Gold And Silver: Capitulation Time

"People everywhere are being fed propaganda, lies and false stimuli of all kinds, but deep in their hearts, deep in their instincts, they know something is wrong."—G. Edward Griffin, author of The Creature from Jekyll Island

My usual weekend missive was mildly delayed for a very good reason; I spent most of Friday evening and Saturday morning formulating this wonderfully verbose theory on why the Fed's sudden shift from "quantitative tightening" to "massive stimulus" had such a negative effect on yields, with an associated and very sharp spillover into my beloved precious metals.

Having read it over several dozen times, I then began mulling over the various charts that I post from time to time and quickly decided to "bin it," because my readers no longer wish to hear about the COT report or the "cartel" or the "egregious open interest" or "fraudulent bullion banks." I can't state this forcefully enough: We have all seen this before way too many times.

It gave me great delight to hammer the delete button while firing a shot glass at the quote screen. Gold, silver and the related junior and silver miners are now in full retreat and in danger of moving from "most-favoured" status to "get-me-the-hell-out" status (and I am being generous, because it looks like we may have already entered capitulation mode). So I scrapped the earlier content, because it serves zero purpose to explain to everyone why now, with gold and silver at 6.8% and 15.1% (respectively) below their 2019 highs, we should expect the armies of Millennial stock junkies to abandon WeWork and Tesla and Uber to seek safe harbor in the wonderment of precious metals. Nine hours of work summarily punted into the digital waste basket. H-r-r-umph!

Every time I visit our favorite gold websites, I see yet another youngster breathlessly ranting about the unfairness of the U.S. futures rules, and how there should be an investigation. I am forced to remind them that there is only one entity that deserves the title of "Precious Metals Whistleblower" and that is GATA (Gold Anti-trust Action Committee), which years ago (1999) first shed light on the shenanigans of the Fed, the SEC, the CFTC and the NEC in connection with the rigging of the gold and silver markets.

All I have ever tried to do is dodge these malevolent takedowns on the assumption that eventually, at some blessed point in the not-too-distant-future, justice and freedom would descend upon us and allow for true price discovery to unfold. That strategy began in April 2013, after the most blatant, banker-derived assassination of gold and silver occurred. Despite massive currency debasement sanctioned by Congress, designed "to save the financial system," this turned out to be nothing other than a classic crony-capitalist con job intended to rescue the obliterated net worth of "selected" bankers (i.e. everyone except Bear Stearns and Lehman). To be fair, GATA was the entity that prompted me to think like a gold bug but trade like a thieving bullion bank, and by and large, it is what has saved me. So kudos to Bill Murphy and Chris Powell for the lifeline.

Today, instead of penning a long, drawn-out tome assigning blame, I am simply going to tell you where I am and how I intend to trade the metals and miners going into year-end. To review, I sold all unleveraged gold and silver equities in the days leading up to and including the top, registered on Sept. 4, and waited until they had backed off to replace what had been sold. I am now 100% long the physical metals (still up 14.17% [Au]; 16.82% [AG] year-to-date), and the unleveraged miner ETFs (GDX & GDXJ; now around breakeven) plus a small position in JNUG (–11.8%). I also hold a large basket of micro-cap exploration companies plus approximately 15% cash. My goal going into year-end is to maintain the positive return I still have in the GGMA portfolio by avoiding any career-ending drawdowns going into end-of-quarter rebalancing. The key for me is execution, and the solution lies in the charts.

The two charts shown below are looking ugly, in that the uptrend lines drawn off the summer lows are now violated. If it were not for the RSI [relative strength index] readings, I might venture a guess that 200-dma [daily moving average] levels could be in sight. After a $106 drop in gold, $1,392.58 is only $65 away. Silver, being the more volatile of the two, needs to drop $0.70/ounce to touch its 200-dma at $16.12, and while it might happen for gold, I can't see it happening for silver.

Now, do you step aside on a bounce next week and look for a better entry level? Broke trendlines say "yes" but RSI says "no," especially for silver. Problem remains that since the CTAs (managed money) are overweight (Crimex open interest is at record highs). If they are forced to pare back positions, at what level will the Commercials begin covering their 300,000+ contract position?

I think this is going to play out more like Q4/2015, where the bullion banks stood in at $1,045 and bought literally everything thrown their way, going from net short to virtually net long by December of that year. We could get a downside blow-off but I see it being short, sharp and sweet. Accordingly, I am going to await one of two events before adding to holdings: 1) RSI readings sub-30 and preferably around 25, and 2) evidence of short covering by the bankers (rapidly declining open interest with a big swing in the COT). To put it bluntly, it is too late to sell and a tad too early to load the truck.

