How is Silver $21 in This Environment?

I was recently asked this question and wanted to address it further and more in depth than Twitter allows for.  Rewind back to Spring 2020 when COVID struck.  Markets were crashing, everyone was in a panic over this unknown illness suffocating people to death, Supply shortages had people panic buying toilet paper, the Fed dropped rates to 0 and resumed QE and Government embarked on a round of massive spending programs and stimulus, literally handing people money. Every gold bug alive, myself included, took one look at these actions and correctly predicted that “this was going to cause inflation.” While we were right about the Macro implications, our choice of investment vehicle to play the coming inflation wasn’t as successful as we had hoped.

 

So where did we go wrong? Well for starters, we were right, initially.  Gold and Silver sniffed out this massive money injection and moved quickly after the panicky, margin-call-selling in the markets subsided. Only 6 months after margin calls took gold down to 1400 and silver to 12, gold rocketed up 50% and peaked at 2100, while silver moved up 150% to 30. Notice, the metals made their moves higher before other commodities like lumber started having crazy moves higher. The soaring moves in commodities like lumber and energy were mostly due to supply constraints, with a bit of “more dollars chasing even fewer goods” thrown in.

 

Gold is not subject to the same situations as other commodities. We NEED energy like oil and nat gas. Lumber and copper are needed for construction and homebuilding. Most commodities, in one way shape or form, are NEEDED as the primary driver of demand. While gold has some industrial uses, it is not the biggest factor in the demand for the metal. Investment demand drives the price of gold, and that is a function of desire, not a need.

 

Notice how I didn’t include silver in that. While Silver does follow gold in periods of panic and inflation fears, as it did in 2020, as it did from 2009-2011, and as it did in the 1970s, it’s primary use is industrial more so than investment demand. Silver has a bit of an identity crisis in that regard. Platinum and palladium are precious metals and industrial metals. They have never had a monetary purpose (despite calls to make a trillion-dollar platinum coin to pay off the debt). Gold is a precious metal and a monetary metal, with some industrial uses. Silver is a precious metal, an industrial metal and a former monetary metal, that gold and silver bugs like myself believe will one day begin to trade again on the merits of its monetary purposes.  As the more attainable metal to the most amount of people between the two, the emergence of silver as the “money of the people,” seems to me, a logical conclusion.

 

I believe this is what we will see one day in the future. As the saying goes, “Gold is the money of kings, silver is the money of gentlemen, barter is the money of peasants and debt is the money of slaves.” When the “kings” of today, the Bezos’s, the Musks, the Buffets, decide they want gold, there will be no more left for the rest of us. And that is where silver comes in. This is my belief and I believe many gold bugs have a similar mentality towards this.

 

But what I believe and what every other investor in the market believes is not the same. My belief is not fact. And this is the very reason why I don’t focus too much on what I believe to be the correct interpretation of the macro data and outlook. What I find important isn’t necessarily what the majority of investors will find important. My forecasting of the data into a future outlook may be very incorrect, and even if it is correct (as it was concerning 2020’s action’s causing inflation) my interpretation of this into an investment thesis and the correct investment vehicles may not be the choice other investors are focusing on. (Again, as was the case in the last few years. Despite the fact that we’ve seen the highest inflation since the 1970s, gold and silver’s price action didn’t follow the same path as many expected.)

 

What was the reason for this? It could be a number of factors. First, in 1980 when gold and silver rocketed up massively, we were 9 yrs removed from the gold standard. It was fresh in people’s minds, a time when the US dollar was backed by gold and how quickly and terribly things had gone wrong in that short period of time, with inflation reaching over 15% causing the Fed to raise rates to 20% to fight it (You think 6.5% mortgage rates are bad? Imagine paying 20% of the loan amount in interest every year! BEFORE any amount is applied to the principle!) 52 years later, and it’s far from fresh in people’s minds. In fact, there aren’t very many people alive who remember a time when Dollars=Gold. You’d have to be 80 yrs old today to have spent just 10 yrs of your adult life under a gold standard.

 

Another reason could be the market quickly looking down the horizon at the inevitable. When inflation comes, interest rate hikes come with it, and as markets are forward looking, what’s GOING to happen tomorrow is more important than what was happening yesterday or today. In the grand scheme of this inflation period, yes, the fed was slow to react.  Yes, they predicted it would be transitory and it hasn’t been.  Yes, they underestimated how bad it would be. But from the time inflation started to really pickup, it didn’t take nearly as long to turn off the spigot and suck up some of that extra liquidity we printed as it has in the past. Remember the cries of those who said they wouldn’t ever be able to taper without catastrophic consequences, let alone raise rates? They tapered their balance sheet increases, hiked rates to 4.5% and are now decreasing their balance sheet all with unemployment at the lowest levels in decades. I hope people now see that these “catastrophe” calls by many in the gold community were made out of either stupidity, sensationalist “fear porning”, straight up propaganda, or a combination of the three.

 

Or perhaps the reason we were wrong about gold and silver had nothing to do with any of these factors. Maybe we will never know why, and although that’s frustrating, it doesn’t really matter. All I’ve accomplished here by speculating, is wasting a ton of time writing about all the reasons we were wrong, when we could have just looked at price action and determined “we are wrong” and left it at that. We don’t need to understand the question when we already have the answer. I don’t know about you, but if I somehow found myself with the answer key to the calculus final back in high school, I’m not going to waste the test time trying to solve WHY the answer to problem 6 is B, I’m just going to circle “B” and move on.

