I’m not going to bust out charts to point to some sort of divergences today. There are far better people for that, but I do have a GDX and SILJ to at least consider. What I wanted to do was go over where we are in the macro picture for a short to medium term review.
If anyone has followed a lot of the gurus, they have talked about the COT report and how the big banks are close to not being net short anymore. This is what it looks like.
I hadn’t been sure how to interpret this in the past, but I have heard a lot more people smarter than me discussing it, so here’s how the theory goes..
- the yellow line is “net short” and corresponds with the first row on the bottom left where it says net short of 351 contracts. This is 1.755m oz.
- As the banks are LESS short, going to net LONG, it shows the banks are positioning themselves to start going long silver in paper contracts.
If you have paid attention, there are also some big things in play
- several cliff drops have happened to take silver down, hard. This was supposedly the big banks spoofing or curving price directionally to force people out of their positions so they could buy back cheaper. Meaning, they may either fake sell or really sell something like 5,000 contracts in a short period of time to “run the stops”, then when a bottom is in, they buy back the 5,000 and those that just sold. Sometimes price has a V recovery, sometimes it’s spread out over a few days and weeks. Despite ALL of the hits, silver keeps recovering
- Lots of banks seem to be getting hit hard with spoofing and other types of charges now, such as racketeering. This is a LOT more than I’m used to seeing.
- China and Russia continue to buy gold and de-dollar. India has awoken post-COVID and is now buying. Every other week you are seeing countries now adding gold to their central banks.
You also have some guys like David Brady warning that perhaps a good jobs report Friday could reverse some of the feel good news in metals lately….
Once again, I’ve been listening to a ton of people in interviews and there’s a lot there I’m positive about. I think the lone voice of nothing good coming in the next few months is Jordan Roy-Byrne. In a massive heap of contrarian investors and technical guys, he’s contrary to them. On opposite day, that seems to mean Jordan has the thoughts of mainstream media.
I’d say there’s one hole in my thesis with gold and silver. If tapering is supposed to be bad for gold and silver, because it somehow strengthens the dollar, you’d think the reverse then would be true. Not tapering is good for gold and silver, right? I saw this on Twitter and it’s hard to un-see…
This is more or less showing a direct correlation between Fed balance sheet and stocks. More or less. This is telling me that investors are sort of ignoring the debasement of currency narrative and spending all excesses on the stock market. No fear has moved to gold. This would make Don Durrett’s case that he has been making all along – that gold may not go up without fear. This chart is hard to ignore.
On the flip side of this, you then have Palantir investing $50+ million in gold. Never heard of the company before, so this was eye opening when I saw they did a lot of AI types of stuff for the government. I’m not going to dive into that as all of you heard about it 40 times from the usual talking heads – but this sort of tells me there is fear going on, a little.
Rick Rule talked about how (I’m going to butcher this) that something like 1.5% of funds, on average, were invested in gold, and right now it’s .5%. His contention is not that gold will have to moon shot, but all you need is the amount of money normally invested to move back to gold, on a percentage basis, and gold will soar. He said, “all it has to do is revert to the mean”.
Meanwhile, I think more and more people are coming to the same conclusion I came to with the bond market going to explode. Jonathan Davis was on Palisades the other day, and while I agreed with most of his conclusions, he seemed to go out of his way to suggest that there will be inflation for the next decade but at the same time seem to suggest David Hunter’s premise of a crash is “infantile”. There are now many, many, many of the deflationists out there calling for a crash in some way, shape, or form. Using Jonathan’s own words, he suggests a strong inflation is here – and this would suggest the following:
- Bonds/Treasuries will continue to print something like 1.5% for a 10 year yet have 5-10% inflation
- Investors will just blindly continue to buy these items, despite the promise of losing substantial amounts of cash to do so
- The Fed has the ability to backstop ALL debt sales in order to do a perfect yield curve control.
