Note: This is not financial advice.  I’m not a financial advisor and I’m wrong 100% of the time.  Investments are risky and nothing mentioned here should be considered financial advice.  Invest at your own risk.

Hold or fold?  There’s a 3rd option – partially fold, partially hold.  More on that below.

Kenny Rogers…

You’ve got to know when to hold ’em
Know when to fold ’em
Know when to walk away
And know when to run
You never count your money
When you’re sittin’ at the table
There’ll be time enough for countin’
When the dealin’s done

Recent recap of some option plays.  Skip to the next section if you only want the meat and not the potatoes.

This year so far I’m up pretty “bigly”.  That being said, I think anyone who bought just about anything at the bottom is up 50-100%.  I bought some about a week before the crash which really screwed me for awhile until they came in the black a few weeks later.  Then you had BNO negatively affected by -$37 oil and me trying to “catch the knife” by buying too early and not letting it hit the bottom.  I’ve made a few mistakes learning a lot of this, but man have I also had some nice plays.  a few weeks back, I called MTZ.  I had loaded up on strike price $35 options and when the price tanked, I bought a shit ton more.  While it was a gamble – I’m a quick study and the charts spoke to me.   MTZ had gone on to hit $48.  I got out of my option play early and still made a killing.  I’m now learning about “taking profits” more and letting some other things fly.

Here was my MTZ prediction with the $35 strike price I had bought options on.  This was May 9th, and the “ascending triangle” spoke to me.

Ascending triangle - MTZ0508202

It then dipped in price.  What many people do is wait for the breakout and play the move up.  I punched it early and gambled a little.  Shouldn’t have, and I got lucky.

MTZ-05152020-1

I bought all kinds of options at the red candle right inside the triangle, and then again at the big green candle at the bottom for pennies on the dollar.  The “pennies on the dollar” options quickly paid for all of them, and I took a 100% profit from the original options.  Something like $700 profit.  Nothing crazy.  But get this, my “pennies on the dollar” options paid for the originals, and I should have then taken 100% profit on half of those and let the others ride.  This is what happened.

On the 12th and 13th of May, I felt there was a strong possibility of an upward move and bought in.  I was quickly punished.

Here’s where it went.

MTZ 06222020

But…I bought at the low because I also felt very strongly about this stock.  And…here’s where it went.  Note the big green circle has it at $48.  I had control of something like 600 shares at $35 strike price and had I held on?  Would have been $7800.  I got something like $500 profit.  So – I probably should have taken profits to pay for my options and then let some things ride and cash in more along the way.

The lesson here though was $500 could then go to some junior miners on a high risk/high return investment rather than possibly betting on the farm I MAY have hit $7800.  I was right on the call.  I didn’t execute a proper profit taking mechanism, which I’m learning about.

With BNO, it was the right call – I bought too early.  It had gone down to $5.85 a share and recently went back over $11.

AG (First Majestic) – I had noticed that silver had been “noodling” around and the price action was building energy that was due to break when you look at the charts.  On top of that, all of my mining stocks had been coming to ends of patterns that all were signaling a big move up or down was coming.  With AG, I noticed a “bull pennant” or “bull flag” – depending how you want to read it.  If you notice, there was a convergence coming.  At the point of convergence, energy breaks it up or down.  Either the bulls or the shorts win.  With this, in a BULL MARKET, it shows that the price becomes too cheap for people to ignore and they load up.  This is what these moves are.  Just because price goes down one day, it’s not the end of the world.  In a healthy bull market, there are run ups and pullbacks.  The pull backs can be weeks on end..but if they cross over a 50% retracement, they are probably no longer in a bull market and might be bearish.

This is the pattern I saw:

bull flag

And this is what AG did.

AG 06192020 price

Notice the pretty flag.  I bought options at the second to last red candle.  I should have waited.  Anyway, I had a price target of $10.69 by July 1st.

This is then this morning early:

AG 06222020-0940

The candle popped up, and I sold 10 of my 20 options for a very nice profit, which paid for 85% of the other 10 options.  I have a strike price at $9 for July 2nd.

I noticed last month that the last week or so of the month, silver prices shot up due to delivery issues expected.  Those same issues are expected this month.  On 6/1, price shot up higher, then futures contracts rolled over 6/2 and the price of silver receded.  This is a long, slow, bull market being built with lots of price opportunities along the way.  “Buy the dip, sell the rip”.

So – with my MTZ options, I pulled the plug too early.  On this play, I still have 10 options remaining.  IF price hits $10.68 on 7/1, I might pocket a nice $1200 profit with those options.  OR, I could sell them low to break even near the date.  OR, they could expire worthless and I’d be down like $150.  These options have already been mostly paid for.

