As usual, this is not financial advice – merely to educate you on what I’m seeing. I’ll look at the con side first, and then show you why I jumped in bigly last week with a trade, and how I did it to capture profits on the way up, and minimize risk on the way down.
With CPI tomorrow, there can be a TON of volatility, so those who are risk averse might simply wait until the dust settles to decide.
Con – Now is NOT a good time to get into miners
You can look at the gold daily chart in a second, and see the high RSI and call it a day.
You can see the bear flag there and see a breakdown any day now. You can also see that the DXY might be due for a bounce. With this, it could be the “wave 2” in Elliot Wave which would be a healthy pull back until a strong wave 3 up. Many like Brady may be betting on a wave 2 any day now, and they could be 100% correct.
With this, you have people ask me – “Nate, what are your targets”. “What is your risk/reward ratio”.
With the physical metals, I buy them to accumulate, not to trade. So if I like silver, I buy it. I did buy most of what I have at $16, so there’s that, but I use the metals to guide me on investing in the miners. If you see gold going to $3,000, then miners would be a strong place to bet.
So I care about the bigger move with gold and silver, but I care about RATIOS when trading miners to them. Why? Because the miners have a tendency to at times be a crowded trade during mania for gold and silver, and be a desolate wasteland in bad times. This volatility can create great trade opportunities – but is FAR riskier than the metals.
Gold – bullish?
If you look at the gold chart through the daily eyes and add a few bells and whistles, you can see that the RSI during strong runs has moved far higher than current. Additionlly, the MACD recently crossed over positive, but we also have the red circle showing the golden cross just happened, which is bullish for people to get into trades here now that there’s confidence a bottom has hit.
It doesn’t mean we cannot have a week of down days, but it’s an indication of sorts that a lot of the downside risk might be already behind us. What I’ve observed with times like these are you start to see the pro traders who were buying near the bottom starting to sell some tranches into a price rise and locking in 10-20% moves, but letting some tranches run. At this time, you may have more risk averse people seeing this and jumping in, getting a FOMO effect which builds as price rises.
If you zoom out to a monthly gold chart, you might see that gold has broken out above the down channel, and the monthly MACD is about to cross over, which might be a time where bigger funds now recognize a bottom and it is de-risked enough to jump in a bit.
Likewise, you now have evidence that nation states are buying the hell out of gold at the central bank level. While rates can go higher yet, I believe gold is sniffing the inevitable pause in rates and eventual reduction in rates and is front running this trade.
One can make the argument that the run in 2011 and the run in 2020 were both in response to ANTICIPATING inflation coming. It wasn’t the ACTUAL inflation that did it, real time, but it was the EXPECTATION that more money is about to be created and gold is re-pricing prior to it. You can see where the peak happened in 2020 that once QE then hit, it became a risk-on trade, which had gold sell off to then lever up your money in the stock market.
My expectation here is that NOW gold is a great trade to be in, as IF more QE or rate reductions are announced over the summer, that may juice the stock market for another balloon move up, and gold might THEN have a wave 2 down. Or, that could be a wave 4 down. I don’t know, I’m not an EQ guru and cannot tell you that NEXT WEEK a wave 2 would hit. I can tell you that if you look closely above, any move up on the daily charts is a saw tooth pattern. You may have 5 days up, 3 down, 7 up, 4 down, 4 up, 11 down – but you will potentially see the higher highs and higher lows.
I BELIEVE when you start to see the lower lows that may be your first indication that a bigger pullback is coming, but it’s also not written in stone – just a time where you might have some risk.
When you look at a chart above, you can potentially imagine that we might be at the first black line up now. At some point a peak may be in, and it may retrace somewhat. You might have 10% trailing stops set and not get stopped out, and another move up happens. Trailing stops set at 10%, pull back, and you are still in the trade. But perhaps you start to see the MACD about to cross over down? Perhaps the RSI for it is 75-80? Perhaps you are WAY above moving averages? Do you SELL ALL now? Maybe
But what if you miss an electric move up? I saw a sell strategy with Steve Penny at the Silver Chartist I now use. Early on, I’d get skittish and sell out and miss big moves up. Other times I’d have tight stops set and get stopped out intraday and miss a several day move up. To do any kind of real trading, you have to learn – but you also have to fail. Hopefully, your failures are lessons that don’t cost you too much, and your successes help make up for it.
When I didn’t know a ton in April 2020, I went YOLO on gold and silver miners. I made a small fortune, and got skittish July 2020 about another March 2020 crash coming, so I sold out of half and banked like $25g in profit. I felt like a genius. Then, you had the 2-3 year curse hit us, and for every run up and break out was a smash down. You don’t feel like a genius when you buy on breakouts only to get your soul crushed. I did, however, make good on a $26k day with banking options for First Majestic, then I made a nice trade on the 2022 war move – but for all of these successes – I’ve also made a ton on small options calls and lost my shirt on other options calls. Overall, my trading account was down 52%, but now back to a decent -25%. I did take money out to repair my one rental unit. Most of my resources are in real estate rentals, but this is NOW where my passion is, and hope to make my trading account my largest holding by the end of this up move coming – at some point – with gold and silver.
Because of my April-July success – I saw how a bull move can really change lives, and want to be involved to catch these again. But I also made mistakes in the past and traded miners SOLELY on the underlying metals prices. You learn there’s a lot more to it, and one painful mistake of 2022 was understanding how oil and fuel prices may play a massive part in miner profits.
