Today, I’m at a hold on the majors – eyeballing some things to maybe get in more next week. I’m learning to be a lot more patient than I was when I first started this 3 years ago. Back then, silver was maybe up $.50 overnight, and I’d be ecstatic and buy AG pre-market, only to see silver get smashed at 8:30 and sold into the market open. This happened to me more than once. But you learn from these mistakes, hopefully!

I really started investing in miners February 2020, and then, it was maybe only $10,000-$15,000 to try out how things worked. I had seen a pattern for a month heading into the collapse where gold and silver had diverged from the markets. This was on the heels of a pivot and at the time – everyone knew some sort of strong pullback was imminent. I then went all in “near” the bottoms, and rode this wave up until when I cashed out half in July 2020. So I made a small fortune there – which could have been perhaps the worst thing for me. I hadn’t learned at this time that stonks go down, tool. I bought into every rally, like many of you, only to get my face ripped off. I then made another small fortune around silver squeeze, where I got a 5x on a bunch of AG call options, and “only” 3x on the rest. That was 18 months ago…so what have I done lately?

I had noticed the patterns with the washout of silver and buy backs – and did a talk about it on Palisades. It had to do with how monthly, you could see the silver options being sold hard into, and then immediately after, a nice rebound. For about 8 months, I had swing trades I was playing for grocery money. Nailed 8 months straight. Well, all good things come to an end. Just as my pattern was working well, I upped my game – and then, of course, miners sell off HARD in December 2021. Since then, I made a nice run up with the war premium in Feb 2022 – but have really been sitting on my hands since then.

That is setting up the fact that I haven’t done much in the last 9 months, but things are getting interesting here. I have to be more careful with my words. I write a blog, I’m an amateur, so I write these things to tell you what I’m looking at – not what to do. I got into the metals/miners as a HEDGE against my properties. In that time, my properties, on paper, have moved up STUPID high levels – and currently I’m down 31% on my trading account (peaked at 51%). I’m still VERY much in the black on my physical silver which I got around the $16 area when Eagles had about a $3 premium, so that’s going to be sitting for my children someday, and it not much at all compared to my trading account. I LOVE the miners. So with that setup, let’s dig in.

TROUBLE

I had posted yesterday that a breakout might be here, but I’m sitting on my hands for the majors. Juniors? Let’s take a closer look below. Early this AM, I saw a Tweet from Christopher Aaron – which I agree with, but got me to look a little deeper at my charts.

I say trouble because….

In the past, I’d see it pop above that line, then I’d say, “stonks go up”, then get washed out after I buy $20k in call options on majors lol. I’m in a TON of cash now (this was 5AM), and I’m hesitant to commit this cash (this changed by noon for juniors). Why? Because the free cash is on margin – and we have all learned a lot of lessons with margin the last year! If I KNEW this was a safe bet that gold would go back up to $2100, I’d commit some of that. But December the last few years has been WEIRD. You have tax loss selling, yeah – but I have to ask, how many people are still left in a lot of these juniors other than long time holders? I still own Defiance Silver – which absolutely has me crushed.

Defiance – down 86.99%.

Defiance is a few of the GV portfolio I liked and bought. The issue wasn’t the stock, it was WHERE I bought. I bought this on 5/14/2021. So in the 19 months which has passed, I have learned a TON. Granted, this is a spec position, so I’m not really worried too much about it, but look at the RSI I bought at. Look at where on the move I bought it. This is a lesson of what NOT to do, and you can clearly see I had FOMO with this. And since I wrote this at 5AM, I went out and added to this position when I took a closer look at my juniors (below).

