Note – this is MOST CERTAINLY not trading advice. It is IMPORTANT to note I use PMs to hedge my real estate positions. I have vaulted physical, lots of miners, and use the paper game recently to play moves up and down. Why? Because I bought miners on margin. Most will not advise this, but I got into this as a DEFENSIVE play to a real estate crash, of sorts, and with this, I put all of my marbles in PMs.
TLDR for the squirrels and goldfish – I wrote a few Tweets on this, but I wanted to lay out a bigger picture as to why in the hell someone would be short this weekend gold and silver paper. The issue is I have a lot of diversified metals holdings – and the ROOT reason is I have large swaths of miners on margin and there is not an insignificant probability of a paper smash back down next week OR a possible stock market accident with the banks. While one can LOGICALLY see people running to metals, this isn’t how PAPER metals work. It’s a different game, and I outline my hedging strategy below – or my thinking on it, at least.
Little did I know, that they are jedi masters at kicking the can down the road, and none of us saw $6T reasons we’d be wrong for a few more years. My miners, like yours, suffered. At peak PM time, I did take profits. But now, most of my miners have been 1+ year holds – some of it for tax purposes, as in those writings, I had summer 2023 as my target date – but also because on many of the exploration/development plays, I’m down 50-75% of on some them. I believe in them, but metals constantly got punted – and thinking another turn was around the corner, I held. Perhaps a wrong choice, but in the US you have 10% vs 25% on capital gains taxes – so part of my thinking with the longer hold was that if summer 2023 was fireworks, that you would see a lot of these juniors go 5-10x. I was part of that july 2020 move up, and made a small fortune on miners – then had to pay the tax man 25% of my winnings. Unfortunately, I didn’t understand tax loss selling until the next year – and have capitalized on some losers that I got out of. But the team I have now, I like adding when I can on dips. I’m not “trading” my miners. The issue is for juniors – it’s so hard to get in and out quickly at times. But for my FSMs of the world – I believe in them for a big pay day down the road and care to get some serious dividends from them.
IF I want to:
- Hold long term to avoid 25% tax rate on sales this summer
- Hold majors to perhaps accumulate value and look for dividends
- Use margin to go “all in” on this story….
Then I need to also consider downside hedging until I’m ready to sell. At times.
Consider this scenario….
Fortuna was $3.15 the other day, and I have 10,500 shares. That value in my portfolio is $33,075. But I have a dollar cost average now of about $4. At one point I had 20,000 shares of Fortuna when it was $4.50, and life was good. But I didn’t understand how margin worked – and my trading firm ended up jacking up my margin% needed on fortuna. I sold a lot of other stuff at a loss to hold on, but what actually was the cause was FSM was too high of a PERCENT of my stock. So I sold stocks at a loss to get cash, but then I had to keep selling FSM at a loss Nov 2021 when the smash to them happened. I eventually got to a place where my trading platform stops yelling at me, but that’s only if I have other investments I’m in so they don’t scream at me for TOO MUCH FSM. Yes, I believe in this company so much, that for 18 months I’ve had a battle with my trading platform over how much of it they let me have.
So we then run into this situation – on really down metals days, they may randomly jack up the percent of margin I need to preserve my FSM. No, this is NOT me running at full margin. Far from it. I am VERY responsible with margin – but most of these lessons I learned the hard way. Remember – my trading account is a FRACTION of my real estate investments – so when my rentals all mooned this past 2 years, I think I went 6x up in my gains in RE vs my losses in PMs. So my fuckery with FSM and my margin issues were valuable lessons earlier on – but I have to protect against downside with metals here.
Consider the below chart…
This is silver from September 2010 to August 2011. Note, we saw a move from $16 to $50 in what, 8 months? But during this move, it wasn’t vertical up. There were periods of rest after strong runs.
Look at gold’s move here over 10 years. You can also see saw tooth types of things..
For my point though, I want to illustrate a 1 year time from of the above – lets look at Sep 2009 to Sep 2010.
By all measures, we were in a bull run at this time. Over this year, we saw a CONTINUED move up maintaining price ABOVE the 200 dma. You can see a stair step. Higher lows. But the yellow periods were times where metals receded and loaded up for their next run up. By ALL measures, this was an indication we were in a healthy, consistent, and strong bull run.