Know when to fold em…(the next section)

In a previous blog, I wrote how I feel a double bottom is coming and how I feel mining stocks are the best way to go.  What many people did see was that silver and gold would quickly deflate, and then bounce back up and re-inflate.  I didn’t see that deflation coming, at least not to that extent.  Apparently, the reason is big money was leveraged out on margin calls and they sell everything not nailed down, including metals and miners.  That being said, the metals bounced back quickly – gold may have surpassed it’s recent high within a week or two.  Silver’s path back up with more rife with speed bumps, but it did a nice gap up.

But there’s risk ahead…

I feel 7/1 might be good up until then with metals.  However, there may be some gold profit taking the last week or so and this might have a sell off.  Don’t know.  I think silver is solid.

My big dilemma is 2Q reports.  Part of me wants to sell everything 7/1 and then come back at the end of August, holding a cash position and perhaps if there’s another deflation, capitalize on buying a real bottom.  If it happens just like last time, my guess is metals and mining stocks would deflate like everyone on a sell off.

But…..

Newmont just doubled their dividends.  Many of these miners for 2Q might have record earnings due to high metals prices.  Some have been interrupted by the mining closures.  However, I feel whatever deflation there is, it will be MUCH quicker this time for metals and mining stocks to bounce back.  This sector is set to absolutely explode due to higher prices making them all more profitable.

So the issue is:

  1. Sell off everything at a nice profit and hold a cash position for 6 weeks?  The downside is missing “gap up” moves in metals and possibly missing a 20-30% gain.
  2. Hold everything, and perhaps set stop losses at a 21% or 38% Fibonacci retracement level.  Have stop losses cut there.  The risk here is losing 20-30% of your investment before you cut it off, and there could be a reversal the second you are stopped out.  I’m not sure miners will have the gap down than others may have.

There’s another solution I heard, and am considering – sell 1/3 or 1/2 of the investments.  This might help you not only capitalize on massive gap ups, but if there is a big sell off, you then have a cash position to buy in much lower to reduce your overall dollar cost averaging.  This probably is the way I’m going to go.

 

What I’m worried about is a lot of novice (even more novice than me) investors doing some dumb shit.  One of my two graduate degrees is an MBA, for whatever that’s worth, and I at least understand a good portion of a lot of this.  I’m not Wharton MBA or anything, but I have a very grand comprehension of how all of the big levers and bells and whistles work.  Had to dust off a lot of knowledge and had to lean on some friends to fill in some gaps for me where I didn’t have an advanced level of knowledge.

At issue are the people that signed up for the Robinhood accounts and really gamble.  I mean REALLY gamble.  People bought into a bankrupt Hertz.  Eventually, I heard they had to freeze trading it.  One poor guy was a 20 year old with no income and committed suicide because he somehow lost $700,000.  In his suicide note, he asks how a 20 year old with no job could even have access to $700,000 of credit.  Well, you short the wrong thing and that becomes a very, very bad day.  At least with options, the worst you can lose is what you put up.  There are people out there going nuts with these trading platforms….and many people could get their asses handed to them really soon.

I have done literally hundreds of hours of research and am subscribed to countless journals and listened to hundreds of industry interviews.  I feel 8 months of “ball deep” education in this sector along with the technical understanding, practice trades, and countless emails – I’m now extremely confident in not losing my ass.  That’s the best I think most people can put out there.  If you think you know everything, you get humbled when you wake up one day and silver is down $.60.  That hurts really quickly.

It is important to understand the big items:

  1. Understand the industry you are investing in.  Some of my friends have REALLY, REALLY strong plays and made a goddamn fortune recently – but I do not have confidence in those industries.  Not my comfort zone.  Maybe a few speculative dollars here and there (like Mastec).    My favorite TV show is “Gold Rush” for the last decade or so and my most prized possession is my rock collection from when I was 8.  My dad’s friend was a geologist and went all over the country getting awesome samples, and put together a box for me.  I’m extremely passionate about the sector and it’s a natural fit for me to then read endless reports of geological mineralization reports along with the private placements and equity deals with the movers and shakers in the industry.
  2. Understand geopolitics.  Things go south at times.  The pretty charts I show are price action only.  Without any information that can “move the needle”, the price charts are the psychology of trading with probability.  Geopolitics are extremely important.  For example, when I picked Newmont and Kirkland Lake as my major minor producers, I read that in Papua New Guinea, they essentially nationalized a mine out from under Barrick.  As the world gets more confusing, geopolitics and counterparty risk could mean EVERYTHING with your investments.  I like AG (First Majestic), but they ONLY have mines in Mexico.  That’s a risk, so maybe only a small portion would go to them.  On and on.
  3. Know when to hold em and when to fold em.  So many people are blind to the extreme risks to the stock markets right now.  You’re up 60%?  Take it, go home.  Take some profits off of the table so if all of your shit goes to zero, you don’t lose your principle investment.
  4. With commodities trading, Rick Rule has said, “the answer to low prices is…low prices”.  Finding situations where a commodity is undervalued relative to other commodities or asset classes is a good place to start.   He made billions with uranium.  At the time, uranium was trading at $8 per pound spot price.  The problem was, it cost $50 per pound to produce it.  He thought, “either the price will go up, or the lights will go out”.  He went out and invested heavily in the sector, and especially junior miners.  The price didn’t go to $50.  It went to $158 per pound.  The “overshoot” effect, I call it.  Because it took so long for mines to get spun up, there was a supply crunch.  It then took some time for an equilibrium to be met.  He said, “of the 5 junior miners I invested in, the WORST return was a 22x”.  My entire investment thesis is related to silver.  The price is extremely low, and there is very little $17 silver left on earth.  I feel a “fair” price for silver, for all of the upcoming demand and current short supply is about $30.  At issue is, mines take an EXTREMELY long time to start up, and exploration was eliminated around 2012 as miners started leaning out.  So – my investment thesis is, “either the price of silver goes up, or Tesla stops making electric cars”.