But, the question then is, IF gold and silver are due for a strong move up, what can happen to juniors like this? This is what Christopher Aaron talks about with “life altering” moves. With Defiance at $.10, is it a good buy here? Honestly, I don’t know. I haven’t been following them and have no idea at this moment if they have duster holes or if this was just a lot of people selling out of the junior miners. What you CAN see, with price action, and given this is tax loss selling – is a stock like this could sell off even harder – perhaps down another 50% if silver hits $16 and tax loss selling goes berserk. It needs an 8x just for me to break even on that stock. At that time, we were talking like $27 silver. Would a $40-$50 silver price have this thing at a 20x from here? Yeah, I can see that. But these are also high-risk plays. So with Defiance, I have a position on them – and I might dabble next week to get 8x the shares I bought it at (added a quarter position to what I had a few mins ago). Don’t know, yet. I’ll do some research this weekend to see if I want to add any more to it or just let it sit for a decade (still going to do the research, but nothing glaring was known at the time of this).

When I look at these, I’m also looking at moving averages. I took them off of the one above, but adding here below. I changed the chart from a weekly to a daily to use the daily moving avg.

What you can see with this is this stock is WAY below both its 200dma and near its 50dma. IF there’s a nice run in silver coming, this could make a move towards at least its 50 dma, assuming this stock is still worth it. Once it crosses above the 50 dma, it might make a run to the 200dma. But that death cross down….

This then has me wondering how majors might be faring with the moving averages. And here is where I hold the pause button on majors and mid-tiers.

What you can see with the GDXJ, is that there’s been this long down trend. False breakout with the Ukraine war starting, but it hit that death cross of the 50/200 6 or so months ago and it’s just been continuing lower. You can see that we are hitting the upside of the downtrend channel. Mysteriously, the 200 dma is right about here and RSI around 60 or so. To me, this is a VERY dangerous place to buy, and this rally could be setting some traps for longs (since initially writing opened above the 200dma and since has come down to support on the line). We could see a pop here if it gets above the 200dma and closes there, and take the RSI to 70-80. But it needs some energy to do this. And – what is the upside here before the shorts come in to take over…another 3-5%? Make no mistake, there can be an epic melt up here, but to me, caution is the word in the back of my head.

Let’s look at GDX.

It’s the same thing, essentially, except that the RSI is 63. Maybe we have a nice couple of days until shorts come in? This could also follow the pattern I was dealing with in 2021, where we would see rallies after the options are off the board, then as options approach for the next month, you see hard selling. Given this is 12/1 today, we might have another week of sideways or slightly higher. Just a guess.

The labor numbers Friday might be something to look at, closely. Last month, it was suspected the life/death adjustments were generous, to not show weak labor numbers a few days before elections. One has to wonder if a lot of the tech job layoffs might show up yet, and one has to wonder how seasonal hiring is doing. IF we have a weak number, it could start leading to that situation I was talking about above that I saw Feb 2020 (note – it happened today since I wrote this, where metals diverged from the markets). If all of these stocks are now missing on earnings, and you are starting to see massive layoffs, it then has a “risk off” scenario coming. IF you had seen inflation at 8.2% for September, 7.6% for October, and perhaps 6.5-7.4% for November, it would be a STRONG sign to me that the last 25 basis points for January may be off the table, as the Fed admitted they need to start to monitor the effects that all of this tightening has done. If we get negative job numbers Friday, this then lands credence to a risk off scenario.

Many are pointing out that once the QT stops and an ease starts – you still may have 6-12 months of pain in the markets. To ME, this might be the window gold has to rise in the first half of 2023. As we get to a point where we might see 100-200k job losses per month, with housing crushed – you could see a position come March where they admit they went too hard, and too fast. ALL of this is conjecture, but I’m walking you through how my mental gymnastics takes me to a place where gold and the markets diverge, again. But man – the juniors are already beaten down like at the March 2020 bottom. Could they be ground to dust? YES. However, to me these look like interesting times to evaluate a buy for some juniors.

The healthiest mining chart I have now? FSM. There’s a fundamentals reason for this.

The San Jose mine permit was upheld for 12 years. But I’ve also been pounding the table for months now that it’s trading below book value, by a lot. I’m hearing some others also echo that sentiment. Many miners who are beaten down are still trading perhaps 2x their book values, or slightly above.

