Some have brought up the inverse head and shoulders forming a few weeks ago, but now I wanted to show it seems to be popping up on a lot of charts I’m looking it. It’s pretty clear on the gold daily chart…
You can see it on SILJ…
Barrick is as clear as the gold chart…
What a lot of evidence sounds like is that miners may start to really turn up here. I listened to a Palisades interview Sat with Christopher Aaron, and I think he unlocked the final piece of the puzzle. All of us can do pretty things with charts and project both an upside and a downside, but he showed in that interview that it looks like the decade long uptrend of the dollar was broken, and now it has tried to get back to the uptrend and has failed several times.
I circled the area in red that he’s talking about. It also highlights the 89.5 many of us are watching for the down move. Essentially, he said when the dollar has failed to recapture the trend, this was a green light for all commodities to go into action.
What I may caution the reader on is that in my last 2 years in this space, you realize virtually nothing goes vertical up or down. We deal a lot in the metals with headwinds and tailwinds of news. Chris also pointed out something I noticed but wasn’t able to articulate. The last 5 months or so with 5.4% inflation, the metals got smashed and the dollar went up. Counter-intuitive, as if someone was trying to trick algos. He said this time, the smash happened, but shortly thereafter there was a major reversal. He seemed to suggest big buyers were coming in as maybe many of them had enough of the “transitory” and understand that gold will do incredible in this environment.
One other word of caution. Silver options expiration is on the 28th this month, a Thursday. My charts show a correlation between this and metals getting smashed leading up to that. I do NOT know if this pattern will hold. We are already near the bottom of the channel for silver. It’s possible we get a nice move up a few days this week, and then a back test of support on the smash. Given how low silver is in this channel, I can’t see a smash of consequence.
The bottom of the channel is about $22. So, it’s very possible we get a beat down to $22, but that might be a tremendous double bottom for the next move up.
The last 7 months I’ve been able to call this recovery AFTER the bear down. Most months, I play this cautiously with short term and long term call options to make a few bucks – usually $400-$1000 in 2-3 week trades. This past month, I upped the bet and banked $3,000. Had I held longer to my actual projection, it could have been $7,000. I was just so happy to see a lot of green on this, I sold off for 20-25% profit in 3 weeks and was out the door.
With my projection, I got within $.13 of the silver price.
You can also see a sort of head and shoulders here, but more or less in the down channel. I think it was significant to break out of that channel, now we have the back test of the channel. If we fall way down into this channel on the beat down, we definitely are seeing a possibility of $22 or less. See Brady’s “not so good line” there? That’s in play during beat down. You also see Oliver’s “good” number that may have been kissed, but Oliver talks about weekly closes, and we fell just short of that. IF we close this week above that, I’m not sure the beat down will be all that effective this month as we will see a lot of money pile in to that momentum trade up. Brady’s “good” line was crossed and has held, and it will be interesting to see Brady’s commentary now that we crossed this Rubicon. Will he now say the bottom is in? With beat down time coming in the next week or so, I’d be cautious here to call bottom.
So – this week I’m very cautious with buys. My “full positions” in on a company are about $2,000-$2,500. Something like Aya at one point I was “overweight” which might have been $4,000-$5,000. I have some that are then underweighted, like KORE. Maybe a $500-$1,000 position on that. So this week I might shop for a few juniors nibbling at dollar cost averaging some small positions. I may have options positions many times these…
Inflation and empty shelves
I think you’re hearing a narrative that might have another story to be told. You hear things like…
- “inflation is CAUSED by supply chain bottleneck”
- “empty shelves are the result of supply chain issues”
Now, these both MAY be correct. But I have another way of looking at this. Chicken or the egg. Here, it seems they are telling you the chicken came first. However, what if the egg came first?
Assume for a minute you are playing monopoly. You start with a fixed number of money, and there are a finite number of properties. Now, what if one player (Bob) started with 100x more money than the other three players? What you would notice is that Bob would buy every property he landed on, immediately. Also, he might make deals to offer twice or three times the value of the price the other players paid. Something happens soon – the available properties disappear extremely quickly, and with this, the amount of properties players have other than Bob go down as Bob continues to throw money at properties to make deals. The other players start seeing the amount of money Bob is offering and hold out, driving the price up. Bob may eventually buy up all of the properties and win the game.
What I’m suggesting is that with a lot of excess liquidity in the system, those WITH money realize that the monopoly game is afoot, and there are scarce resources. They use excess liquidity THEY have to purchase all of the items they need to do business, but then buy more in the EVENT of a shortage down the road. Everyone buying MORE than they need is a self-fulfilling prophecy. I read somewhere once that local grocery stores have about 3 days of food for their local communities they serve. What happens if everyone now thinks these shortages are coming and want to store months of food? You will see shortages.
