I read an article by Jonathan Margott yesterday here where he pointed to lower gold prices ahead. He seems convinced of it. I disagree with his conclusions and I’d like to ask questions here and point out where he and others might be right, and where I and others might be right. Take a look at his article, and I’d like to start with some comments.

  • He starts with a comparison to 2013-2015
  • He then compared taper then with taper now
  • His conclusion is rate hikes will happen and that could take gold to 1400-1500
  • He then uses charts to draw definitive conclusions

So, first of all – I LOVE and APPRECIATE well thought-out articles and ideas, EVEN IF I DISAGREE. When I read things like this, it challenges me to broaden my spectrum of understanding. It helps to either find weaknesses in my theories or even perhaps bolsters them. So I’d to start this off by saying that he makes some good points that made me really question what I’m doing.

One point of order here is that my recent trade ideas playing the smashes are short term in nature. Last month, I was in this trade for roughly 7-10 days and got out with a 50% upside. Perhaps this month I pull the plug at 15% upside. Meaning – even if he is 100% right, I can still play that recovery to a certain point. We have seen the bear flags come up on these recoveries and get smashed further. However, I was usually out of these trades before the rug was pulled.

That being said, most of my options I bought are for Jan 2023, so they could withstand some downside. Mergott is talking about perhaps 1400-1500 which would decimate a lot of options plays out there. So this type of number catches my attention. No one wants to hold call options with time decay on a move down to 1400 gold. No one. So let’s take a look where I might have some disagreements with him. This guy I believe is probably worth 100x of what I am, so he is Mike Tyson in a corner and I am the water boy who just learned to fight last week. I come into the ring here with odds against me.

What made me write this is the certainty he has in this conclusion. I need to convey that all of us see gold and silver going up, a lot, but along different time spectrums. Perhaps Mergott sees gold at $2500 by 2025. Who knows. But I think anyone in metals needs to have a sliding spectrum of certainty and be nimble to the news cycles and information provided.

Let’s address some of these points…

Comparisons to 2013-2015

I wasn’t involved with the markets in 2013-2015, so he starts off with the high ground here. What I can tell you from my reading was that gold and silver ran up in 2011 due to the anticipation of lots of inflation with the QE. By 2011, the thinking was that the “money printing” was limited within the banking system and thus the FEARS of inflation were unwarranted. By the time they said they would start to taper QE, the gold and silver FEAR trade had subsided. Don Durrett writes about how gold needs a fear aspect to it. I didn’t agree with him at first, but the idea is growing on me.

What is different this time around is the direct money printing of trillions of dollars given to Americans which results in our money supply going hockey stick. You can see varying degrees of this in print, but you see something like 40% of all USD ever created were created in the last year. Meaning – the inflation worries that sent gold to 2089 in July 2020 were actually founded. However, once this money bomb was dropped – I’ve also read it takes about 18 months to work into the system. We are seeing that now.

I never thought I’d see a CPI print at 6.2%. And, this last trade I did, I put on right before the CPI was announced. This is what shot gold and silver up a lot over 2+ weeks. What is now coming out is the YoY 24% home prices are now slowly coming into the CPI. It is a large portion of the CPI, and while they might want to tell you certain things are coming down, the rents and rent equivalents are about to really take hold here. Meaning, as inflation continues to be reinforced, I do expect gold and silver to catch a bid.

I also see this inflation rate potentially subsiding, someday, as this rate is hard to sustain. Many people think if this comes down to 4 or 5%, that the inflation story is dead. No. We are normally at what, 2%? So the year over year INCREASE may slow from 6% to 4%, but what is lost here is prices are still continuing to rise.

Meaning – the difference from 2013-2015 was this had not seen the inflation we do now. I would thus contend that yes, they need to taper and raise rates. However, Mergott thinks a raise of the rates would hurt gold – but I would think this would confirm the inflation narrative.

Let’s consider possibly that the 10 year goes from 1.6% to 2.5%. And inflation is 6-7% by CPI, and perhaps a lot higher with shadowstats. You also see oil prices are potentially about to soar.

I believe with this, the inflation narrative is here to stay. With this, I would expect money to come out of stocks/bonds and rotate into cash and then into gold. No one wants to hold cash for periods of time with 10% inflation. Bonds are a guarantee loss of spending power. Gold has shown it to be very resilient to times of high inflation, having increased 24x in the 1970s.

I think Mergott’s argument has issues with history in that the inflation narrative here is a fear trade which boosts gold.

Taper then and taper now

I think where the logic here has problems is that junk bonds are trading below the rate of inflation. When taper happens, it means they are buying less of bonds, treasuries, and shit corporate junk bonds. Ultimately, no one wants to buy this shit with no yields in the inflationary environment, and those that hold it see the mack truck coming. He contends that they will complete their taper by June and then increase fed rates.