 

Recap of how miner stock works.

If you are company ABC and you pull silver out of the ground at $16 per ounce and it is selling for $17 per ounce, you are making $1 profit on every ounce.  If silver goes to $20 per ounce, you are now making $4 per ounce.  So if I bought some silver to sit at home and look at me and make funny faces, that silver at home going from $17 to $20 makes me $3 profit on my $17. Or, $17.6%.  If I’m a miner, that $20 silver is now a 4x on my profits, or 400%.

Now, a company like First Majestic has an AISC (All in sustaining cost) at about $12 per ounce, give or take.  $17 silver gives them roughly $5 per ounce profit.  $22 silver gives them $10 per ounce profit.

Last year, they mined “25 million silver ounces equivalent”.  At $5 profit, that’s $125 million profit.  At $10 profit, it’s $250 million profit.

Many people think silver may chase all time highs in the next 2 years and may chase $50-$100 silver.  While it might sound silly, in 1980, adjusted for inflation, silver hit $150 per ounce.  In 2011, it hit $78.  And…the conditions are ripe for it again with a supply squeeze.

If silver hits $50 per ounce, First Majestic profits go from $125 million last year to $1 billion, or about an 8x for them.

 

My favorite miners….(again, not investment advice.  This is like talking about my favorite NFL stars).  

With miners, there are many categories.  It’s not just someone taking gold out of the ground.  There’s a lot of categories you will see below.  Early on with my investments, I asked a buddy of what he thought about a company.  He said, “they are a miner that didn’t sell anything last year, I’m not interested”.  I wondered how a company could be “hot” and “in demand” and have no sales.  Well – this particular company was a project generator that takes a hole in the ground and gets it ready for one of the big boys to buy it at stupid high premiums.  So, when prices of metals go up and there’s no metal to be dug, they come to these companies and pay up handsomely.

The miners below have either given me some good returns or the research I did tends to lean towards some really good returns for me upcoming.  Do NOT invest in miners because some idiot on the internet told you to do so.  Do your own research.  I do a LOT of YouTube video watching.  Out of 2000-3000 junior miners, maybe only like 100 make it.  I try and find the best teams along with “following the money” of the top people and where they invest.  I am a member of a few paid subscription services (my favorite now is Mining Stock Journal by Dave Kranzler).  The MSJ subscription cost me $20 a month and it paid for itself 10 times over in the first hour of investing.  It’s now many multiples of that.  If you know who to follow, they can help you find the best of those 100 that make it and help you pour water on the guys with just a hole in the ground.

Producers (these are majors and mid caps) – Kirkland Lake (gold), Newmont (gold), First Majestic (silver and gold), Pan American (silver and gold).  All of these have been around the block and got better with efficiencies in the last 9 years of lean times.

Pre-producers (inside of a year) – Pure Gold (35% gain) and MAG (2% gain, I bought too much when the price was higher).  I think Pure Gold has a 4x in it by Christmas and MAG could double by Christmas with $19-$20 silver if not more, and MAG will be the largest silver producer in the world.  The big deal with these is that their value has been a profit TAKER up until the point of “first pour”.  Lots of millions went in to permitting, drilling, marketing over maybe 5-10 years.  Many times their feasibility studies would have them being done at $1250 gold.  Well, both of these will be re-rated and start being a profit MAKER.  This is the “sweet spot” on the Lassonde Curve Jeff Clark talks about.  One big thing with MAG is also that only 5% of their property has been explored.  So as they are making all kinds of silly mad money, they can reinvest some in exploration on their property.  This could significantly, significantly increase their market cap with more finds.  MAG is also listed at 49% of the high end of analyst ratings, meaning there’s a possibility of a double even at $17 silver.  Imagine $20 silver?