The doom vortex loop
So inflation is here, which causes people to buy more than they need in anticipation of shortages, which stresses the supply chains. The supply chains realize demand is up, and therefore higher prices come in to capitalize on the surging demand (this is micro economics 101 people). The higher prices are meant to make more profit, but also reduce demand due to manufacturing capacity. Instead, this is a George Gammon doom vortex loop. Instead of higher prices quashing demand, it’s feeding the inflation narrative. See – the problem is that inflation is being CAUSED by excess money to play monopoly. The RESULT is supply chain strain, empty shelves, and higher prices – so higher prices are causing higher prices.
See, the answer to this is to hire more people (at inflated wages) to produce more goods to then catch up on the demand to lower the prices. If you are a business and you are making $10 per unit sold, and are at max capacity, life is good. Why are you investing billions to increase capacity, hire more people, to then see your unit profit go to $5? Meaning, the ROI is uncertain and if you want to increase supply, you may not recover your investment – if this is a temporary thing. Additionally, if more demand comes in because the scarcity is realized, you do NOT have to change production and your unit profit can go to $20. So there is little incentive for businesses to solve this supply chain issue.
What will happen is in the short term, collectively, everyone is going to go “oh shit, this is real” and then the rush out of dollars for necessities begin. We are seeing the shortages everywhere. But THEN what happens is perhaps the rush to things you MIGHT need. I’m going through the idea of solar now, perhaps thinking energy prices may significantly rise as well as shortages in panels could happen. Lastly, it’s the rush to things you WANT. This is where you may want a new bedroom suit next year, but prices of wood are skyrocketing and the thinking is interest rates will go up and cheap credit may disappear. Why not finance $10,000 of furniture now at 10% for 10 years than wait a year and the price is $15,000 and the credit is 30%?
I believe this is the structure of HOW a blow off top happens. This may be why Hunter keeps saying we aren’t there yet. This is why I still put his thesis at 20% with Oliver at 80%. Oliver’s arm wrestling IS happening as we speak, but when you deconstruct how a blow off top happens with this doom vortex of inflation, Hunter’s thesis comes right to mind.
I believe the next step there is when companies finally decide to expand production to meet soaring demand. Once the shelves are fully stocked and the supply chains catch up, everyone is stocked for months with food. Everyone bought the solar. Everyone financed their furniture. And that is the apex. THAT is when shit goes downhill. This is when the supply is fully out there, but there’s no more buyers. And THIS is the orgy of deflation that Hunter sees. This is when you have price roll backs to try and at least get your money back on the cost of the goods you just put on shelves. But there’s no buyers.
This is your great deflation after a blow off top.
You can see the S&P was making lower highs and lower lows and then a strong move up. So we have to watch to see if we are getting a double top and then down, rolling over, or seeing new highs.
That all being said, I’m waiting until after options expiration on 10/29 to really re-engage.
Long term call options
I got a request to address this the other day. I’m not an options guru, someone like Chris Marcus from Arcadia Economics was an options trader on Wall Street. With options, there’s tons of different strategies and these things can get complex. I can’t even pretend I know a ton about them, so I won’t. I do, however, like my call options. Typically, you can buy these for a lot of dates.
What are they? They are the RIGHT to buy an amount of shares down the road. You are not obligated to buy them. You are trading the RIGHT to buy. An example of this is below…
Example of long term call options
Last summer, before silver went bananas, First Majestic was at $9. I bought a lot of call options at a $10 strike for $3.20 on average. At one point, I had 85 of these options at that average price. Each call option is a contract for the RIGHT to buy 100 shares. So I had the RIGHT to buy 8500 shares of First Majestic at $10, expiring Jan 21 2022.
When AG (First Majestic) was $9, the STRIKE price of $10 was OTM (outside the money or out of the money). This means that if we fast forwarded to Jan 21 2022 and the share price of AG was $9, then the options would expire worthless. If you take 85 contracts times the $320 per contract I paid, you are looking at $27,200 I put up for the RIGHT to buy them at $10.
Now, let’s say AG went to $20 anywhere in that time, and I held that right. I could EXERCISE those options to buy. So I already paid $27,000 in TIME PREMIUM for the RIGHT TO BUY. The further out you go, the more time premium costs. So I would have to then pay $85,000 to then own those 8500 shares (paying $10 each). However, those 8500 shares are now worth $170,000. I paid in $85,000 for the 8500 shares at $10, plus I paid $27,200 for the RIGHT to buy. Total cost is $112,200 for shares now worth $170,000. Or, perhaps unrealized gain of $57,800. If you put up $112,200 that is a 51% profit.