If you take the book value and divide by shares, you get $4.78 per share. Let’s take a look at Newmont here…

When you divide that out, you get “spare parts” value of Newmont at $24.30. And it is trading at $47.47, or nearly 2x book value. You could say that Newmont is less risky based on jurisdictions, size, etc – and you’d be correct. But are miners right now beaten down to a pulp yet? If so, it might suggest that Newmont should trade at perhaps 3x book value. And, it did, just last year when NEM was at $85.42, or about 3.5x book value. So in “healthy times” you have the markets valuing a gold miner at 3.5x their spare parts value, and FSM is about 75% of spare parts. I wish I could buy even more, but my broker keeps forcing me to sell because it’s too high of a percentage of my portfolio lol.

Meaning – you can easily see how just going on a 2x book value analog, that FSM could be valued, today, at about $9.50. At 3.5x? You are looking at perhaps $14 a share. What I can SEE with the FSM chart was how it was beaten down HARD with the San Jose permit situation a year ago, BEFORE the entire sector took a shit, which pushed it down further. ADDITIONALLY, the chart shows you the pretty pink area where they did the Roxgold acquisition for shares, which the investors hated (at the time). It has turned out to be a masterful move by Jorge Ganoza.

If you look at FSM income statement, you can see that the revenues went from $278m at the end of 2020 to $715m now. And that’s with a struggling gold price in 2022, for the most part.

You can see that they had issued 107m more shares to buy Roxgold….approximately. This caused share dilution.

However, the share dilution of about 37% or so was offset by doubling the assets and more than doubling revenue.

Ratios

I want to first look at gold to majors.

What you can see here is gold to GDX may have been stretched, and now that it SEEMS a bottom has been made, GDX may awaken. It doesn’t mean it cannot revert. This ratio chart suggests that momentum here may have GDX outperform gold for maybe a few months yet. This is the kind of move we saw after the 2020 March melt – you saw gold move up a lot, but GDX significantly outperformed the metal.

This is interesting to watch. IF GDX can close above the 200 dma, there’s hope. But yeah, it seems to be well defended today. Wondering if 100k job losses tomorrow smash gold to the upside? No idea if that will happen with the jobs, but any shorts getting in a day before these jobs numbers are a risky bunch of people 🙂

With GDXJ, you can see a LOT more meat on the bone….it also shows you how these were ground to dust.

If you look at that big peak in the middle, that was the March 2020 lows. You can see how GDXJ was beaten up miserably recently, and how much it can run if you look at 2016 and 2020 as analogs here. This suggests GDXJ can get to a ratio of about 30. IF this means gold is $2100, it means this could get to $70. Given it is $35 now, that’s a 2x move it has in front of it for gold to only move about 25% yet.

But if we look at the gold to FSM ratio, what do we see?

This has the ratio moving to perhaps 218. that has it at $9.63 and perhaps a 3x from here at $2100 gold. But what happens if this is $3000 gold? What the chart is also showing is a gold to FSM ratio when FSM was MOSTLY a silver miner. My best guess is this chart heads down to maybe a 100 ratio, giving FSM a $30 share price at $3000 gold. This is also conjecture and many may take issues with this high target. I can see at $3000 there is definitely a wide berth here of a $20-$30 price which is not crazy.

The main issue with trying to project higher share prices with these higher metals prices is that miners seem to tend to run lower grade stuff at higher priced metals. This is what I didn’t see coming, and someone who invested in these for 30 years probably snickered at some of my write ups. This is part of the learning phase you go through. If a miner is projected to have $50m in earnings for a quarter, beating it by $5m is really good news and overshoots by 10%! But if the price of gold went from $1700 to $3000 in a short period of time – one could reasonably have seen where profits could have been $200m instead of $55m. But, because they ran lower grades, they still overshot earnings – but the moon-like projections you can make on earnings is completely out the door.

This is why miners may have a bit of a cap with much higher prices. Because the move of a lot of these miners to start to run lower grade stuff makes good business sense to them. If they can mine 1m oz of gold which costs them $2400 to mine at AISC, and gold is $3000 per oz, they are STILL making the $600 per oz profit, and they don’t have to touch the 1m oz in the ground which cost them $1200 per oz AISC. What the higher grades can do, to an extent, is improve their resources of oz in the ground that can be mined. So there is a long of danger there with trying to project stupid high earnings just because of $3000 gold.