Pre-producer (> 1 year) – treasury metals, 11% gain (gold) and silvercrest, -2.87 gain (silver).  Treasury may be a 4x and silvercrest is supposed to have the lowest AISC for silver at something like $5 per ounce.  If you have a silver company that is making a $17 ounce for $5 and everyone else is at $11-16, you’re going to be a lot more profitable than the others.  They have extremely high grade silver which should have them highly profitable at $17 silver.  At $25 silver, they are silly profitable.

Exploration (high risk) – precipitate gold (27% gain), minaurum, aftermath silver (9.73% gain).  I bought something like 17,000 shares or precipitate dirt cheap and it’s not letting me down.  One analyst I read is calling it a 5-10 bagger.  It is slightly de-risked as it now has a deal with Barrick.  Barrick would not mess with a junior explorer and spend $10 million unless they think there’s a possibility of a 1 million ounce deposit.  This is really close to one of their properties in the Dominican, which is the 5th largest mining operation in the world. So…I’m liking precipitate and saw the CEO Jeff Wilson on a few interviews.

Exploration (less risk) – Wallbridge (-1% gain), discovery metals (29% gain), freegold (51% gain), and tudor gold (I’m almost at a double with them at 71% gain)

Prospect generators – Goldmining Inc – lots of projects ready to go, long hold and $3000 gold will make this stock go ballistic.  They bought cheap and with rising gold price, this could print money.  Lion One is sitting on 10 mm ounces in Fiji and have had experience selling projects like this for billions.   They have a small plant onsite to test and assay, and whatever gold they are finding help pay for more drilling which helps prevent share dilution.  Vista Gold is one I found and can’t really unsee the numbers.  They have a Net Present Value (NPV) of $1.6 BILLION but only a market cap of $91 million.  They control 13 mm ounces of gold and have a 40% IRR.  They are ready to mine with almost half a million ounces per year with an AISC of $688?  Might need a billion or so to build infrastructure and a mine, but this is something to watch.  If Eric Sprott gets involved here, this share price could double quickly.

Streaming – Franco Nevada (major) – up 5% in a week, and Ely Gold (junior) up 16% in a week.  Ely’s business model on their investor presentation is similar to that of FNV in its early stages.  Some of the projects Ely has are just now about to hit production.  One of Ely’s customers, if they hit big, could be a company maker.  How these streaming companies work are mostly like this – we will give you millions, and in return, instead of you paying us cash, we can buy x amount of your gold at stupid cheap prices.  For a miner, this means no cash out.  For a streamer, higher gold prices can absolutely make their income statements pop – and many of these have no debt.  They aren’t miners, they are credit analysts and math geeks.  They have zero interest in taking over a mine, so only the best of the best projects get approved with this.

 

Footnote on mining investments and how cash moves.  

The “early adopters” (me), get in on the ground floor and get stocks at their cheapest when they are undervalued.  Eventually, big institutional money like Vanguard will see how profitable a lot of these companies are and start to shift major funds towards them.  Above – this makes the large producing miners go up in stock price.  More profits the 3rd Q will take it up even more.  Higher metals prices, even more.

Eventually, the Robinhood kids start to catch on, and common investors start driving the price up even more.  Then, at the peak, you have the taxi cab driver or hair dresser talking about the mining stocks.  That is the time to start selling off at its peak.

While all of this big money comes in, you have to understand the last 7-8 years have not been kind to miners, and a lot went out of business and lost their asses.  Those that did survive mothballed mines that are not profitable at current metals prices and innovated on more creative ways to be profitable.  One BIG issue for the big companies, was that exploration is the first thing to go.  So – as a lot of BIG money comes in to the Barricks and Newmonts – they are trying to scoop up as many of the other companies as possible.  Many people don’t realize it could take 10 years to get a mine online, then a mine life might only have 10 years.  So when the Barricks of the world are mining out all of their existing resources, they have little to no exploration projects in the pipelines.  This is where a lot of the juniors come in.  Lots of purchasing happens, lots of mergers and acquisitions.  Exciting projects are purchased from project generators, developers, and explorers.

To conclude – the next 2 months could be a market mess with your traditional equities getting murdered.  Could their fall and sell off cause metals and mining stocks to contract like they did in March?  Absolutely.  To what degree, no one knows.  Or, it’s possible, this is a company by company thing, with those successful companies like Zoom spared when other companies with 1/10th their normal earnings get eviscerated.  It’s also quite possible that metals prices continue their upward trend leading to 2Q miner record profits and the move out of traditional securities is transitioned to mining securities.  Finally, it’s possible it’s all burned down again, this time far worse like in the great depression.  One possibility is the last 3 months have been the “dead cat bounce” and it would not have been as high of a bounce if it wasn’t for $3 trillion of Fed liquidity…but even that may not prevent the cliff from falling.

All of you need to seriously weigh your risks over the next few weeks/months as these will be some choppy waters!