 

This is why I focus on price action and not my opinion on Macro. 9 times out of 10, if you analyze price action in markets, the “why” becomes clear. The factors of the macro picture that are most in focus by investors begin to emerge and you will see why your view was incorrect. Analyzing price action as the “be all and end all” under the assumption that markets don’t do things for no reason has kept me from sticking to an incorrect viewpoint most of the time, and riding it all the way down. It’s kept me from fighting with the market, believing it was wrong or stupid and I am the “smart” one who is losing all his money. Remember, Wall Street is the most competitive industry in the world, with the smartest people on earth working in it because it pays better than more noble endeavors. If you seriously ever think you got it all figured out, or that the market is just wrong and little ‘ole you are the only one seeing it clearly, watch out, cause you’re about to lose a LOT of money.

 

There is another factor that gets brought up a lot I want to address to, and that is the constant references people will make to “reduced supply”.  On a regular basis, I will hear someone talk about COMEX inventories reaching “lowest levels since…”.  The implication being made is that this constant reduction in supply will lead to prices increasing. So, buy, right? That’s a no brainer! (Because the most competitive industry in the world will often give you a free lunch, “no brainer” like this one, right?) The “economics 101” implication here of supply down, price up is forgetting the other 50% of the formula there, demand. Supply down and demand up or the same, then yes, there is likely to be a rise in price. But that is not the case if demand is dropping along with supply.

 

But how could demand be dropping when the echo chamber of gold bugs have been claiming every day for decades that it’s not? Here’s an easy way you can determine if demand for an asset is dropping: Price is going down.

 

A few months ago, I pointed out in an article that sentiment being bad is not always a sign of a low and that “you should be buying.” In bull markets, bad sentiment is a great indicator for adding to positions for the medium to long term. But sentiment that is TOO bad may be spelling out that the market is turning from a bull market to a bear market, and in a bear market, really bearish sentiment can stay really bearish, get worse than you imagine and never see incredibly bullish sentiment levels even after huge rallies. You have a tendency to see highs and lows in sentiment remain in an overall higher range in bull markets, and an overall lower range in bear markets. Much like I have pointed out regarding RSI (staying 40 and above in bull markets 60 and below in bear markets) You aren’t typically going to see 0% bulls at lows in a bull market. It will bottom out before reaching that extreme. You also won’t typically see 100% bulls in bear markets. Short term tops will occur before that is reached.

 

In a similar way, in bull markets, comex supply tends to increase and it tends to decrease in bear markets. So, much like the misguided rants of the permabulls yelling that bearish sentiment is a reason to buy, when in fact, it is simply confirming that gold and silver are in a bear market, these same rants of “supply decreases” being a reason to buy, while supply continues to decrease along with price, are also misguided. They are not depicting a reason to buy, they are in fact, also confirming a bear market.

 

Here is a chart with the price of silver and the registered silver ozs in the comex warehouse. Notice first that supply was steadily increasing from 2018 after silver bottomed in 2016 at $14/oz. At the $14/oz retest in 2018, inventories were significantly higher. That right there was a clue on the trajectory of silver, as to whether or not that retest of 14 would fail and see a lower low. When silver skyrocketed in 2020, inventories did too. By the time silver retested 30/oz in Jan 2021, (Right around the time of the silver squeeze hype) Inventories had peaked and began declining ever since, and price has followed. Interesting that the drive to “squeeze” silver higher due to supply shortages came at the time when supply peaked and a 60% decrease of that supply since then has done nothing to “squeeze” price higher. (Or it’s NOT interesting, IF you actually understand that supply increases with demand and decreases with it as well. From that standpoint it would be obvious the peak in supply and price would come at a time when “silversqueeze” was on the news and trending on twitter.)

 

Here are a few more charts. These are the ones the “supply shortage, buy now” permabulls don’t want to include in their narrative, because then it begins to break down. The first is Gold from 1995 to 2013. Again, as gold approached its lows near $250 in 1999 and retested in 2001, Comex stockpile decreased with price, but supply was higher on the retest of $250 than it was in 1999 on the 1^st test of $250. It steadily increased from there for the next decade, along with a gold price that increased 8-fold in that time frame. And then came 2013, and the beginning of price breaking down and the bear market in gold. And look what Comex supply did! It decreased sharply right along with price!

 

Here is another, showing registered ozs of Comex gold over a longer time frame. Again, supply was high when price was. Once price began to decline, so did supply. When price moved sharply higher in 2016, then declined again, supply moved sharply higher too, then declined again right along with price. Then it began moving up again around 2018, as gold began making higher lows and higher highs, confirming that a bull market was beginning, in the same way it confirmed the bear market in 2013, and is doing so again now.

 

I hate to have to say this, but it is unfortunately true. There are a lot of “bad actors” in the gold community. The least harmful of them (but still quite harmful) are the ones who are sharing bad information and have no idea what they are talking about. Others know better, they are spouting propaganda for the purpose of stoking fear and sensationalism to try and sell you something, or defraud you in one way, shape, or form.