I think he makes an excellent case for inflation to be here for a long, long time, but where I disagree with him is this. If you are indeed looking at shadowstats and seeing a 10% inflation, perhaps 5.5% on the CPI, I just wonder how long the Fed can talk the talk of transitory before BIG money starts selling out of these. This will put pressure on these debt instruments. In order to keep rates low, there MUST be a buyer. IF the fed is the ONLY buyer, then what happens? China and other sovereigns sell their debt to the Fed who adds it to the balance sheet.
In the short term, you will see the Fed’s balance continue to rise. This is at the same time they are trying to hint they want to stop buying $120b a month in bonds. At the same time, you are seeing over $1.1T in the reverse repo, suggesting too much liquidity that banks are not lending out. Then, you also had the Fed setting up $500B repo facilities – I would suspect for the days where crazy Fed buying stops and banks need overnight loans. Remember – this WHOLE thing started in 2019 because banks would not lend to each other overnight because they didn’t trust the MBS and other collateral. The Fed had to step in and provide liquidity when the rates hit 10%
Anyway – the point here is that IF this inflation continues, as Jonathan suggests it will, it tells me that eventually, there will be a lot of selling of the debt with no buyers other than the Fed. This can pin rates down in the short term, but the overall question I’d then have is how much of that debt can the Fed add to their balance sheet? This is where Hunter had talked about the Fed balance sheet perhaps hitting $20T. Why? I believe this is why.
At some point though, there’s a crossroads. There’s a Rubicon that must be crossed. Do you…
- Expand the Fed balance sheet to infinity and in turn, de-value the USD into nothing?
- Let rates rise to slow down the economy and crash the stock market and allow a deep recession?
Given those choices, it seems the only path they can go on is to continue to backstop all debt sales and increase the balance sheet. To Davis, this might suggest the chart above would thus continue to rise. To me, if the Fed balance sheet continues to rise, it then sends the dollar down. What happens when the dollar goes down to 85, 80, 75?
A LOT of what we buy in the US is imported. What this will do then is make us have to use more currency units to buy the same amount of goods. Produce prices and commodities explode – and this then shows even greater price inflation to the consumer, putting even MORE pressure on debt.
How to play this?
I’m playing this several ways. Short term, I am dealing with call options. My Sept 17th ones aren’t going so well as I was decimated with the jawboning time and time again. My Jan 21 2022 call options – much better. And, I believe, there may be some short term noise like Brady discusses which could create volatility. In the longer term, I still have a lot of the GV Sitfolio I got buried on with the recent sell offs, but these are some strong companies. I added a little to them on the pull backs. For the long term, I have now added $20k in GDX to add to my GDX call options.
GDX has been a dog. Woofing it up all the time. However, this is one opportunity I could not pass up. Why? It’s the most hated in the most hated sector in investing. But I did an analysis and showed pretty definitively that GDX is on the outlier high of being valued to gold. Meaning, when gold sold off, GDX went ballistic and sold off much harder and deeper. While I caught the bottom in gold with my GDX Sept call options, I didn’t account for GDX to then continue to sell off for days after gold bottomed. That’s a tough lesson in investing. Catching a bottom in gold, but then watching the bottom in GDX hurt my soul.
Take a look at this chart. This is my original work.
This shows at the top red line that GDX is undervalued to gold the most it has in years. Translation – if you think gold has a strong move ahead to January or so in a leg up, then to revert to the mean, GDX would have to significantly outperform gold. So I bought the GDX shares as opposed to that value in call options because I’m about to get pasted for September call options and I can’t go to zero constantly on call options. If gold goes sideways, I’m protected. If it makes a strong move up, GDX will make a stronger move and what call options I do have with january will scream alongside the shares I bought.
While owning GDX, GDXJ, WPM, and SILJ aren’t the sexiest plays in town, my contention here is that we saw a lot with the juniors in gold and silver like we just saw with uranium. That is – everyone knows these things are going up, but they got front run by retail. Big money has yet to pile in to the majors, yet we all chased the juniors. Right now, I’m waiting for that rotation from tech into GDX/GDXJ, SILJ, and WPM. Once this BIG move happens, I would THEN put more money into my individual companies and juniors. Right now, I think we all got ahead of ourselves, and it has shown with this sell off. GR Silver hit like $.30? Are you kidding me?
