and explode the national debt.

They tapered, they accelerated the taper, they’re going to be done with tapering entirely in 2 months, and nearly everyone now is certain of a rate hike in March. They’re even already talking about reducing their balance sheet by selling assets back to the market, possibly beginning this year. In that time since June, GDX and GDXJ broke to new lows in Aug, again in Sept, and are breaking down again to new lows as a write this. GDXJ has now lost 1/3 of its value just since June.

Folks, there was ample opportunity to protect your investments from downside risk over the last few months by buying hedges that could have mitigated your losses, as well as providing you with cash to buy with at lower levels. (If you had only LISTENED to what the market was telling you!) If you did this, congrats you’re sitting in a much better place then you would have been right now. If you didn’t, sorry to say but you missed the boat.

I have been greedier than most in the gold market. While many have been buying every dip along the way, we have remained hedged, nibbling only slightly on a few names for long term holdings while expecting a significant amount of more downside than most have been looking for and waiting patiently to make much larger purchases then. So far, that has paid off quite well, and will likely continue to for a brief period of time. But there is an old saying in the market, “Bulls make money and bears make money but PIGS get slaughtered.” I’m not trying to be a pig here, and I definitely am not trying to get slaughtered.

At this point, risk/reward on the short side is not appealing anymore. That is not to say we won’t go lower, or that it might not be painfully lower. (The last 15% of a 50% correction has a tendency to hurt more than the first 35%) We can certainly have a fast flush out that could be very painful. But at this stage of the game, looking at risk/reward and the probability of further downside versus infinite risk to the upside after an 18-month correction, considering the time left for further selloffs to continue, it feels to me that both from the perspective of time and price, that ship has sailed. 

Many are finally coming around to the idea of Fed tightening being the driver in PM weakness and to expect some harsh drops coming soon. (Where were they 6 months ago?) I prefer to stay ahead of the crowd. We have been so far. So now is not the time to plan for the drop, as many now think is inevitable, it’s the time to plan for what comes after.

Which means it’s time to get back into a BULL state of mind. Let’s take a look at why.

March FOMC is 6 weeks away. The Fed is GOING to hike. So far, history has rhymed quite well, with the change in control in the gold market shifting to the bears as soon as taper fears began both in 2013 as well as in 2021. Gold bottomed on the fed rate hike announcement in 2015. While history may not repeat exactly, it is reasonable to expect something similar. This is not a lot of time to start making a wish list and a LOGICAL plan to execute it. 

We probably have more downside from here, and we might even trail lower after the rate hike is announced, but in my opinion, we are nearing a point soon that I think will be a very attractive place to take positions for the intermediate and longer term. If you missed out on making a plan to protect yourself to this downside risk, make sure you do not miss the opportunity to make a plan for adding to your long-term investments that is likely coming very soon.

After 18 months of consolidation in gold, its time to make a move. I say this because in the last 15 years, Gold has had 4 major consolidations: 2006-2007, which lasted 16 months and broke higher for a 90% gain from the correction low. 2008-2009, which consolidated for 18 months and broke higher for a 180% gain from the correction low over the following 3 years. 2011-2013, which lasted 19 months and broke lower beginning the bear market that didn’t bottom for another 2 years. And then there is today. 2020-2022 which in February is an 18-month consolidation from the Aug 2020 highs. Gold, now at 1800, is currently 7% above its “floor” at 1680. Historically, we are reaching a point in which consolidations in gold begin to resolve. 

While I’m not ruling out a break of 1680 still, I’m beginning to think the odds that it happens are far less than what I thought they were over the summer. Even if we do break lower, I was never expecting the magnitude and duration of a “bear market” this time around like we had in 2013-2015 low.  So, a break of 1680, will likely be limited in both time and downside potential, assuming we don’t have an all-out market crash that takes everything down, like in March 2020.

Here are some charts a shared on Twitter. While there are many aspects of this consolidation that are similar to 2013, it also is starting to look very similar to 2006 as gold began drifting higher towards the end until it broke out. If you are of the belief we are still early in this bull market cycle for gold, this might be a more logical analogy.