Last week was a brutal one for the miners, as it blew away my thoughts concerning end-of-October low and subsequent recovery. The setups for the unleveraged ETFs (GDX/GDXJ) are now tough ones, as they have not yet crossed into oversold territory. But make no mistake, they are now in downtrends with a series of lower highs and lower lows. As in the case of the Large Speculators (managed money), the generalist funds that are overweight, the miners cannot remain long as Q4 progresses, or else face certain extinction into year-end as their performance rankings begin to threaten bonuses. I await lower RSI readings for both GDX and GDXJ, and again urge you all to keep an eye on the COT for the beginning of massive short covering by the bullion banks.

Sentiment is now at polar extremes when comparing stocks today versus stocks in August. That is best seen in the Citibank Greed Fear Index, which is now at its highest level that I can recall, at around 90. As of this morning, the gold miners Bullish Percent Index is solidly stuck in "neutral," as the miners are yet to move into the extremes seen in August 2018 and April–May 2019. While the excesses of the summer of 2019 have now been worked off, the seasonality that I expected to arrive in early November was replaced with a "risk-on" breakout move in stocks and the U.S. dollar, based upon yet another "trade breakthrough."

Now, there is no use dissecting the veracity of this supposed "breakthrough;" the algobots that set prices for stocks, Forex, and precious metals were determined to use the headline event as an excuse to ramp up stocks and deflate gold, silver and the miners, which means that human traders were forced to follow. Therein lies the risk, near term, in the metals. While algobots have zero worry about losing their jobs, carbon-based traders are sailing into year-end with too much cash, too few risky, alpha-laden stocks, and way too many hedges, with the precious metals being a primary safe haven (or so they thought).

Over the weekend, I read somewhere between twenty and thirty gold commentaries from all the usual players, and there wasn't one article or opinion anywhere close to the table-thumping and chest-puffing seen and heard at the Sept. 4 top. All of the reposts of earlier bullish articles are now irrelevant, because as far as I know, not one of them actually called a top in September. How am I to take their now-bearish forecasts seriously enough to change my views? What is important is that they are all neutral to bearish, near term, but bullish to super-bullish, longer term. Translation: They bought too high, and had they sold any/more in September instead of doing victory laps on Twitter, their followers would be a lot happier. So now they have to hold on and pray for a rally to get everyone back onside. The significance of my weekend reading is that the precious metals newsletters/bloggers/podcasters, as a collective, are now a really good contrarian indicator. Last April–May, they were black-bearish and now they are just bearish. That is good news.

As for me, I sold my GDXJ at $43 and bought it back at $37, so at $36.50, I’m offside a fraction and a lot closer to the bottom than the top. I like being in that position, but at the same time, I have to be mindful of the irrationality of markets and make you all aware that it is at the end of a move (as opposed to the start or the middle) that things can go a little haywire. I learned in the late 1980s, in trading the then-parabolic Nikkei index, how 90% of price moves occur in the final 10% of term. That works in a similar fashion for corrections, so the current correction in gold, silver and the miners might (as opposed to "will") see a fast, sharp downdraft as the result of some bogus news headline to mark the final lows for the move—and the most reliable indicator for me is still RSI.

So, in closing, I have chosen to save the economic philosophizing, and offer my best guess on where we are and what to do in a market and world so completely bereft of order and sanity and so laden with debt and despair that it is a wonder capital markets can still function. If you were a pro trader living and working in 1977, with gold at $500 per ounce, and were told that total U.S. debt would exceed $23 trillion, with the Federal Reserve balance sheet at $1.5 trillion, you would laugh at the person delivering the news from the future. Then you would sell everything and load up on gold and silver, expecting $50,000 per ounce for gold in 2019. You see, U.S. federal debt has increase thirty-two-fold since 1977 (when it stood at around $700 billion) so if you apply that kind of increase to $500/ounce gold, you get $16,000 per ounce.

Of course, that was before the invention of the Working Group on Capital Markets and coordinated central bank interference, but that is a sub-topic for another day (or week, or month. . .)

Sharpen your pencils and get ready to add to holdings. We might be there now but let's let discretion be the better part of valor and sit tight.

Follow Michael Ballanger on Twitter @MiningJunkie.

Originally trained during the inflationary 1970s, Michael Ballanger is a graduate of Saint Louis University where he earned a Bachelor of Science in finance and a Bachelor of Art in marketing before completing post-graduate work at the Wharton School of Finance. With more than 30 years of experience as a junior mining and exploration specialist, as well as a solid background in corporate finance, Ballanger's adherence to the concept of "Hard Assets" allows him to focus the practice on selecting opportunities in the global resource sector with emphasis on the precious metals exploration and development sector. Ballanger takes great pleasure in visiting mineral properties around the globe in the never-ending hunt for early-stage opportunities.

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Charts provided by the author.

Michael Ballanger Disclaimer:
This letter makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents my views and replicates trades that I am making but nothing more than that. Always consult your registered advisor to assist you with your investments. I accept no liability for any loss arising from the use of the data contained on this letter. Options and junior mining stocks contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. One should be familiar with the risks involved in junior mining and options trading and we recommend consulting a financial adviser if you feel you do not understand the risks involved.

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