 

I’ve been very busy recently, so I only caught pieces of this, but it seems the guy running Wall Street Silver has had a past (and present it seems) in fraud and manipulation. Unfortunately, I’m not surprised in the least to hear that a twitter account and webpage with a massive following, that mostly shares fear porn and the incorrect (lies) information I’m referring to, is involved with manipulating people. It’s really not the exception, it’s the norm. (Him, along with Bre-X and 90% of all Jrs).

 

Don’t “trust” anyone. Do your own research, audit everything you hear. As you begin to see what information does and doesn’t hold water, you’ll also begin to notice the same people saying it. The same people saying, “supply dropping, BUY!” are typically the same ones who are talking about bearish sentiment being a buy, talking about commercial short positions on COT reports leading to an “imminent short squeeze” that has never happened and will never happen. They’re the same ones predicting a comex default “any day now”, a major bank failure and contagion that will send the economy into a depression. The same ones who have had 10,000/oz gold targets (For over a decade), and the same ones who say the Fed can’t even taper QE, let alone end it, raise rates and REDUCE their balance sheet.

And yes, the bet I made in Nov 2021 that the Fed WOULD taper, because they literally said “we’re going to taper” was with that guy who runs Wall Street Silver. It was a ridiculous opinion for him to think they couldn’t or wouldn’t taper, that I believed at the time was sheer stupidity. In hindsight, I’m sure it was sensationalism to “build up the brand” so he had more people to manipulate and defraud. I was happy to take his $220 on behalf of my charity, the Meta C. Mergott Foundation. Better off in our hands than in his.

 

Now let’s look at some charts. First up is Gold. The major thing that stands out to me here is the deviation in price from the 200-day MA as we topped at 1950. We can see similar deviations over the past couple of years, higher or lower, saw a “return to the mean” with at least a test of the 200 day MA. Recently, we’ve seen price then revert back the other direction. This is typical in a choppy sideways market. We can see in this example of the bull market from 2000s to 2011 that extended deviations above the 200 day saw tests of the MA then continued higher. In the bear market of 2013-2016, they came back up to test the 200 day, failed and continued lower. This back and forth action above and below that we have currently is showing there is still some uncertainty amongst investors as to which direction to take, so this test here is important. A hold here or even slightly below this area could begin a “higher low” that sees gold start to trend higher again. Let’s not assume anything here. That could be dangerous. Let’s let price action do the talking.

 

On silver, in addition to 21 being the 61% Fib retrace from the 1993 low to the 2011 high, it’s also the 50% retrace of the 2020 low at 12 and the high in Aug at 30. Add to that now, that its also the 50% retracement of this move we just saw since the Sept lows at 17.50, up to the Jan highs just south of 25. 21 was where price stopped its decline multiple times before, and where price stopped its rally as it consolidated near lows this past summer and into fall. So, 21 here should provide some support initially. Also, looking at shorter term MAs, the 13 and 30, they have crossed lower and are beginning to deviate from each other by a decent margin, as is price from both of them. It isn’t an extreme amount, but it’s enough where we can begin to say that expecting further downside in the short term is getting pretty greedy, which is why we sold our puts Fri on SLV for a 165% profit (It was a small position. We had 1/3 of our cash position in the GDX puts and added about ½ of that into the SLV puts. But it’s better than the last 6 weeks being a zero-sum game.)

 

Onto GDX, we pushed through this top area of support at 27. We haven’t quite hit the 26-25 area yet, but the same deviations in price from the shorter term, 13 and 30 MAs is even more pronounced here on GDX than on Silver. Additionally, the same deep deviation between the 2 moving avgs is reminiscent of times when price returned to at least test the purple (13 day) EMA. That is about 7% up from here with the further downside targets only slightly lower than where we are. We’ve dropped 20% in 4 weeks and seen RSI go from 60 to 25 in the same time frame. So, although we can have a bit more downside, a bounce is due here. Even if we don’t rally much from here, we were holding puts that expire in 3 weeks that just now, are only $1 in the money. We don’t need a rally here to lose a lot of those gains, the time decay alone will kill us without any further declines. So, we exited at break even. We will watch VERY closely to see if this ends up a higher low onto higher highs, or a small bounce that is onto further declines.

Everything with GDX can be applied to GDXJ, but a bit more pronounced. Additionally, GDXJ is right at major support here at 33-32.50 so that reinforces the idea of a bounce coming in miners. SILJ looks terrible and is in utter collapse mode, down nearly 25% in 1 month. I certainly don’t want to be long here, but I’m not going to push my luck on the short side here either. We’re analyzing risk and reward and probabilities and despite poor price action, reward here for being short isn’t attractive vs the risk.

 

I haven’t posted GDX/GLD in a while. The daily chart looks similar to GDX. Big decline, deviations between price and MAs as well as the MAs themselves, a collapsing RSI a well. We are at the 61% Fib retrace of the move higher we just had. Right at a level rallies failed at this past Summer to Fall, so some level of support is anticipated here.

 

Flipping to the weekly, we can see RSI stopped dead on this Rally at 60, a typical sign in bear markets. But now we are at 40. It does seem like the market is a bit confused whether it wants higher or lower from here, so this is another reason to be careful assuming direction. We saw indecision on the rally with RSI failing at 60, its reasonable enough to assume indecision on this decline too and see a bounce here at RSI 40. But the overall picture is lower highs and (so far) lower lows. Miners continue to underperform the metal and that’s not what we want to see if we are bullish the overall sector and miners specifically.

