Renaissancemen.org

First – this is NOT investment advice. If something like this sounds of interest to you, please contact a licensed professional. I am not a professional trader, nor have I ever claimed to be. Be careful shorting anything!

I first wrote about this a few days ago here, but I wanted to expand my thinking and talk about some pitfalls.

I am someone who owns some real estate that I rent out, so I got into PMs to hedge against downside risks with the units. When I say hedge, most people don’t know what I’m talking about, so let’s start at basics with an article like this. For you advanced guys, this article will be below you – but I’d have some value here if you pointed out some additional ideas or thoughts to this. Always seeking good ideas.

Also – I come at this from a writer’s viewpoint. As stated, I’m not an industry expert – so I would welcome industry experts to comment on this anywhere. I am someone who loves to learn. I had a newsletter that had over 230 or so prints, but it’s not a paid thing. I do this for fun and want to learn with all of you. As something new comes up to me, I try to master it the best I can and share with curious people like you.

Hedging…

The idea of hedging here is to PROTECT what you have. We will start with this premise, as I’m also aware there are many different types of complex strategies, but I want to start with the basics.

Assume I own a house that I rent out. The value of the home is $100,000 and I have a $80,000 mortgage on it. I have $20,000 in equity. I rent the house out for $1300 per month and mortgage/taxes etc cost me about $800. That’s $500 in free cash flow that is taxed, but may also have other expenses. For argument’s sake, let’s just say it’s $6000 take home and $4500 after taxes for even numbers.

I saw a problem in the repo market in 2019. It happened on Sept 16th, but I didn’t read about it until October. The big takeaway from everything I read was that the banks did not trust each others’ collateral. I had flashes of 2008. I had bought a house for $130,000 and a year or so later the value had dropped to $70k. What started as a house I would be in for 2 years to then rent out turned out to be a 7 year stay. Now that I had some rental units, income, and a new house built – I sought to protect it from downside moves.

Using the sample rental home above, I was worried that the value on paper might go to $50,000 and renters would no longer be interested. I’d be stuck having to pay the $800 out of pocket and I could not sell the house for $60k if I owed $80k on it without a “short sale”. I needed to PRESERVE what I had.

The idea then was to perhaps place (example for a single house) $20,000 into PMs. IF the markets tanked, the idea was that the $20,000 could become $50,000 as the rental went from $100,000 to $50,000. IF I had a period of no rents, or had to sell, this hedge using cash to convert to an asset would then assist me later. That was the general idea. Preserve the $20,000 in equity and protect against a massive downside loss in case I had to sell the house at a deep, deep discount.

So I got into PMs with the idea that if my real estate went into the tank, that PMs could launch into orbit. I had read about 2011, and at that time, prior to knowing anything about vaulting, I got physical silver. I had gotten to a point where I wasn’t comfortable with the volume at home, so I looked into vaulting ideas but also put a lot towards miners. I made a small fortune in 2020 on the way up, sold out half, and then you can track how my portfolio went from there.

Now – you can follow the pretty chart. I doubled my money in my trading account within a few months – and within a year, I had tripled my initial investment. But June 2021, right before tightening – PMs took a dump. The last 18 months with miners has been really tough, and I wish I had understood how to protect where I had gotten to. Around the time of the dump – I also took out a good portion to completely renovate one of my units from the ground up that had run $25,000 over budget. Inflation…lol.

So in the example above, at June 2021, not only had my real estate gone up, but so did my hedge. But I didn’t want to sell out of miners. I had a team of horses that I wanted to hold onto. But I bought a lot of it on margin. The issue with this is that they then screw in the backend with how much margin % you need. A lot of that down move you see is me being FORCED to liquidate miners. There’s also tax loss selling in there as well.

But if you look at 2021, the house, for example, was worth $120,000 and my initial PM investment was $60,000. I didn’t have any idea how to then hedge my hedge. I have an idea now. That is what I want to present to you below.

Trading account

I put my trading account performance up there for everyone to see because I had a PROBLEM I needed to solve for the upcoming monster moves in metals. I needed to understand that IF my account goes that high again, how to preserve? But I also want to walk you through that timeline above.