This is the GDX, and to me, this paints a beautiful double bottom, in the form of a potential W. At that second red circle is when I bought a ton more GDX options for January as well as bought my GDX stock. While this will NOT go in that straight line up, it gives you an idea of the potential of the double bottom, if this takes hold.
With the SILJ, you can see the channel moves, what appears to be a false breakout down, with a reversal.
The vertical bar is the date my SILJ options expire. I bought a ton at $14 SILJ for Jan 21 2022, but my $17 were down to $.50. Probably will buy 10 more on a pullback the next few weeks. My contention here with SILJ is this channel has been building a LOT of energy, and I feel that the bottom is in with that move down – and now there may be a lot of short covering on the way up.
Now, to wrap this up, we look at silver recoveries. Remember the charts I mentioned about the beat downs and recoveries every month? Well, Friday was the start of the recovery…
you can see that silver bull flag the last 3 months as well. What I’d like to see here is silver break above that dotted line resistance in the next 2 weeks, back test it, and then spring upwards. That’s hopium, a little. But you can clearly see every month there’s an average of perhaps $3.12 recovery. This could put us at $27 by mid Sept.
Circling back with the COMEX, you can see about 13,000 contracts on the board at the moment with Monday taking down perhaps another 6,000-8,000. What I find fascinating about this now is that you have $24 or so on the board at the moment. You could potentially have a lot of people taking in-month deliveries – the most I’ve seen was about 10m in month purchases. We are sitting now with 107m in registered and I don’t think they want to actually let a lot of this go.
Overall, I worry that Jordan may be right – not in that gold will never rise, but the time where it goes parabolic may be delayed and kicked down the road. That’s going to hurt my call options, badly. Not because a chart tells us so, but QE to infinity may continue to raise stocks until they cannot control the interest rates anymore. When that happens, we do see stocks crashing. But would that rotate money into gold, or with the rising negative real yields could big money anticipate all of this and add to their funds so that gold is rising WITH stocks like it did 2001-2008?
That being said, I see the macros being strong for 2H of 2021 for gold. The Afghanistan thing is horrible, and while I cannot comment on anything related to this publicly due to my job, I can make a comment that this might be a fear play for metals with instability.
Lastly, I’ll leave off with this thought…..
Times are precarious. Anyone reading this gets a sense that any day we could wake up with the Dow down 2,000 in futures which sends the DXY over 96. We could possibly imagine a day where the DXY drops $2 and starts a free fall. This level of volatility is tremendous for trading opportunities, but also a highly stressful environment for all of us. We fear losing all of our money in a trade, but also fear losing all of our purchasing power in cash by NOT being involved in a trade. Anything we put money into can look like it can explode up in value or down in value. We are all seeking an edge. A prophet. A fortune teller. We all want to discover the guy with the magical tool we don’t know about that is indeed predicting the future. We want to get to that area before everyone else to get a 10x. At this point, however, it feels like there’s a lot of anxiety. The record-long bull market in equities feels overstretched by orders of magnitude. The 40 year bond bull market looks to implode if the masses digest real inflation is here.
I can tell you this – keep it simple to start….
- keep $500 in cash per person in the house
- get “protection” in case of population volatility and looting when the “arab spring” hits us with food prices
- Buy extra at the grocery store and stock shelves and freezers in your house. IF there are food shortages, you may have 3-6 months worth of food.
- Buy some physical gold and silver, in several forms. Don’t keep much at your house, if any, as you make yourself a target. Pretty much anyone who reads this who has any PMs probably dealt with bullet point two above first. I also have significant silver with Kinesis and over time had bought some cheap when silver dipped to $12 and bought OneGold silver when you could not find it at a retailer for less than $25.
- I play miners to lever up my investments. These are significantly undervalued compared to literally everything else. People will eventually pile in, but call options like I play are risky if you are too early to the party. See Tavi’s chart below