 

Another note on being bullish miners and why and when we are. The point, the ONLY point to own miners for (that the market values) is their leverage to gold via increased profit margins. When gold is 1200 and a miner is producing for 1000/oz, an increase of 20% in gold to 1500 is an increase in the miners profit margin by 150% (assuming costs remain the same). THAT is the reason you got a 200% rally in GDX in 2016 and much more in some high-cost miners. HMY went up 1000%. AG rallied 8-fold. Because costs in 2016 were 1000/oz for the biggest miners and gold was 1050. It then went to 1375. The biggest producers, ABX and NEM saw $50 profit margins increase 650%. Miners with costs for gold near 1300 and silver near 18, went from $250 and $4/oz in losses, to $75 and $3/oz in profit in just 9 months (and a lot of people caught short in the process).

 

Reserves are nice, dividends are great, but the major moves, both higher and lower that have occurred in miners have a tendency to unfold over 1-3yr periods typically and they are a result of profit margins increasing or decreasing significantly. Majority of producers have been terrible investments. And why would they be good long term holds in a market that see margins increase from $100/oz to $1,000 and back again in just a few years’ time? This is the exact reason why I have focused my career in this sector on timing. Because there is a time and place for miners. Get it right, you got multi-bagger gains in a few years’ time. Get it wrong and you’ll ride them down sometimes 90%.

 

One final point, regarding the Patreon site launch. What was supposed to be Jan turned into Feb, then March. Unfortunately, its going to be April. Here’s why. I mentioned I just moved back to the city. The reason for this is because my girlfriend of 7 years, whom I very much wanted to marry, and I broke up. So, the move was not really planned or expected, nor have any of the other endeavors that come along with a separation after such a long time together. I JUST moved in and got settled and March is next week. There are still some personal things I’d like to have the time to focus on before launching and devoting my time to the site, and I will NOT launch this halfcocked. When we launch, it will be with guns blazing. Until then, articles will continue to be on this blog, short updates on Twitter and I will continue to use Twitter as a “free trial run” in terms of posting signals when the models depict bottoms, profit taking opportunities and trend changes, as well as any positions I purchase or exit, what they are, why we chose them in particular, the prices bought and sold for, all in real-time when we buy or sell them. Apologies, but 1 month delay turns into 3 very quickly when you’re running around making major life changes.

 

To sum up, don’t focus on the why, worry about what price action is telling you. You’re going to be wrong a LOT. Even the smartest guys are wrong nearly half the time, they’ve just learned to exit fast, take small losses, not dwell on it, and move on. Remember that silver and miners are not gold. Know what you’re buying and do it for the right reasons. Beware of almost everyone in the gold sector. Easy litmus test, if they never admit when they’re wrong, if they have never said sell or even “maybe its time to take some profits”, they probably aren’t being honest, for 1 reason or another. Supply decreases with demand in bear markets because, why wouldn’t it? Patreon site will launch April 1^st and will have more updates between then and now and market wise, we need to be VERY careful. Gold, silver and miners aren’t the only bear markets that COULD make a higher low and start turning up again. We can look at SPX and see a similar picture. Copper, the Euro, even Bitcoin. Don’t get complacent one way or the other. Be open to the idea that your opinion is wrong and be ready to react if it is.

 

-Jonathan Mergott

 

Gold Update

A couple of weeks ago we entered a short GDX position by buying March $28 puts at about $1.50. This was a 1/3 position, meaning the full amount we ultimately wanted to have was 3x this size, but we started small because the holidays have a tendency to be quite and not the best gauge on what markets want to do.  The point of this was if we were wrong we could exit quickly with a very small loss. This loss on a 1/3 position would be negligible compared to the 160% we made on a full postion in Oct buying GDX calls. Our target looked to profit us ~100%, so this was a good risk/reward here.

 

It hasn’t worked out very well as gold has been tearing it up last couple of weeks. But despite a 7% move higher in gold of over $100 since then, we have seen Silver unchanged over the last month and only a 14% rise in GDX in the same time frame. While that IS “outperformance” it barely is in terms of what miners typically do when gold is on a tear. Had we have bailed immediately, we could have dumped those puts for a 35% loss at just under $1, but the lack of follow through with silver and begrudging “drag” higher by miners with gold is still not giving me great confidence that the “low is in”. From that standpoint, I thought it was worth waiting as a large part of the damage was already done and further losses on the puts would be negligible.

 

What I mean by that is this: If we’re managing a 100k portfolio of miners and other gold investments, with a 10% cash position for hedging and leverage, our 1/3 position on these puts was equal to ~$3,333. While gold did well, silver hasn’t and miners broke higher leading to a quick 30% loss, then 50% a few days later. So, a $700 loss. An additional 30% down from here would be a loss of $200, but we easily could have just been early and have the chance to regain some of that. So, I found it not worth bailing on here in an environment where gold is running into resistance, silver is not participating at all and miners are barely outperforming. We still have 2 months on those puts, after all. An opportunity to add another 1/3 position here and a 10% correction in GDX brings those puts back to $1 and eliminates the loss entirely.