I started around March 2020 – but February was just a few thousand understanding how to buy and sell. I went all in damn near March 2020 lows on miners, and had bought physical silver at $16 and $17 in Nov/Dec 2019 (since vaulted most). As you can see – as July 2020 hit, I had doubled my trading account – which was sizable. I sold half. I later re-invested a lot of that on options. One of my killer moves was $3 paid for like 80 options of AG for a strike price of $10. During silver squeeze, I sold my remaining options for like a $26,000 profit in one day. I reversed the silver squeeze an Einstein on the chart, but you get the idea. You think you are invincible! With silver squeeze, the Monday after, my trading account was up like 25% in a day, then the next day, down everything I was just up. Why could I not preserve and lock in that parabolic move higher, without selling my miners?

As you can see the progression with the trading account – that massive move down you see towards the end of 2021 was first a lot of my GDX/GDXJ options getting smoked, then later in 2021 my Fortuna had the bottom drop out of it with SEMARNAT.

I’m not going anywhere!!!

The issue is in the US, there’s capital gains tax issues. IF you sell before holding for a year, it’s something like 25% taxes. I had NO idea about tax loss selling – so early in 2022, I owed the tax man a nice chunk of change – which of course had me selling from my trading account to raise cash.

When you get the horses you like, and you don’t want to trade in and out of them – you start to picture 5x and 15x moves on some of these. But I wanted to hold all for at least a year so I don’t get murdered with taxes.

But if my hedge increases in value, what do you do?

With my example above, my example house that started at $100,000 in value was damn near $200,000 in value. While you could see my PM exposure in the example go from $20,000 to $60,000 – you now have it at $10,000. So my mining stocks crushed me, but my houses kicked ass.

My miners were my downside insurance – and my houses went up, so I didn’t care much about losing with the miners. I had something like 6x my miners loss in gains with RE.

But the question remained – if my HEDGE melts up WITH my primary investment – how do I hedge THAT gain? This was not a conversation 3 years ago I would have much understood. A lot of this comes with making mistakes and learning from them. Now, I made mistakes with mining stock investing, but my major issues were:

1. Trading these in and out with metals moves. Junior miners can become illiquid and with this, you get buried when selling at a loss.
2. Getting whipsawed on a move. I’m not a day trader, at ALL – I might do a trade once every month or two, but I’d have a situation where I was worried things would go further down, and sell – only to see metals run. I’d have to wait a day or two to get back in, and went I would, perhaps then the price would go down. I’d get smoked both ways.
3. When buying on margin, not protecting downside risk – which is the point of this article I’ll get to below. Miners would run hot, I’d have all of this available cash to buy, and I would – only to see the move fade and I’m underwater on items I bought on margin.
4. Trying to play sawtooth patterns with miners I want to hold longer term to get profits
5. At times, playing too much of my capital on options. I love options, a LOT, and have done EXTREMELY well with them, but there were times I should NOT have played them and I went too hard into them. I now have limits to myself on what percent I might play.

Hedging my hedge

That was the setup for the rest to come, and you can see now why I am looking to hedge…my hedge. Some of my real estate I bought near lows, one not – but my point is that I think I have tremendous equity in these that might take 10-20% off the top with the upcoming recession, but I cannot see both losing 60% AND tenants in my units. So my vaulted physical will REMAIN my hedge against doom – but now I want to look at miners as perhaps a second PRIMARY investment and I want to hedge these winnings as we go.

What I mean by this, is imagine you have a stock portfolio of $100,000 in PM miners. Imagine you see a big move up like Friday, and you see your account shoot up to $110,000. You have a feeling this particular move is going to be short lived. So what you do then is short gold and silver futures (I use micros/minis) to PRESERVE that gain. For example, if the metals recede and I am correct, then my miners would go down by $10,000, but the value of my short would increase by $10,000. I’m using extreme examples here for illustration.

So imagine today you wake up and your miners are valued at $100,000 but your futures account now has +$10,000. You can take that cash and re-invest in your miners so you now have $110,000 in miners. The flip side though is true. What if you have $110,000 in miner after this move and you short, and it runs $10,000 hotter? Well, you gain $10,000 on your miners, but you owe $10,000 in your short account. So when you put that short on, you are locking in that $110,000 value.

I cannot advise you step by step on this – only give you ideas to then speak to your financial advisor about. They will probably tell you to stay away from gold, silver, and miners anyway – but the idea here is to PROTECT the upside moves. Also – you can protect DOWNSIDE moves.

Let’s take a look at everyone’s favorite company to hate on this week – First Majestic.

If you look at this chart above, you could see perhaps a few indicators that someone like me might look at to buy them.