Where it gets fun is the $8000 gold that Michael Oliver and others talk about. Then, even all of the known gold you have at $2400 AISC makes silly profits. But at that juncture, just about every shitty project that cost too much to be mineable gets the green light. The FLOOD of gold into the market in 1-3 years would be enormous. This is why I think $8,000 isn’t really possible as $3,000 gold will eventually flood the market. Where $5,000 and $8,000 gold IS possible, is a situation where diesel is $15-$20 per gallon and ESG makes mining gold damn near impossible. In THAT case, it’s not as easy as taking projects that looked good at $2000 to production in 12-24 months as permitting may need to get re-done and the PEA/FS may need to get re-done at much higher input costs. Even then, $5,000 gold seems enough to also get a lot of people who bought it at $250 per ounce to cash it in to pay off their homes.

Torque

When you look at individual miners, this might be where you look at torque and risk.

If I look at something like a gold to AEM ratio, it suggests perhaps the ratio will go from 35 now, down to 20. So with gold moving up maybe $100-200, you could see how AEM could double from here.

Newmont?

It’s sort of the same setup as AEM.

You could see a move to $2100 gold perhaps have a double in Newmont. This is a double with relatively low risk. Consider some factors here. Gold may be going up, but with the recession play, we can start to see diesel coming way back down. This then re-opens the profit potential we all were seeing 2 years ago.

The smaller the company, the higher the torque you will see – but the risk is also higher for smaller companies.

What you can also do is take a look at individual companies against the indexes. For example, I talked about FSM above – look at GDXJ to FSM.

You can see that perhaps GDXJ might have a 2-3x in it with a move to $2100 gold. What about FSM against GDXJ? You could see how an FSM could outperform the GDXJ index. This is more evidence to support a $9 FSM with $2100 gold – but my bet is that we might be seeing a $12-15 price. Why? If you look at when FSM hit $9 a share, that was when it was a 60% silver company during silver squeeze. It’s now a much bigger company with 27% silver revenues and 70% gold. It’s going to be moving to a 19% silver company, yet it is named Fortuna SILVER Mines. Several times I have suggested a name change to Fortuna Gold and Silver, but that can be a pain in the ass. However, with a soon to be 450k AuEq company, FSM today has the torque of a junior gold miner with the upside with silver in the name if we are seeing a $50 silver price. In fairness – FSM has jurisdiction issues where the jurisdictions are not “clean”. You have Burkina Faso with coups, Argentina with high inflation and price controls, and Peru with anti-mining sentiment. Let’s not forget the best jurisdiction of them, Mexico, just had a 1 year permit dispute with San Jose which smashed the share price (note, it’s not yet fully recovered from it, by a lot).

So if we look at a handful of juniors that I own, look at the moves up that can happen just to get back to $2100 gold and/or $30 silver.

Integra

Discovery Silver

US Gold

Reyna

South Silver

Bear Creek

Conclusion

To me – I can see where gold catches a bid here with uncertainty, but as Christopher Aaron points out, life altering money could be seen in the juniors. If you look at a current snap shot of GDX, and GDXJ, something interesting pops out.

The majors are being rejected at the 200dma. Also, not crazy high volume. So I’m staying away from GDX where in the past I would have bought on that breakout. The hope here is a back test of this line and a spring back up.

So while gold moved up here today, the moves might now be favoring the juniors to catch up. Prior to writing this, I did add to all of my junior and mid tier positions. I added a tranche, so it wasn’t like I went all in. Tomorrow, this could all reverse and go to the pits of hell, so don’t listen to me. I just wanted to share with you what I’m looking at as an amateur here where I don’t have a team of analysts and a Bloomberg terminal to assist.

Also, as we all know, a goon can come out and shit talk the markets and all of this is wiped out in 13 seconds. I can take these measure risks because I already have LARGE positions in real estate relative to these accounts and a sizable chunk of my account is in mid-tiers like FSM.

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