 

So let’s look at some charts and see how we’re shaping up.

Gold is running right up to resistance at the 23% Fib retracement that is also right at the 2011 high near 1920.  Additionally, its ascent began steepening as it got there, deviating from short term moving avgs and long term moving avgs, (as well as short term moving avgs deviating from each other). Now today, we are having a reversal.

 

I’ve heard a lot of bull arguments for gold, and its not that I necessarily disagree with them. In fact, I agree with a lot of them. Especially the attractiveness of such an asset during very uncertain times. The only part I disagree with is that this is going to make it go significantly higher. We have high inflation, high rates, a possible recession looming (again), and the SPX is down 18% in the last year. Yes, gold is pretty attractive here, but maybe that’s why its holding in so well versus other assets. At 1920, were down half of what the SPX is from all time highs. So maybe rather than these reasons being why it will rocket to 2500, maybe they’re why it isn’t collapsing to 1400.

 

As I’ve said before, gold and silver are not equal and there is clear evidence here of that. If you want insurance, if you want wealth protection, you want GOLD, NOT silver, and recent price action (as well as countless times in history we’ve seen the same) is all the evidence you need to prove that.

 

On to silver, we have consolidated since Mid Dec while gold has risen $120. This is just pathetic, and again, doesn’t support the “bull market” view in my eyes. Now, that could change. It’s hard to look at silver and get a lot of evidence to support a drop or an explosion higher, and anyone claiming it looks like that, well, check the rest of their track record when saying such things and you’ll likely find all you need to know there. (They’re guessing, as usual. But hey, maybe this one will be right!)

 

GDX got 10% higher from where it was when we thought we were going to get a deeper correction and left a negative divergence in RSI along the way. We’re beginning to see it test recent lows while gold is still above 1900 and only off about 1.5% from it’s highs. Silver is down fairly significantly compared to gold as well. Even if we are to continue higher, it looks like a pause here is likely and could retest that 29-30 area we previously consolidated at. Even if we do not get a chance to add the other 1/3 position to our puts, I think we can mitigate losses here which are very insignificant as its 33% of a 10% cash position on a gold portfolio, so 3% of the portfolio has dropped 60% while 7% in cash has done nothing and 90% has gained ~10%. On that same 100k portfolio, that’s a $700 loss versus a $9,000 profit. And that is how an insurance policy should work in the event we are wrong about it.

There is one interesting development I am paying attention to here which may indeed give a signal that the low is in.  I have mentioned before I think gold and bonds will correlate decently here and instead of looking for the FED to pivot, I am looking instead for the bond market to pivot and the Fed to move against the bond market. This is what we saw in the 2018 low. Gold and Bonds bottomed in the Fall and the Fed hiked rates 1 more time in Dec, moving against the market while rates dropped, and gold rallied. 7 months later they were cutting rates again. I think in this rate hike cycle, we could see something similar. Inevitably, the Fed will act too late, as they always do, whether it’s hiking to much and moving against the market, or holding rates too long and moving against the market.

 

Everybody is expecting a “run of the mill” mild recession. There is a reason we haven’t seen those in 30 years. Everyone is overleveraged and in such a situation, eventually something unexpected breaks and there is contagion. Everybody likes to look at the same issues it was in the past, but likely it will be something entirely different that no one will see coming until its too late.

Looking at the 30 yr bond, we can see it bottomed late Sept/Early Oct, around the same time as gold. The cycle on bonds has been pretty consistent, and that was too early for the cycle low. We then made a higher low and are now retest Dec highs. What’s most interesting to me about that higher low is that RSI stopped dead at 40. But here we are retesting highs and RSI is right at 60 and right about at the 200 day MA as well. So there does seem to be a bit of indecision here, and it is not impossible to take another quick leg down and have a slightly “late” low in terms of the cycle. But if that was the peak in rates, and the Fed doesn’t seem to be done hiking yet, just slowing the pace of their hiking, then we may be set up for that same 2018 situation.  AND we did see gold bottom at the exact same time AGAIN.

This is definitely something to pay attention to in the coming weeks IMO. We don’t have another FOMC meeting until March, so a lot can happen between then and now. So far, unemployment is not doing what the Fed wants to fight inflation, but that is a lagging indicator that by the time it changes, could be too late for them to react in a meaningful way as to prevent a “hard landing.”

Wanted to give an update on the Patreon site as well as some signals from the models. I REALLY want to launch this Feb 1, but still don’t feel like I’ll be up to it. Additionally, I have some personal matters to attend to that I don’t want to distract me from the site, so I’m going to push it back again to March 1 now, which I’m hoping will be more than enough time to get some things settled. Until then, I will continue to post signals from the models, articles and when we’re entering or exiting positions as a sort of “free preview” of it on twitter an on this site until we launch it.

Now as for the models.  The trending model is reading a 74 now and has continued to be above that 40-50 area that indicates an uptrend. We flashed some signals that it was beginning to reverse 1 month ago but recovered. This in addition to the profit-taking model signaling a peak, and the thought process of this being a bear market rally was our reason for buying puts. Important to note, the trending model confirms we want to hold a position, long or short AFTER we get a signal to enter it, so it lags. It confirms later, so the fact that it is still indicating an uptrend now that we are reversing is typical.