1. They are coming off of a draw down and touched a Fib level…
2. The bounced off of the 200dma
3. The RSI is washed out at 30 or below
4. The MACD crossed

Now, I don’t remember this exact date, but I was in AG a lot then. For this example, we will buy $10,000 worth of AG at then $10 per share, so let’s use 1000 shares in Oct 2020.

You watch your investment grow over time, and you want to hold them for a year to avoid 25% taxes. You figure if they do really well, you might get dividends someday on your 1,000 shares.

You have heard, “if you make a double, sell half” when talking about junior miner shitcos, but well, your investment in a silver major is now double???

At the gap up on open the day of silver squeeze, you and everyone have euphoria! This stock could run to $30!!!

Greed sets in.

But now, guys like me say, “let me lock in that $14 profit the best I can”. Additionally, this was 4 months later, so if I sold all of that, I would have paid $10,000 and sold for $24,000 to pocket $14,000. That means I owe $3,500 to the tax man. Maybe it runs to $27 and holds – and a year from now I get $1 dividend per share? That’s a $10,000 dividend payment!

So my options are:

1. Sell on silver squeeze mania to lock in $14 profit, per share and pay 25% taxes
2. Hedge at $24 share price to protect against downside loss. Sell at a later time to pay 10% taxes
3. Sell half and hedge the rest to lock in your initial investment
4. Let it ride, as you are clearly seeing it will run to $50!

Using the above, many felt number 4 was their best choice. And, they have watched a $24 stock come down to $5.xx yesterday and drop $18. Not only would you have lost the $14,000 in profits, but you are now down almost half on your initial investment!! You bought a lot of that on margin, and now you are getting margin calls on equity.

What hedge?

If AG is half gold and half silver then, but you see it pretty highly correlated to silver, perhaps you would work with silver futures. This is a RISKY game, and most DEFINITELY you should research for days before doing. But, looking back, it’s how I would have played silver squeeze on NON-options holdings.

Assume the value of the 1,000 shares is $24,000. You saw a MANIC move up. Your idea here is to protect that $14,000 profit the best you can and sell at 1 year of owning the stock in Oct 2022.

You short silver micro futures for 1,000 oz. You figure that if silver drops from $30 to $20, that First Majestic would recede. A silver micro might cost you $2,000 of spending power in your account. For every $1 silver moves down, you pocket $1,000. For every $1 silver moves up, you lose $1,000.

This would have to be an approximation to the best of your ability. This can’t be exactly correlated 1:1. Maybe you figure if silver goes from $30 to $20, that AG may shrink from $24 to $12. That means that if the price of silver goes down $10, your short will be worth $10,000. Likewise, your shares may only be worth $12,000. You sell at the 1 year mark and the stock is worth $12,000 and your short is worth $10,000. That gives you a $12,000 profit, and you may owe $1,200 on your AG stock. Not sure on the cap gains for the shorts. You may have also gotten $.50 in dividends for $5,000 for holding all of that time.

While this is a more complicated idea than just selling, you can then also imagine a scenario where we saw the price come back to $20, but the person kept holding AG and the short. Now imagine price rebounds and continues up, and now you have seen a sustained move to $30 and not a parabolic move. You take your short off then and feel that silver may move to $50.

Another idea here is that imagine the price of AG came down to $12. You were a year in, and you got out of your short $10,000 up. You like AG. You can then use that $10,000 to buy another 1,000 shares or so of AG with profits from the short.

I always wanted to figure out where these people kept getting cash on all of these washouts. “On sale!” But, with what money? I was buying into big moves, and when the moves started going against me, I had to sell into the down moves….due to margin.

Where this can run against you….

Of issue here I think is trying to lock in MASSIVE moves, not trying to predict the top of any move. When you do this, remember that the stock can keep running.

In the below example, we go back to First Majestic in Jan 2016.

The first set of red circles, we assume you get in at the bottom with the low RSI at $2.50. You spent $10,000 and got 4,000 shares. Mar 21 2016, you see a euphoric move to $7. This then made your $10,000 investment turn into $28,000. Here, you put a silver short on – but price keeps rising. Look at the move then to $19!!! That would have had your investment at $76,000!!! So if you tried to somehow perfectly hedge your move up, you would have missed on a much bigger move that came later.

The third circle on the right is where you would have sold a year later at perhaps $7.97. While the futures locked in that profit, it also smashed you on the way up higher.

Not a PERFECT hedge

So with my metals futures shorting, I’m not trying for a 1:1 hedge. My goal here is that when I have a strong move up with the miners TOO QUICKLY, I’d like to throw on a downside hedge to preserve the quick move.