So that’s suggesting you want to actually BUY AG long term. I didn’t, mostly.
What happened was during silver squeeze in February, those options went to $15 each at $10 strike price while the AG share price was touching $25. With a YEAR left, it seemed that if silver went to $50, these options would go through the roof! Sadly, a few weeks before this, I sold a lot of those options at about a 2-.2.5x. After Biden came in, $2T in spending was approved, and of course metals would get smashed on that. Yeah. Point is, I tried to de-risk and sold off maybe 50 of those options for nice profits.
Then when silver squeeze hit and I saw $15 in front of these with the cost of $3.20, that’s about a 5x. I should have sold, but what I did was think about greed. How high COULD they go? After the smash, the next day, prices started coming down and I got out of all of them for 2-3x.
I don’t have the numbers in front of me, but the AG options I had paid out $27,000 for netted me probably about $54,000.
With this example, you saw how I was able to double a pile of money with options. You leverage up on the right to buy shares at a strike price down the road. The downside is someone bought those at $15, when I paid $3. With AG now at $12 or so, and the strike price at $10, with 3 months left, my guess is they might be worth $2 today. So someone lost a ton of cabbage buying those high.
Now, why did I buy them for 18 months out? The idea was that I felt then, that silver was going to moon shot. Silver was probably $19 when I first bought these. Maybe a little more. Instead of buying 8500 shares at $9 for $76,500, I used long term call options to control 8500 shares for only $27,200. The long term call options tend to move nicely with the price of the underlying stock, so I tend to use these for larger producers to maximize my profits.
Why not short term?
Short term options of 3-6 months or less cost a lot less, but man does the risk intensify. Those AG long term options I killed it on? Well twice this year I bought shorter term options and both times, I was blown out and lost it all. Essentially, I gave back all of the AG winnings with these. The problem I run into with short term options is that I don’t manage risk appropriately. You buy these, and perhaps spend $5,000. Literally the next day, bad things happen and you are down 10-20% Instead of me taking the loss, I am married to the setup and figure a recovery will happen. I’ve been burned, badly – and both of these had to do with GDX. The one time I was playing the GDX on gold – and gold held tight, but the GDX turned south, hard, while gold didn’t move. That was a painful lesson. I think I WILL continue to do some short term plays, but I think I will probably only hold for a 20-30% profit and sell. That’s what I just did recently with Fortuna options, and got a nice profit.
So you have to come up with your own risk tolerances. If I have a setup I like with a short term option of 3 months or so, and I am seeing 30% profit, I may just sell immediately. If it’s an 18 month option, and I figure we may see significantly higher prices, perhaps I might pull an AG with those and wait for a 2-5x. These won’t come often, but if really think that we may see $50 silver and $2400 gold in the next 18 months, then locking in long term options now is a steal.
Where this is interesting
With the PMs, you can see the saw tooth patterns. Whether you are in a down channel, side channel, or up channel, you see times where there are pull backs. I mentioned above how during the last 7 months, I was able to make profits with options, DESPITE silver being in a down channel. See below.
At the bottom of the green circles, this is where it was the day after monthly options expirations. I’d buy my options positions then in things like FSM, GDX, SILJ, AG, etc. Most of the time I was buying longer term call options. This minimized my downside risk. When I was seeing green in these, I was selling for modest profits. It was a proof of concept. This past month, I used more shorter term call options in FSM mixed with longer term call options and it worked out well. So I had some risk with the shorter term, but I sort of mitigated this with the longer term call options.
I fear in the next few days, we will start to see the beat down happen. However, I’m putting those odds at 50/50 this month. After 4 solid months of beat downs, silver is near the bottom of the channel. I do not want to buy options at the moment, only for the prices to head south in a few days. I want to reduce my risk by waiting until the monthly options is over on the 29th. That being said, if I buy $1,000 in Discovery silver today, it’s possible I have a 3-4% downside in the next 2 weeks, but given we are at the bottom of the silver channel, and lots of heads and shoulders are forming, it might be the time to start building some positions in the juniors.
With this, I’ve been buying tranches low on some things and as I’m approaching beat downs, been selling some stuff. These are smaller profits, but I’m playing the saw tooth pattern as best I can at the moment. Some of these like Discovery might be really long holds, but if I can buy it now at $1.10, next month at $1.25, the next month at $1.50 – you will start to see the RSI for Discovery get up at the 70 area. When I go to take some profits, I’m selling the tranche I bought at $1.10 and banking some of those profits. However – when this next leg up REALLY begins, many of us might be out of a lot of this at RSI 70 and some of these may heat up to 80+.