The logic here is sound. By slowly tapering and slowly increase fed rates by perhaps a quarter of a point at a time, this is much different than doing things quickly and causing jolts to the system. I think there’s merit to consider this argument. Doing this slowly, over time, could prevent shock and awe in the system.

I think where the issue here again is inflation. If they start to see rates rise faster than expected because no one is buying high risk Evergrande type of shit at 3 or 4 percent, these vehicles could rise very, very sharply to entice investors.

However, this could increase the cost of capital for companies and stop expansion, instantly. That 24% rise in housing? Well, if interest rates move up from 3% now to 4% or 5% over the next year (I know, the fed funds rate won’t increase that much) we could have an instant fatality to the housing market. This could reduce inflation, but that won’t be seen in the CPI for perhaps 10-12 months after that.

Ultimately, with input costs higher, rates going up, Biden signaling price ceilings and shortages, and Warren’s baseless “corporate greed” narrative to higher prices, the stock market is bound to go sideways to lower.

One other thing here, is the crypto world I feel will see this most sharply. With leverage costs going up, regulatory bodies going after it, when these items don’t go up 5x in a week but show real risk and downside, this is going to go down – and hard. Where does this money go? Will it go after stocks that are declining and potentially in free fall? Will it chase gold and silver which is the hard money they have been seeking? Don’t know.

Ultimately – this taper has the potential for market disruption with a significant downside. I think IF there are significant deflationary shocks – and all kinds of margin calls happen, this is how you could see gold smashed. However, even at the March 2020 lows you were seeing $1453. His scenario I believe would require multiple strong deflationary shocks which go along with Milkshake thinking, taking the DXY even higher.

My thinking here is the DXY is sooooooo far overstretched here that it will fall pretty hard in a correction.

I’m not a forex guy. So, take my DXY predictions here as some simple chart analysis along with the idea that no one in their right mind wants to hold the USD for any sustained period of time in a perhaps 11-15% inflationary time – if you look at the shadowstats number.

Rather, the USD here would act as currency piling up trying to find its next best place to store it. We then go back once again to the fear trade with inflation and my bets are gold holds up well.

Likewise, the plunge protection team here seems to buy on any real shocks to the system. Days when I wake up to the Dow -500 on Evergrande concerns then ends up plus 170 on the day? Nothing to see here. My thinking here is that I’m in the Oliver camp and sudden deflationary events are met with a parachute or emergency off ramp to try and soften the landings. I don’t see a March 2020 event in our future. I could be wrong. IF I’m wrong about a sudden deflationary event, then Mergott’s reality is highly favored here.

Conclusion with this is that I believe in order to hit 1400-1500 gold, we will need sharp decreases to the markets to cause margin calls and I don’t see this happening. The fed cannot allow this taper to “fail” so I believe they provide a softer landing over a sustained time. This would permit the taper to stop, over time, but not significantly impact the gold prices on sharp sell offs. This would perhaps haver a deflationary impact on the FAANG stocks over maybe a 6 month time frame of 20%, but it would not happen overnight.

I do have lots of concerns with the stock markets, but I also believe that now our fed is backstopping everything and they cannot afford to fail with the taper. Some of this taper will be met with that injection in the other arm discuss they were talking about.

Rate hikes could take gold to 1400-1500

I covered a lot of this in the section above, but one thing of interest here was if you look at the interest rates in the 1970s, they were high and gold went with them because it was an inflationary environment. How our system was setup is a beautifully designed system. Really. I think the problems have been politicians have juked the numbers that affect how the system operates. In that respect, I am not of the belief of “end the fed”. Rather, I feel that our governments have not been honest with the metrics that govern how this system operates. Remember, one of my fields of my career is metrics and analyzing systems.

Let me explain how this works – if you get the best engineer in the world and he designs a bridge that can sustain 10 tons of weight (single lane small bridge), it probably can hold 12-16 tons, but they rate it for the safest number possible. The design was 100 years ago and it has held up. Now just imagine someone telling you your fully loaded 18 wheeler is 10 tons, but it is actually 16. You go over the bridge and you are good to go. But over time, you are weakening this bridge due to someone giving you false information about the weight of the truck. Eventually, they pack the truck with 20 tons and tell you it is 10, and the bridge breaks.

Most people right now are then saying ‘end the fed’ as a result of not the bridge design, but how people have been misleading those using the bridge.

My contention here is that people have been abusing the CPI for many years to keep interest rates low and borrow money cheaply with low risk. Those risks have not been accurately captured and thus there may be extreme risks of default with 4% junk bonds that should be priced at 15%. IF we have shocks, I believe it will be a lot of the system untangling the worst shit out there.

