Gold, Silver And Mining Stocks: Patience Will Be Rewarded

Without question, investing in the precious metals sector has been a pain in the ass for nearly the entire 20 years I’ve been involved. The official intervention, which has become shamelessly blatant, is the primary reason. But also, speculative capital floods into the sector when a big move looks ready to occur. The sector quickly becomes technically overbought and sentiment soars, which makes it easier for the banks to beat the metals and miners back down.  What’s the motive for this?  To prevent a rising price of gold from signaling the degree to which Fed and Government policies have engendered untenable systemic problems. First and foremost is the problem of uncontrollable price inflation unleashed by flooding the monetary system with printed currency.

The precious metals sector ran up sharply from the end of September. Along with it, so did the open interest in Comex paper gold. When the latest price ambush operation began on November 19th, the open interest in Comex gold had shot up to 620k contracts. The RSI and MACD momentum indicators were in “overbought” territory. And the HGNSI (Hulbert Gold Newsletter Sentiment Index) soared in a brief period of time from a negative reading to 60’s. The HGNSI is a reliable contrarian indictor. When the HGNSI moves up into the 60’s, a sell-off of some sort predictably follows.

In the chart above I’ve drawn an uptrend line which hopefully will hold. The sharp sell-off was accompanied by a 60,000 contract plunge in Comex open interest. Per the recent COT reports, most of that open interest was created by the banks, who print Comex contracts like the Fed prints money and uses the newly created paper to fill hedge fund buy orders. The banks then operate to create the sharp sell-offs like the ones in the chart above to “harvest” profits on the short positions they established during the price run-up.

With a bona fide securities market operation, the broker has to find sellers from which to source securities that can be brokered into buyers – the broker can’t simply print new shares of stock or bond certificates the way Comex banks print new gold/silver contracts. That said, per history (the London Gold Pool, the run-up in gold in the 1970’s, run-up in gold from 2000-2011) we know the banks can only hope to slow down the price rise in gold and silver. Otherwise the prices of each would still be below $300 and $5, respectively, where they were when I started getting involved in the sector in 2001.

The charts for GDX and silver look similar to the gold chart. GDX is almost identical while silver is similar but not as “clean.” I don’t know what the specific catalyst reignite the move higher in the sector that began at the end of September, but GDX ran 20% in six weeks. If the SPX ran 20% in six weeks, the hosts on CNBC would be doing naked cartwheels on air. I do believe that patience will be rewarded and the next move up will be bigger than 20%.

A new subscriber asked me about any concerns I might have holding equities in mining stocks when we seem to be at very lofty stock market valuations (tech)? He said he sees the compelling reasons to own the metals directly, but is somewhat reluctant to own the miners if the markets were to significantly correct.

I’ve addressed this issue in the past but it’s worth mentioning again given that the stock market is even more overvalued now than the last time I shared my thoughts on the subject. For sure, in a big sell-off scenario like March 2020 or 2008, the mining stocks might be proverbial babies tossed out with the bath water. But they’ll recover quickly because gold and silver will be soaring as capital floods into flight-to-safety assets. In 2008 the HUI index doubled between early Nov and year-end despite a continued sell-off in the stock market. Lately on big down days in the stock market, the miners typically have been flat to green.

Stocks are always risky. The ultimate safety is having possession of physical gold and silver. “Possession” is the key. But if you also want a shot a wealth enhancement, the mining stocks are historically cheap vs the rest of the stock market. I always recommend keeping plenty of cash on hand to take advantage times when the mining stocks sell-off in correlation with a general market downturn.

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