That entire move was $940 to $1280 from trough to peak. Or, about $340 in a year.
Using that same scale, we just did that move in 5 months, and of that move, 60% of it in the last week.
You can see from the Nov lows, we had a hell of a move from $1620 to $1780 in just a few days. Then, look what happened. Cool off for a week. Went from $1780 to $1723 in 5 more days before another run up.
Earlier in the day Friday, I took a $2300 sale of ZIM I owned for 4 days. I started to see metals run, and in my mind, I saw Ukraine all over again. THIS was my fear…buying near the top of the move…only to watch the move recede over a few months.
Anyone who has played miners has seen the FOMO on these moves up. THIS IS THE TIME!! Well, in fairness, with banks failing all over the place, it COULD BE the time.
But let’s look at the 15 min chart and show you where I bought the paper shorts. Remember – my thinking was – IF the paper smashers come to play, then I may get yelled at about FSM again. IF gold keeps rising today, I SHOULD make out like a king on miners. However, if I short that, I will lose on the short. On the flip side, a short would gain value so I would not get barked at if gold fell from here and FSM would tank worse.
This is now the gold futures chart, and I entered 2 micro shorts yesterday on the way to my grandmom’s house. I’m in a $1951. This is a 15 min chart, and to me, it shows me at THAT point, it was a $140 move in 8 trading days and the shorts were about to come in.
If you look at the Ukraine move, that was a $300 move in a month and a half based on fear. But, the next month and a half saw a sharp drop from the top – then grinding down. To ME, this 8 day move was destined for a pull back.
And…then my parabola got a parabola on top of it. I had warned others earlier in the day – if you are going to short this, have stops. Then I didn’t put on stops myself. Stopped looking for a few hours – then went hiking at the end of my day and noticed I got blown out. At 4PM, I could see my losses were $1500 on the day with 2 micro golds and 2 micro silvers. I woke up to banking $300 on a long gold, so I was down $1200 on the day. My portfolio was up $3,000 unrealized gains AND I took a realized gain of $2300 on ZIM. So…I rolled the dice. And I just checked now and my short loss on the day was $3500. In theory, it was almost a perfect hedge for my miners.
The dice won – as it seemed then that everyone collectively realized it’s going no lower and closed their shorts.
I believe this weekend there will be strong buying, but I also feel there’s some gaslighting going on. I feel like the rug pull is coming.
We have a POSSIBILITY of gaps up Sunday night. But, my miners were SO underperforming the metals, they are about to outperform the metals. Let’s do some fun math below.
My expectations a few months ago were that FSM was significantly underperforming gold, and that an outperformance was due. It went the other way, as another pull back in metals in January pushed miners even lower.
But we are now in the “historic” undervalue territory. This is a good place to invest in miners, even on crazy up days.
If you look closely at that chart, I’m expecting perhaps a move down to 200:1 gold to FSM ratio is due, at some point. Perhaps even down to 100:1 on mania on metals. IF we might expect a move to $2500 in this wave 3, you could perhaps see this result in a $12.50 share price. Perhaps a 100:1 on full blown mania like July 2020 takes us to $25. While that sounds absolutely crazy, let’s also take a look at First Majestic in 2016. But consider if I have 2 micro gold shorts, with a high likelihood of a pullback – against a possibility of a higher move to $2500, we can see that….
At $2500 gold and $12.50 share price, my shares tripled from where I bought them at. The price where I bought the hedge was about $3.25, give or take. That could then have an upside of $97,125 in share price to what I have now. Likewise, if I somehow stayed short on 2 gold micros the entire time, I am looking at $550 x 2 = $1100 x $11,000 loss on the micro. I don’t plan on being in the shorts the entire time. God no.
But $180 move in 8 trading days?
Now, we can consider that FSM could recede below $3 if they somehow take it down to $1800 again. My short was placed at $1950, so that is $150×2 = $300 x 10 = $3000. This will cover any issues with my FSM shrinking value so I can KEEP all of my FSM shares.
Consider that if somehow, someway, FSM DOES make it to $12.50 by summer? My unrealized gain on FSM would be $97,125, but there’s also what most aren’t considering is it might be possible with a share price like that and the money pouring in as Seguela is in full production at the Ivory Coast, it’s possible you see a $2 dividend on massive profits. They may want to do a more sustainable $.25 per quarter, but when you are looking at $2500 gold prices, this divided time is how you get from 200:1 ratio to 100:1 ratio. This is potentially looking at $15-$20 share price with a $2 dividend. With 10,500 shares, that’s a $21,000 dividend check by early fall.