 

The profit-taking model however is showing 88 after this reversal. This indicates with a good level of certainty that now is a good time to take profits on positions you entered recently. It does NOT indicate a top. It also does not indicate a time to take profits on long-term positions you have a multi year time horizon on. But it is indicating that we could be instore for a correction here. How deep, and if it turns into a significant down trend from here is undetermined so far, but is enough for us to want to hold out on those puts.

 

That’s it for now, keeping it short because I have a lot to do and still not feeling great. I will keep updating though if something significant happens.

-Jonathan Mergott

Be Realistic

We’ve had a hell of a rally in Gold, Silver and miners, so I wanted to post an update without having to be constrained to Twitter’s character limits.

 

Let’s start with the Dollar, as that is what everyone has had their eyes on and has no doubt, been dictating all moves in the markets for some time now. After the Fed announcement where they raised rates 75bps (as expected), DXY attempted to rally back to highs near 114, but fell short. As I pointed out on twitter and in my previous article on Nov 6, the canary in the coal mine here for DXY was the failure at RSI 60 as price peaked at a lower high. Sure enough, within a few days we had a bearish cross over on the moving averages and the trendline break was soon to follow. DXY attempted to regain the trendline on Wed the 9^th, and to hold the RSI 40 level that it has been above since June 2021, but it closed below the trendline and then began cascading down, while also losing that 40 RSI level.

 

Weaker than expected CPI print didn’t help and today we got it again with a weaker than expected PPI print. Rather than a waterfall though, today DXY is fighting to hold at the 38% Fib retracement from the May 2021 lows to the Sept 2022 highs. We are now short term oversold with a deviation from the moving averages that is rarely seen, and when it IS seen, it typically means a rally back to meet them is coming soon.  Now it should be noted, that “meeting” the moving averages, which currently sit between about 109.25 and 110.25 can come in different forms. We could have a sharp rally in the next few days up about 3 points that tests those moving averages, OR we could simply consolidate for a bit and wait for them to catch up. But any way you cut it, the decline here looks like it’s, at the very least, ready to pause.

Looking over at the Euro for a mirror image of DXY confirms the same things. After a break of major support at around 105, an area that was a bottom from 2015-2017 and was tested 3 times and held, Euro broke below it falling to 96 in Sept. Today, we are retesting that major support level (now resistance level) at 105, which coincidentally, is also where the 200-day moving average sits. We are now starting to get some push back on that rally here, after a MASSIVE move higher. We have a deviation in the short-term moving averages in the Euro which typically indicates a pause, as well as a deviation in price from those moving averages that confirms this. Additionally, we have the highest RSI print on the daily chart in almost 2 years and the highest print on MACD in 2.5 years. We also have a massive divergence in MACD between its signal line and moving average, which again, has typically indicated a pause in the past.

Jumping to the weekly chart on Euro we see another concern here in the short term. RSI is nearing that all important level of 60, a level it typically peaks at during rallies in bear markets. Add that to the major resistance we’re at and faltering on a news event at the 200-day moving average and we are starting to paint a picture that is indicating a pause here. Again, a “pause” could mean a sharp pullback then back and forth consolidation for an extended period (like it did from 2015-2017), a tight consolidation while extended indicators “catch” up and overbought levels back down (like it did as it rallied all during 2020 after a big move higher from COVID lows), OR it could mean a bear market rally high, with eventual new lows to follow.

As everyone has already mentioned, this drop in DXY has been one for the history books but HASN’T been unique. We saw a similar drop after a similar rally from 2014-2015. A sharp move down after a lower high in April 2015 saw the downside catch right at the red moving average which, like today, also sat near the 38% Fib retrace from the low of its nearly 1 year move higher. What came next was a sharp rally higher that failed at a lower high with RSI topping at the 60 level on the weekly chart. It then consolidated for 6 months, eventually retesting highs before falling back to the consolidation lows again. It was not the high of a bull market, we broke to new highs a year and a half later. It was not the beginning of a bear market either, those lows near 93 held for over 2 years. That 7-point initial loss from highs at 100, when it finally did break down, did so after hitting new highs and only broke down an additional 5 points. The sudden drop from highs that came in just 4 weeks was the majority of the move lower for the next couple of years.

I mention this because it is remarkably similar from a technical standpoint to where we are today. I wouldn’t be surprised to see dollar bulls and dollar bears BOTH disappointed by the next few months of action in DXY. If history rhymed here, we could see a sharp rally up to around the 109-110 area on DXY (which would likely coincide with ~1-1.01 on the Euro) before trending sideways for a frustratingly long time.

 

It’s worth noting the correlation with Gold and DXY during this time as well. It may SEEM like the 2014-2015 period was not heavily correlated to gold vs today but there were a few interesting points that I think are similar. We can plot the big notable moves in gold over the last 2 years on the DXY chart and it makes perfect sense. I did so on the chart below. Low in DXY Aug 2020 coincided with highs in gold and silver. Lower low in DXY Jan 2021 saw a retest of silver at the $30 highs, but only $1960 on gold, then a fast reversal in both from those levels. (In hindsight, that was one of the first warning signs, failure to make a higher high with a lower low in DXY).