Let’s look at an example of what I mean regarding a LOGICAL plan. Below is weekly GDX. Currently down 35% from the Aug 2020 high. It is struggling to hold on to this area near 30 that was the ceiling for the entirety of the bear market. The next major area of support is near 25, down an additional 15% from here. That would make it a 45% correction from the high. Could we go down 55% to support at $20? Or 60% to $17, the 2020 crash low as well as the 2014 and 2018 low? Of course, it is certainly possible, but that much of an extreme is likely not PROBABLE. (Remember, we’ve been right to be greedy and bearish, but we don’t want to be a pig.)

Now let’s take a look at Abbra Silver, as it’s a Jr many people like and one of GV’s top sitfolio holdings. If the floor gives way on miners and GDX suffers a 15% loss from here, the Jrs will be a mixed bag. Some will likely plummet; some will barely budge. Some may simply decline in line with GDX. A lot in terms of a “plan” will have to be constantly updated as markets change and a bit played on the fly as it happens, but assuming a 15% drop in GDX, a 20% drop in a volatile small cap silver Jr is a conservative and probable expectation. 

Looking at OTC (ABBRF), Abbra hit a high of 68c, not in Aug 2020, but May 2021. (The Aug 2020 high of 35c was equal to last week’s high, actually. Again, I think this speaks clearly to the aspect that the change in control from bulls to bears in metals happened in June, as that was the high in many jr's that were bucking the trend of the majors and metals up until that point). Since June, it is currently down 60% at now 27c. A 20-25% correction from here puts us at support right near 20c, which would be a 70% correction from highs hit only 6 months ago.

Could we go to 15c? Sure. 10c? Of course, but its far less probable and too greedy an expectation in my opinion. Keep some cash in case it happens, market crashes are always a risk any given day. But start looking at these names that you like, placing a REASONABLE expectation of a range in price they may fall to in the coming weeks, then decide based on your own conviction, what you are willing to pay for them and how much capital to commit when they get to those levels. Most importantly, don’t forget to execute when we get there. Everyone likes to talk about buying the correction, until it comes, then they worry they’re catching a falling knife.

Speaking of “catching a falling knife”, something important I want to note. I’ve mentioned before that I tend to weight the market’s price action greater than macro analysis. The simple reason for this is that there can be varying opinions on the interpretation of current underlying factors, and even more interpretation of what future underlying factors will be and how the markets will react to them (because markets are forward looking, so what the data is now is already irrelevant.)  I have my ideas about what’s driving a market. Some will of course disagree and have their own ideas. We can spend weeks debating what the key drivers are in a market and never reach a conclusion, or we can just look at price action.

Put more simply, I put a higher weight on what the market IS doing vs what I THINK the market SHOULD be doing.

In line with that thinking, I generally wait for the market to give me some indication of a turn before diving in to buy on declines. Along with other criteria I use, a big factor is miners outperforming and turning higher ahead of metals. This method has worked very well in the past and allowed me to nail the Nov 30^th 2020 low in gold to the day by watching the miner performance (which turned and bottomed 4 days earlier). It also was a major factor in calling the low in early March, which was 1 day early to the exact low on the GDX. (it dropped another 8c from the previous day’s low). It also caught us a nice rally in early October.

Many who have criticized my “watch the miners/miners lead the metals” thesis, often cite the 2016 low as an example where that wasn’t true, and they are right. At the bear market low, miners consolidated and broke lower while gold maintained. Miners were not giving us any clues as to an impending further breakdown in metals then, they were just absolutely capitulating. Within days though, they turned and turned HARD. In 3 weeks’ time, gold was up 10% and GDX rallied nearly 40% off its low at 12.50. While there were no clues as to the low, the relative outperformance to the metal soon came and even buying then at around 17 on GDX left you with a nearly 100% profit 8 months later.

I mention this because it is very possible to see something similar when we get to the final low. Buying into declines from here may feel a lot like catching a falling knife. It’s important to remember a few things. First, we are buying longer term investment positions. Those are the type you want to buy when they are cheap and declining. Secondly, don’t bet the farm all at once. Plan for multiple “tranches” of buying and expect to do so over a period of a couple of months perhaps. Also, leave a little cash left over in the event things go lower than we expect, or take longer. The last bit can be deployed as we begin to get confirmation we are turning higher.