A bullish miner story
Oil had run up, and now it’s back down. Obviously, we used the SPR to do this, and I do believe as 2023 goes on, you will see oil prices move much higher. But with the 2 year pull back AND higher oil prices, the RATIO of the underlying miners to metals have been PC loadletter beaten (Office Space reference)
Let’s take a look at where these ratios are now, and look at it under an ASSUMPTION of a strong gold leg could be here. Obviously, you can take the counter to this and see gold/silver due for a pull back. If you now also assume that miners have perhaps 40% less fuel costs than 2022, you can perhaps make an assumption their profits will be higher – AS metals prices increase once again. This may be the main catalyst for an outperformance. The chart is just demonstrating the relationship between the metals and the miners, and you can see potentially how underlying costs to miners, as well as market sentiment towards miners, which are reflected with these ratios.
In the three above metals to miners charts, you can see that all mostly have been far outstretched to the metal and are now making their move towards favoring the miners. It appears the gold majors like NEM have moved and taken the GDX with them, where the GDXJ is coming to life now and could significantly outperform GDX. Lastly, you can see that the silver miners were beaten terribly relative to the low silver price and is now awakening.
Side note – I love Keith Neumeyer at AG, but felt a lot of dilution has happened the last 2 years along with high costs of the gold mine at Jerritt Canyon have affected the operations and profits – to the point I feel AG may be overpriced to its peers, by a lot, due to the KN effect. Meaning, I feel at this time there are silver plays with less risk that could have higher upsides. Due to the weighting of AG in SILJ, I prefer at this time to have a lower risk play with SIL, which has a higher concentration of Wheaton Precious Metals. I will someday get back on the AG train, but that day is not today.
How I’m playing these?
Again – this is for educational purposes, and I only really learned this through failure other ways. IF there’s a big run yet to do, I have a larger swing trade on. Currently, I’m up about 5% across all three, averaged. This also means I can wake up tomorrow and prices fall tremendously. So when I bought, I didn’t have an upside target to sell, rather I had trailing stops I wanted to have triggered to capture gains on the way up.
I have 3 tranches set to sell. 1/3 at -5%, 1/3 at 7.5%, and 1/3 at 10%. I believe as I feel the move is running towards completion, I might set my trailing stops tighter, perhaps 3%, 4%, and 5%. But for now, many wanted target sell numbers. IF I could see a move up to a top rail, perhaps I might do that.
With FSM, I do have numbers in mind, but they are mostly over $20, which sounds silly today to say out loud. Can we pretend gold hits $2500 this year AND FSM gets their permit situation taken care of, AGAIN, and it trades 2x book value like a Newmont?
If you could see FSM outperform GDXJ, and GDXJ gets to $100, you could see FSM over $20. That’s probably where I’m putting tighter stops and have tranches for sale then.
Right now, it was about understanding how we COULD be in a move.
Everyone in this trade also knows an hour after I send this, silver could be smashed $1 and gold $80. So take this as it is – an educational piece on a current trade I have to play along at home. Yes, I could get stopped out – but that would potentially give me at this point a 2% loss on my trade, with a possible upside of the 2020 move ahead. I’ll take that, as I feel the first half of 2023 could be a hellscape of unemployment, companies failing, pensions failing, and calls by mid summer to “do something”. When that fire hose of cash starts, gold has already anticipated that inflation to come and to me – that might be when I’m out of everything for awhile and look for some possible momentum in just riding an index like SPX higher for a short term trade.
I believe later 2023 when the fire hose gets turned on, is when they realize there’s no copper or aluminum in the warehouses and this is when I’m cashed up and looking for my metals commodities to start a nice run. I’d also be looking to dabble back into gold and silver miners here after potentially sharp retreat when the rotation to risk on happens.
I have my macro forecast for 2023 here. I also discuss how commodities are going to be a great play the second half of the decade here. Note – once again, I am an amateur and do this for educational purposes. If you want to invest, maybe use this as educational tool to ask your financial advisors about.
January 12, 2023 at 7:04 am
Hello Nate. Always enjoy reading your posts. I’m a long time gold bull but I see a capitulation coming. I see Silver between $16-$18 by May/June of this year and FSM at or very near the March 2020 Covid lows of $1.50. I see Gold testing the $1600 level again. After the capitulation I see the bull market in metals take off in a very big way last half of 2023 and continue for 18 months or so and peak late 2024 or early 2025. Just my humble opinion.
January 12, 2023 at 9:20 pm
So far I’m up 6% on my big trade and the worst I can do at this point with all of my trailing stops is to break even. I was anticipating lower cpi, which translates to slowing or stopping rate hikes. But higher rates and elevated inflation would hurt market earnings. What macro events would you suggest push down metals to a capitulation? The big risk I think is a 2020 cliff drop. However, Michael Oliver suggests that it would be an arm wrestling event down, and so far he has been spot on. I’m not saying you are wrong – I’d like to hear your thinking. It helps me to ask people who think differently than myself on these things because it can reveal holes I hadn’t considered. There is never a ‘safe’ time to really enter markets. It’s assessment of risk. How long you want to hold, your loss appetite, your greed/fear levels. So far I’m doing very well in r this trade, but I’m also humble enough to know any of us can get rugged on any day. Best I at least make informed decisions taking all sides into account