In the above chart, you can see where I put on my gold and silver shorts. I saw this “blow off top” and a $200 move in just a handful of days and saw my trading account go up a LOT, and quickly.

It is possible that after a quick pause here, it can run MUCH higher. But, it’s also possible this moves down a lot – even to $1900 as an arc touch or even down to the long term trend line somewhere at like $1830-$1850 if the Fed creates more issues today.

So I see a lot of downside risk FIRST before a strong upside move LATER. This $200 move in like 8 days is like nothing I have ever seen and wanted to capture that upside move. Looking at this chart, you can see it is more likely than not we move down before up. Remember, NO ONE has a crystal ball, so we have to look at this through a prism of likelihood and risk.

When I’m doing these downside hedges, I’m trying to perhaps capture 50-75% of the profits – but this can also allow me to then have a lot of upside gain on any more vertical moves.

Futures

Futures can be risky and you have to really understand how to buy and sell these things. It took me awhile to figure out the limit, stop, etc and thinking inversely with shorts, profits, and how many contracts to hold/sell. Additionally, there are times where miners sell off even as metals move up – so you have to be careful that you don’t get double smashed with your miners going down, but your hedge with futures short is also going down in value as the metals are going up.

It has taken me some trial and error here to get where I am, and in about 6 weeks of doing this, I’m up $5,000 or so. I had a few nat gas and oil micros here and there, but the point is that I’ve played futures on times of day, riding moves, and setting stops at times when others letting the horses run.

Right now, BECAUSE of the big move up in 8 days, ideally I can see a fib retracement, digesting what is going on, and then a stronger move up for a nice wave 3. The problem with all of this is we don’t know if gold could retrace back to $1800 or continue on until $2300. We cannot know. But when we have watched moves in the past, during a bull leg, this is what it might look like…

Timing?

You cannot be perfect with this – but using the above, you can perhaps use the WEEKLY RSI as a proxy for where you had seen highs and lows before. Take a look at this. At the green, I’m buying stocks and going LONG futures (I wasn’t invested then, just hear me out for a backtest). At the red, I’m perhaps selling SOME stocks for profit, but I’m going short futures.

Note – when you are red at the circle, your futures short is growing in value to protect downside losses in miners. At the green, is an idea of where you could buy back the short and use profits to add to your miners you like. You can then go long miners and go long futures. This assumes then the bottom will not fall out of the market. To protect on the way up, perhaps you have stop losses. But if you look from the second green dot to the second red dot, look at that volatility!!! It is just easier, in a sense, to hold until you can see the weekly RSI near cooked. Like the AG example above, it doesn’t mean it cannot run higher yet.

If we apply this to TODAY….

You can see a clear short sign at the top left with the first red circle, which is March of 2022. Idiots like me were buying here. This would have you then short on the weekly until about Sept 2022. This then had a signal to go long near 30 RSI. Note – I’m using the weekly RSI here, you may get blown out if you just use RSI, but I’m using this to illustrate an example.

This would have had you long until RSI hit 70 on Jan 16th. This would have you short – with another red dot.

At issue here is there was no clear sign to get out of the short with a weekly RSI of 30. What you would do then is – when your short breaks even, buy back. I believe THIS is what we saw Friday more than anything. I believe you have a lot of people that were short waiting for a deeper wash out. So why lose money on your short? You would not. When it went back up to 70ish is where I put the short on. My expectation now is perhaps a several week or month move back down to RSI of 30.

However, if there’s a strong move back up, I get the hell out of my short because a thoroughbred can run here to $2500. However, it is….more likely than not we have a downside move here. So I keep the short on, and have stops where I feel the price is breaking out and let my stocks run higher, to then put a short on later.

This is a lot of the saw tooth action you are seeing. On a bull run, strong moves get shorted into to protect gains. You see moves down, and when signals change, they get out of the short and go long. I was using RSI 30-70 here as an example, but you need to understand guys like Brady and the like have complete systems where they might have 10-15 indicators. You and I are novices who are trying to tread water in the seas.

I hope this helped give you a good idea of what some of these guys might be doing to protect gains on big moves, and can explain where the hell they are getting cash on all of these draw downs. It is also possible when you are seeing RSI 70 on the weekly, they might even be selling 20% of their position for cash, they wait a few months, the stock is cheaper, and this cash is just sitting there for them able to buy back twice the amount of stock they sold.

Best wishes!!