Let’s check First Majestic in 2016.
First Majestic made a crazy move higher as silver prices ran – but as I have demonstrated, but revenue, they are now a gold company. So is Pan American. And….so is my beloved Fortuna. However, with silver in their name, AND strong exposure to silver, these companies can trade ballistic as the generalist gets in and looks at things. Mind you, this was a move of silver from $13 to $20 or so.
Imagine if we get some vertical moves from silver coming? How is that going to move FSM and AG and PAAS? Everything silver will go nuts.
What we need to ask ourselves in the next few days, is HOW REAL is this banking thing? I think it’s very real, but I also see grandma Yellen giving candy out to anyone who asks for it. What I’m potentially seeing now is a lot of regional and local banks about to have problems if deposits are leaving them. The Fed may have created a vertical Fed Funds rates that essentially has the potential to wipe out all smaller banks in the next few months, and favor the large banks with liquidity. For all you and I know, this could have been the playbook the entire time to get a roadmap to allow CBDCs to work through the larger banking systems.
Meaning, what you are seeing as panic right now could be bankers trying to get their cut of more stimmies, and quickly. All of these banks are seeing similar unrealized losses to SVB. This chart we saw a few weeks ago was before SVB failure.
Meaning – the Fed may have wanted pruning of the banking industry. Pruning of the housing market. Pruning of the commercial real estate market. Pruning of the stock market. What many of you are seeing as “OMFG, they HAVE to start cutting now, they broke three banks!” is possibly part of their plan all along. They may pause, they may even engage in another 25 basis points. Remember, unemployment is “historically low”. I had pontificated that this is because of companies this time around cutting footprints with commercial real estate PRIOR to mass layoffs, as companies use cash on hand to try and weather any storms and keep their talent.
This then popped up last night…
The gaslighting here is also getting people to panic. FEAR. This may cause a LOT of physical sales of metals this weekend, much like last weekend. But it’s a matter of seconds before premiums shoot up again to stall the physical buying.
It is ALSO possible this short covering Friday was banks giving their metals desks a heads up that they are about to go long metals. But, really? Is Citi really in the business of stockpiling gold to hedge their bonds? No.
To me, this feels toppy. I can be 100000% wrong, and if so, I massively profit on Fortuna going up, as I showed. This is what hedging is, to an extent. You play both directions in such a way to PRESERVE what you have. Now, there may come a point where I just get destroyed and have to buy back. But I think those that were in that position closed on Friday afternoon. I feel a fresh wall of shorts is coming.
Let’s look at the muppets for next week.
To me, we are looking at a banking crisis, and they all know it. I believe rhetoric comes out this week to ensure the dollar is strong. They want to demonstrate the banking system is resilient. Grandma Yellen basically gave QE to banks this week, and it seems to me the money bombers are just getting gassed up on the runway. They haven’t even BEGUN yet to get to the skies.
Why is that? Has anyone seen the Yellen talk with Congress where she is spearheading a national debt to $50B? And – it makes zero difference to them because…MMT – as long as things move in a positive direction, to them, deficits mean nothing. Sure, the cost of houses may go up double, but so will your salary. But, your salary is not keeping up with inflation, and this is the thing the MMT people cannot escape.
Meaning – if you think Monday banks will collapse all over, I have a bridge to sell you. I believe this banking thing is in the first inning, and the issue here will be that weaker banks will be eaten. I will talk more about that tomorrow, in a tweet I called “the autophagy of the financial system”.
What you and I think of PM investing is getting your shiny, sticking it under a mattress, and someday when a magical number like $50 is hit, we win our lottery ticket, sell our shiny, and pay off our house. But this is NOT how futures markets work. These people are buying and selling hundreds of contracts for a nickel profit. They buy “lots” of metals, it moves $.25, they make $3.2m and reset for the next move, up or down.
What I’m seeing is that there appeared to be a lot of short covering, worrying banks are going to get swallowed up. No one wanted to go into this weekend short, it seems, except for me.
Here is my concern….