After a retest of Jan lows in June 2021, DXY exploded higher after the June FOMC meeting where the Fed first began planting the seed of “taper” in the markets mind, and ultimately the first steps in this tightening cycle. Proportionately, the move down in gold and miners after this was excessive vs DXY’s gains and another warning sign for precious metal bulls. (That was the warning sign I took that made me bearish on gold, citing similarities here with 2013 and advising caution.) A few months later, DXY began moving to new highs and gold, silver and miners began dropping to new lows. Now, as DXY looks to have peaked with a big move down, we are seeing a HUGE rally in metals and miners (and everything, really).

 

In the 2014-2015 rally, DXY peaked at 100 in March 2015. At the same time Gold was 1140. DXY dropped sharply and gold took that cue to rally over $150 to 1300 in just 3 weeks. 9 months later, DXY is retesting highs at 100 and gold is falling to new lows by another $100/oz. That was the bear market low for gold. Despite the fact that DXY made a higher high 1 year later, gold rallied strongly for the first 9 months of 2016 as DXY was weak and did not break to new lows while the dollar hit higher highs. In fact, comparably, it gave back very little in relation to new highs in DXY. The next 2 years is what is interesting. DXY hit lower lows in early 2018 but gold did not hit higher highs. As DXY rallied back to near the highs at 100 from 2015, gold rallied too, seemingly uncaring about what the dollar was doing at that point. As DXY retested 100, the 2015 high in mid-2020, Gold tested 1750, a 35% gain from the 1300 level where it was in 2015 when DXY hit 100 the first time.

 

Now that we’re on the subject of Gold, lets take a look and then circle back to the dollar and what this could mean for gold going forward if history does indeed rhyme with that 2014-2015 period.

 

We have a lot of similarities with Gold as we do with the Euro. We rallied $170, or about 10% since the lows 2 days after the Nov FOMC. That gain came in just 9 trading days. Currently, we are testing just below the important 1800 level, which also near where the 200-day moving avg sits at about 1765, and today, we’re starting to see gold struggle. This area between 1760-1800 is a big floor that held gold prices for most of 2020-2022 with a couple exceptions, until we broke down to new lows this year. That “floor” of support is now a “ceiling” of resistance and bears seem to be pushing back, with bulls getting exhausted in the short-term here. Much like the Euro, (and inverse to the DXY), we are seeing a very large divergence in price from the short-term moving averages, and a large divergence between the moving averages themselves. Again, same as the Euro, this typically, at the very LEAST, indicates a pause is coming while either price declines to “meet” them or the moving averages increase to meet price while it consolidates. We also have the highest RSI and MACD levels in 9 months, with another big divergence in MACD signal line vs it’s moving average.

Silver is similar, with the exception being it has exceeded it’s 200 day moving average. It’s testing its former “floor” of 22 and seeing a big pushback today after initially rallying on a weaker than expected PPI number. Again, RSI is at the highest level in 9 months, as is MACD. MACD however, has seen this level only twice before in the last 2 years. Both instances saw a sharp drop follow. (It’s also worth noting, after outperforming gold most days since it began rallying, we are seeing a SIGNIFICANT underperformance in silver today, down over 2% while gold is essentially flat. 

On the note of miners, you may begin seeing a theme here. GDX is testing near the 29 level “floor” it held all of last year. Again, testing the 200-day moving average and struggling. Again, seeing a huge divergence in price from short-term moving averages, and a huge divergence between those moving averages themselves. RSI turning down after highest level in 9 months, MACD at areas it has failed at before and has only exceeded once in 2 years. Additionally, we have a big gap at 27 that is begging to be filled, and strong support (former resistance) near the 26-25 level that I think needs to be tested. I could say the same points for GDXJ but will instead just post the chart. Everything is the same for both. Same warnings we are seeing in the Euro as well and the inverse signs we’re seeing in DXY.

Now here is my major concern, and here’s where we take it back to the DXY rally from 2014-2015.

 

I know the perma-bulls have been calling for “The FINAL low in gold” for 2 years now and been completely wrong so far, all seem to think this is finally it. This may come as a surprise to some of you (sarcasm), but I disagree and think they are probably wrong yet again.

 

I think what we are seeing here in DXY is going to rhyme a lot with the 2014-2015 rally, and what happened after as it began to break the uptrend (by that I mean a consolidation, no new highs for the bulls, no bear market decline to appease the bears. Just boring back and forth). Equally, I think gold could act similarly to what it did then as well.

 

As I mentioned that breakdown in DXY in April 2015 sparked a big, straight up rally in gold. After consolidating at around 1140 for a few months, we rocketed up 150 to 1300 as DXY broke down. Majority of that move came in 12 days (We’re up 170 and it’s been 9 days so far this time). We saw a massive divergence between the 2 short-term moving averages, a huge divergence in price and those moving averages and the highest RSI and MACD levels in 6 months. A lot of this move higher in gold is identical to the rally in early 2015. Additionally, the catalyst for the move higher (a break down after a long and strong uptrend in DXY) is identical to back then.

Now again, if history were to rhyme, what this may mean is we are not done declining in gold, but we may be very close in both price and time. In terms of time, the final low in gold came 1 year later after the DXY broke its uptrend. In terms of price, it was about 10% lower than its previous low before the rally to 1300 started at 1140. So that COULD indicate a final low in gold coming Fall-Winter 2023, with price bottoming near 1450 (10% below previous low at 1620).