Adding LEVERAGE to our positions when things begin to start cooking, THAT is when we want to wait to see miners lead and outperform metals. By leverage, I’m talking about any position you put on in addition to your investment portfolio to make a little more as we start to run. Typically, I do this with calls on the ETFs and some producers.

Whether you want to use options or just buy the stock is up to you, but I feel this is an important aspect of taking advantage of prices moving higher. We wouldn’t be buying jrs if we didn’t believe an explosion in metals prices will send them soaring, but it is also due to their own building of their assets. Some do better than others at times then rotate their outperformance. 

Producers on the other hand, are simply leveraged bets on metals directions. If gold begins trending higher for a period of time, so will the GDX, that is a guarantee. A jr may not if say, they have a poor drill result or do a financing. Everyone wants to find the jr that’s going to give them a 5-10 bagger, but the fact is GDX in the money LEAPS will give you a 5 bagger too if we return to Aug 2020 highs at 45 in the next year. And there are a lot less variables with a basket of established, major producers if gold is moving strongly higher than trying to increase the market cap of an explorer by 5-fold.

Another point on producers. For the duration of this decline, we have been holding our Jr investment positions and additionally the highest QUALITY gold stocks we can find. To me that has meant 1 producer, NEM and the royalty companies. That’s been a good call as an equal weighted basket of NEM, FNV, WPM, and RGLD has outperformed GDX since June by 10%, and GDXJ by 20%. But as things begin to bottom and turn higher, the biggest profit is in the LOWER quality companies.

I’m not saying go all in on a high-cost producer with mountains of debt. But for example, that same equal weighted basket of FNV, RGLD, WPM and NEM got smoked by HMY coming out of the 2016 low, which outperformed them by 325%. The same with CDE which outperformed by 275%. The simple fact is, if a producer like HMY is producing at a cost of 1400/oz when gold is 1400/oz, investors know there is no profit here until gold turns, and it gets dumped, hard. The moment that starts to turn, the pendulum swings back in the other direction with equal force. GDX rallied 170% from its 2016 low by Aug that year. Both CDE and HMY went up 10 fold from their lows, all in just 8 months. Higher costs equal higher leverage, and have a tendency to scream when coming out of major lows.

Many people have asked me what Jr’s I like for when things turn higher, and I’ll be the first to say, stock picking jrs has not been my strongest suit. I’ve mentioned before, there are a lot of guys who I think have done a great job picking quality jrs with great 5-10x potential, and there are also a lot of guys who done a great job on timing and direction. These are two very different things and being good at one doesn’t make you good at the other. I’ve seen almost nobody who has done an exceptional job at both timing and direction in metals, as well as nailing the best 10 baggers.

I have done a lot better in terms of timing and direction myself. One isn’t necessarily better than the other. Everyone is looking for the stock with a 5 fold potential over a few years, but by simply timing and positioning correctly in GDX puts and calls over the last 6 months, multiple major swings higher and lower have netted us the same 5 fold return on our leverage and hedges while most 5 bagger potential Jrs have been stuck in the mud. (Something to keep in mind.)

If you are trying to research the best jrs to begin buying in the near future for long term investments, there are a few great people who have done some quality research you can start with by piggybacking on the free information they have shared and the due diligence they have already done themselves.

The first is GV’s Silver Sitfolio and Gold Fever portfolio, available here https://www.goldventures.org/. Additionally, there is great write ups he has provided that are shared on twitter and the Wallstreet Silver subreddit.

Another must follow for his picks in my opinion is Erik Wetterling, aka The Hedgeless Horseman. You can read his website here https://www.thehedgelesshorseman.com/ . Don Durrett is another who has done quality research and is a must follow on twitter as well. His website is https://www.goldstockdata.com/

Everyone now is focusing on a downside break in miners, so we’re going to look a step ahead at the bullish potential coming out of this. Like most of the market, their realization came too late, and the expected poor performance they think is coming will likely hit a pinnacle in despair and bearishness right when its time to buy. I know that investing in precious metals and miners the last 18 months has been like going through Hell, but you know what they say to do when you’re going through Hell, right?

Keep going. 

We’re almost there.

-Jonathan Mergott

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