In March 2020, we lost $240 of gold price in 9 trading days.
While we had a quick rebound, prior to that time – gold was trading opposite Dow. This is what we have seen recently. But if there is a mad rush from stocks, people like me that have margin could get wiped out unless they sell things – and many of these people who may have just got into gold at $1920 see gold now at $1991 and may have stops set at $1960. Or $1980. IF a liquidity event happens, any big money that just got in here may have tiered stops set all over the place with lots.
What I could see is a gap up on Sunday night. Lots of physical buying. East physical buying. Melt my face off with shorts. Blown out Sunday night – but remember, I am potentially thinking my 10,500 shares of FSM might also rise $.30 the next day. That covers my short mess I’m in. So I’m not really losing any sleep. I’m not selling FSM within the next 3 months, so I don’t care about upside move right now. I’m SOLELY worried about a downside debacle.
So the question someone like me has is, “what is the downside risk on my margined stocks IF a liquidity event occurs this week?” I believe this risk is greater than 10%, which is WHY I would choose to be silly enough to have shorts on right now. What I then would look at mostly is FOMC. How could this affect metals prices?
My guess is that I will be closing my shorts on silver much sooner than the shorts on gold – but remember, silver has the industrial component too. We could potentially have a 1,000 Dow down day with a $1 up day in silver coming – OR it could be a 1,000 Dow down day with a $2 down silver day.
Remember – silver has been in this ugly downtrend. It could reverse quickly back down, or run up to $23.84 before running back down. OR – it has a breakout with volume over $23.84 (estimated here with CFDs). Meaning, my downside loss, to me, for now, is perhaps $1 more in silver. That’s $2000 in the 2 micros I have. IF over $23.84 or so (with volume and a big green candle), this is when I would consider closing my silver shorts. Until then, you have a lot of chop about to happen. I would also now consider $20 a new silver floor, so what I would like to see (as a short) would be perhaps to get to $21 or $20.50, find a new higher low, then I’d go long from there.
With gold – you could make a technical argument that this is the 4th time $2000 is challenged and we are at the end of a double bottom move up with a blow off top.
While “this time it’s different” could be made as an argument here, the statistical likelihood is that the profit takers move this down and trip stops along the way to capture their profits. With FOMC coming – there’s a wildcard there, which means – uncertainty. You are sitting on perhaps $80 an ounce profit on paper gold, you are taking profits Monday and Tuesday, which then trips a lot of the newcomers out.
The question then, is what is the upside and downside? I could see an exhaustion run to $2100 here, but that would be a $300 move in 2 weeks. Unlikely. Not impossible, but lower probability. Looking at a chart like this, as a gold bull, I am seeing a possibility down to $1900 where $1900 is bought a LOT, and this becomes your higher low. I don’t have a crystal ball, and I can be wrong – but $2100 gold with FSM outperforming gold could take the share price back to $4.50. At 10,500 shares – that’s a $10,500 upside move – but my short will be down $2,000 (2 micros x $1000 per $100 per oz move). Likewise – I am betting there is a higher probability we see $1900 first. That could take FSM back down to $3 a share, but I then bank $1000 PROFIT on the short – or $1950 to $1900 close, times two.
Why? Remember, my situation is different than yours. I am in this for a $25 FSM price, a $4 discovery silver price, a $25 USAU price, a $5 Integra price – my miners will move stupid amounts to $2500. Perhaps I sell USAU at a 5x? But – perhaps I keep the FSM for the dividends that could be raining down. I also have troilus, impact silver, southern silver, reyna, Abra, Pan American, Defiance, and Precipitate on holds for over 1 year.
The shorts, for ME, are a way to buy when things are overstretched to protect super downside moves – BECAUSE I own stocks on margin, I have to protect against the downside. WHEN I feel like the chains are broken, you take off the shorts and let the thoroughbreds run. Until then, assume paper shenanigans.
Could I get blown out further on my shorts? YES!!! However, remember, whatever I’m losing on the shorts may be multiples higher with the miners. I probably will wait until about $1900 gold before I consider a large chunk of NEM/Barrick – I do GDX for perhaps a few weeks of a hold, but if we are running to $2500, I want the dividends from NEM/Barrick.
Best wishes to all of you, but I wanted to explain WHY someone would choose to be short some micros into this.