 

Some of you might remember that 1400ish was a target of mine for a final low for quite a while. I elaborated on many reasons why in my article “Cost” from July 2022.  For the “too long, didn’t read” crowd, the answer is the name of the article. I am looking for price and cost to meet at an area that makes profit margins razor thin for producers, which historically, (like in the 2015 low), was an incredible time to buy miners with multi bagger returns in the years that followed. I HAD been expecting, as gold is a volatile market, for price to decrease at a speed that was faster than the increase in the cost of major producers, but that hasn’t been the case so far. (It’s not easy to hit 2 moving targets with one bullet). But the idea of it is sound, and playing out pretty accurately (so far). ABX and NEM both just reported AISC at about 1275/oz last quarter, and with inflation still higher than 0, it continues to increase. A decline in price within around a 12 month period into the 1400 range, should certainly see costs within the 1300 range, even if they increase from here at a “slower rate” than they have been.

 

Interestingly, this long-term chart on gold could support that view, as 1400 was major resistance all throughout the bear market from 2013-2018, and 1440 was the 2020 Covid crash low. This area around 1450 is also a confluence of Fib levels. But perhaps most important is a major uptrend line that began at the 2006 lows, connecting the 2008 crash lows, 2015 bear market bottom and the 2018 low. If we were to extend this out about 1 year from now, it intersects that area right around 1450 in late 2023.

Obviously, it is a much better investment to buy producers when profit margins are 100/oz on their way to 500/oz, then to buy them when profit margins 500/oz HOPING that a moonshot up thousands of dollars in the gold price will give you profit margins of 1500/oz (and the triple on your investment that SHOULD logically follow that). Unfortunately, that’s not what most people do, as we can see few were buying miners into 2015 as profit margins dropped to about 50/oz, but plenty were talking about “to the moon” in Aug 2020 after gold had already rallied 50% in the last 6 months and profit margins for major miners we at nearly 1000/oz.

 

Now down to brass tacks. As always, this is NOT financial advice, always do your own research and all decisions you make on investments are your own, I can simply tell you what I am doing and what I WOULD do in certain situations.

 

If you were like me, and buying when I outlined that “the boxes are being checked for a rally” on Oct 25^th, this is a good place to take profits, which is being confirmed by my model as a “logical profit taking opportunity” and that’s exactly what I am doing this morning.  Jan calls on SLV, GDX and GDXJ (All in or near the money at the time of purchase) have doubled since I said this on Oct 25^th, and all 3 have more than tripled since the Friday Nov 4^th lows after FOMC.  To me, it seems obvious and logical to take this opportunity to cash out on a little more than half of these calls. This takes my initial cost off the table and a little bit of profit. The remaining calls are all on “the houses money.” If we continue higher, I profit more. If we take a sharp, quick decline, it is all still profit, just less of it then before. I can then decide if the pullback is acting in a way that warrants adding back more of these calls or taking the remaining profit off the table, but from here on out, it’s a ZERO risk position.  (I should mention, as I talked about very similar setups that were screaming for a pause in gold and miners that are identical in the Euro right now, that I am also shorting the Euro here).

 

Note, I’m NOT selling long term investment positions. What I’m selling is from the cash portion of my gold portfolio that I have been using for hedging for the last year and a half while we declined and adding to those long-term positions with the profits from those hedges. Then, using that cash position as leverage when we identify incoming rallies by buying calls on the ETFs. This method has SIGNIFICANTLY mitigated my downside risk on my portfolio during the declines and given me the liquidity to add to my positions at great opportunities, as well as emphasizing the upside when we are gearing up for a rally and continued to build yet a bigger cash position for those opportunities and for future hedges if and when we begin acting weak again. I am not suggesting selling long term investments, especially if you believe in them.

 

Whether we pullback in a way that looks like we want to buy again, or whether this rally is done for now will entirely depend on what I said in that Oct 25^th tweet, “the reaction after a big move.” We just had a HUGE move. Up 20% on GDX since that call. If this rally has another leg to run higher left in it, then I want to see buyers coming in on pullbacks. They can be sharp and decline quite a lot, but I want to see those moves get supported if they occur. This would mean I want to see gold hold 1700 min, Silver ~20/oz, GDX 25-26 and GDXJ 30-31. We will likely see some gyrations beyond those levels on a few of them if we pullback strongly from here, but we will have to analyze that as it comes and make the decision then as to whether this still looks good or not. I will certainly update as to what I am doing when that determination is made.

 

In conclusion, be realistic. I know the “to the moon” crowd is out again, proudly exclaiming their victory in calling this low (that makes their records 1 in 423 by my count) and predicting 3,000+ for gold in the coming months. It is certainly possible, I’m not gonna say it WON’T happen, but I am also not gonna BET my positions on it. I’m buying and selling on what is LOGICAL and PROBABLE. I’m not treating the market like a Powerball ticket.  Since my call on the 25^th, you got +8.5% on gold, +15% on silver, and +18% on GDX and GDXJ. Since the lows after FOMC, it’s +10% on gold, +20% on silver and over 25% on GDX & GDXJ.  All in 3 weeks if you were buying on my signals! We’re making a profit, and that is good!

Now take some.   

-Jonathan Mergott