What will happen when the fed stops buying shitty junk bonds? Could a lot of these rates skyrocket? Yeah, but I think when the fed stops backstopping a lot of this that the “metrics” will start to get more accurate. That is healthy for the system.

And yes, some rates will go up. By a lot.

What Mergott is referencing here is the fed funds rate which may go up a quarter of a point in 2022, followed by some more quarter point raises over the next year from there. To me, IF it does happen, it could slow gold’s historic climb by the time 2023 happens. Remember the 2009-2011 run up? Well – I see now to 2023 could be that time of a strong move up. The inflation story to me is causing lots of eyes to try and understand how to navigate through a highly inflationary period and this means a lot of people are about to understand gold.

At the same time, you still have countries buying gold for their central banks. Are they buying to protect and hedge their currency, or are they buying due to “tradition”?

Using charts to draw a conclusion

I feel this is dangerous, in practice. I use charts as part of the story. I don’t rely on them for certainty. I love how Kevin from North Star Bad charts sees a lot of this in the eyes of probability. Sort of like a hurricane cone, given his meteorology background. When people use charts for 100% certainties, that’s when I have some issues. I think his use of charts here doesn’t take into account the COMEX smashes ahead of options.

When some might want to look at this chart and show definitively that “gold holders ran for the door” (and this is the price action they WANT you to see), the truth is this news was released a day before COMEX monthly metals options. I have written many articles about this, so again – as a chart guy – you are being told to look at this price action as “gold is dead” but this is false price information. And because of this, it causes chart guys to draw false conclusions.

This is a chart I’ve had for a few months.

See the gray cup and handle? Interestingly enough, the recent top in gold was then smashed down to the ascending triangle line which also happened to be a touch to the arc. The red area you see was the handle starting with the flag. The yellow is the channel bound action sideways, and the green is the end of the handle being formed which will start to move up. That triangle compression area is something where I feel this will push gold higher.

What Jonathan sees is this. I stole his trend line that I didn’t see. That last touch also coincides with th3e cycle I play monthly for options expiration, at the end of the inverse H&S move. RSI was stupid high and it was due for a correction.

But if you are looking at charts from 2013, you are looking at price information under different circumstances. What was inflation then? Were input costs going up then? Were we looking at inflation that could be around for years to come? Meaning – the charts are really good for potentially navigating trades – but I’d be hesitant to use them as a burden of proof in a court of law. What you DID see here was another touch to the trend line up. And there’s a reason it stopped there, I’d presume.

If you zoom out, we are potentially challenging this bull market move, altogether.

What I can tell you is that this price chart shows compression, not directionality. Meaning, you cannot draw conclusions by looking only at this chart whether it will go up or down, and to conclusively go one way or the other is risky.

Again, if you are looking at this chart in the context of inflation, geopolitics, nations gathering gold, super inflation developing in a lot of countries – and our country, acting as the reserve currency, is fighting over pronouns as tanks gather on the border of Ukraine and Chinese rhetoric over Taiwan becomes more unfriendly – AS global supply chains are breaking down AS energy crunches are happening (potentially self inflicted gunshot wounds) AS money printer goes burrrrrrr. As we are talking in the context of Basel 3 possibly sending gold prices higher?

Meanwhile – I believe gold’s biggest threat here is a massive deflationary event, but that would be only IF the fed allowed our stock market to plunge. I cannot rule out that the Fed is looking for bag holders other than them. I also cannot rule out Mergott’s possibility of $1400-$1500 gold. But that would not be a result of selling gold because it is a dead trade during a highly inflationary environment – it would be because people are running with their hair on fire away from equities that are stupidly overstretched beyond anything ever, housing prices stupidly overpriced, cryptos are stupid overpriced, and junk bonds are stoooooopidly priced.

Where I feel there’s absence in this analysis of the masses is the stupid undervaluation of gold and silver relative to everything else. And IF the hair on fire out happens, during a super inflationary environment, that moves to cash will be nothing but temporary.

What that triangle is telling me is that some big move is happening soon. MY bet is that it’s up, but I’m also aware it could be down. I put this at about 70% up, 30% down. I realize though, that the only way this really goes down is with a massive sudden deflationary event. And I just don’t see it happening with the plunge protection team back stopping everything. Could it happen? Yes. Cannot rule it out. More lock downs? Could be.

Conclusion

I feel it is a well written article and I think people need to understand this is what he does for a living. I don’t. However, as a gold/silver bug here, you need to always understand the risks of investing, and none of us have a crystal ball. We play the odds like we might be playing poker. If we are holding pocket kings, we have to be aware that someone could have pocket aces and understand the risks.

Be safe, and invest wisely.

I like how he has some investment strategies in here as well during times where metals decrease in value. Lots of good stuff to review in the article. This isn’t about “right or wrong”, it’s about understanding your levels of risk and determining for you what is right for YOU.