Gold and Silver Miners get Crushed

Junior Gold Miner index above, back at 2019 levels when gold was in the 1400’s. The larger gold miners in the GDX index isn’t as bad, but still fell below it’s Feb 2019 high.

Junior silver miner index above, also below pre-pandemic highs when silver was struggling to break $18. The larger miners in SIL weren’t hit as bad, down to May 2020 levels but above pre-pandemic.

Gold and silver futures above. They didn’t hit annual lows and are still well above pre-pandemic levels.

These charts show the pressure on GDX, GDXJ, SIL & SILJ over this last week.

I think we’re running out of buyers.

  1. Sentiment in gold and silver and their miners has been steadily declining, as neither metal has shown any positive developments since July 2020.
  2. Cryptocurrencies have been skyrocketing over this past year, and many of the would-be metals speculators have gone to the action over there.
  3. Mining stocks are generally excluded from any ESG investments, especially in precious metals, so they get no money from this growing trend.
  4. Mining stocks in general have little if any footprint in the most popular passive investment vehicles such as QQQ, SPY & IWM.
  5. Mutual funds have long favored a mixture between stocks and bonds, with little interest in the mining sector except as a high-beta cyclicals play and generally no interest in precious metals.
  6. Momentum traders and trend followers are usually long-only and simply avoid markets with price action below declining moving averages, especially with the 50 day moving average below the 200 day.

At the same time, economic data has been turning in favor of the deflationist side. Lumber touched below pre-pandemic levels, copper hit 2019 levels last week and has since rallied to March 2020 levels. The labor market is still surprisingly weak, the 2020 stimulus levels will not be repeated, and talk of fed tapering abounds. Interest rates have been plummeting, while TLT (20+ year treasuries) have been strong and rallied past 150.

The bullion banks are trying to reduce their short positions in gold, and they very successfully hammered gold in the light trading on Sunday 8/8 past a number of key levels, causing managed money to reduce longs by 56,000 contracts while they reduced their shorts by 33,000 contracts. According to Alastair Macleod in his interview on kingworldnews.com, these bullion banks are trying to get rid of most of their short gold positions in order to adjust to changes from Basel 3.

I wouldn’t be surprised if the bullion banks tried to hammer gold again, but their goal is to trigger stop losses and buy back, and they lose a lot of money if they don’t trigger any. There is a limit to how much this can accomplish, especially as more of the managed money is shaken out of their positions. A significant amount of the managed money positions don’t rely on stop-losses and algo trading, and the only momentum traders in the space are going short (hence the 29,000 short contracts opened in the last COT report).

Anyway, I was a buyer last Thursday as the miners were thoroughly crushed, focusing on miners that I had lighter exposure to, and I used that down day in general to finally sell of my long-dated put positions. Here’s where my portfolio ended up:

  • HEDGES (22.4%)
    • 22.4% TLT Calls
  • PRECIOUS METALS (46.7%)
    • 9.8% AG (Silver), mainly shares some calls
    • 6.6% SAND (Gold, Silver & others), all calls
    • 5.4% LGDTF (Gold)
    • 4.4% EQX (Gold), shares & calls
    • 4.2% SILV (Silver)
    • 4.1% SILVRF (Silver)
    • 3.7% MTA (Gold & Silver)
    • 3.0% MGMLF (Gold)
    • 1.8% RSNVF (Silver)
    • 1.4% SSVFF (Silver)
    • 1.4% WPM (Gold, Copper & Silver), all calls
    • 1.0% GOLD (Gold, Copper), all calls
  • OTHER COMMODITIES (17.1%)
    • 5.5% NOVRF (Nickel/Copper)
    • 6.4% CCJ (Uranium)
    • 3.9% UUUU (Uranium, Vanadium, Copper)
    • 1.4% BQSSF (Uranium)
  • CANNABIS (5.7%)
    • 1.9% CRLBF
    • 1.9% GTBIF
    • 1.9% TRSSF
  • CASH (8.2%)

General thoughts and trades on my positions:

  1. Hedges: I changed this back from “downside bets” because I no longer consider it recklessly short. Just last week it was at 30% of my portfolio, last month at 35%, before that hovering near 40%. I’m going to be a lot more careful with long-dated index puts in the future and right now I just consider calls in TLT as a better hedge. Those puts were not only fighting the fed, but also fighting a relentless wave of share buybacks and passive investors. I’ll try to be more strategic about these in the future; right now I just think we’re more likely to see another bounce than a significant correction.
  2. Precious metals: This portfolio isn’t easy to balance, because I work full-time as a project manager and often only have my phone app when trading. During the day I have general ideas of what I’m least long and what I want to add to. Last week (mainly Thursday), I added a few more calls in SAND and GOLD, but mainly stuck with shares of anything my previous allocation was low in. Next dip I will be looking back at EQX, SILV & MTA because these are some of my favorites which I haven’t added to in a while.
  3. Other Commodities: I actually tried to sell some NOVRF at $3 but was too late. I’ll probably add more if it revisits $2 though. I also added a little UUUU but otherwise didn’t touch the space, as I’m comfortable with my current allocations.
  4. Cannabis: I originally entered this sector back in March as a small entry into an area with long-term potential and possible near-term weakness that I figured wouldn’t correlate with the rest of my portfolio. The sector has been weak since then, coming down around 20%, and I’ve added just enough here and there to keep my 3 picks balanced and at roughly the same level. I don’t think about this sector much, and I plan to just leave it on “cruise control” this way until it finally starts to get somewhere.
  5. Crypto: I have no conviction in this space. Performance of the sector in general has been phenomenal, and my trades there have all made decent money in the past year. I may enter again in the future, but for now it feels too risky to me with deflation piping up and stocks struggling. With the junior precious metals miners I can see new lows and think “blood in the streets, I’m buying” with confidence that these will do well this coming decade. With Crypto I can’t help but think “alright, another tether pump. Let’s see how far they drive it. When will this scam finally end?” I’ve heard the bullish cases and how crypto will revolutionize finance, but I still just see a digital game token, a market for expensive 8-bit graphics called NFT’s, a free-for-all with pump and dumps and ponzi-like stablecoins that have questionable backing, and a feverish FOMO frenzy about values rocketing to the moon. In short, I see Crypto as a pure risk-on asset with price action as it’s primary narrative.
  6. Cash: I would’ve had much better performance over the last 18 months if I just avoided puts entirely and stuck to heavier cash allocations to reflect my concerns for risks in the system. I’m still juggling how to play levels of one vs the other, but for now I decided to use puts more tactically and I think a bounce is more likely than a plummet. This is partly because of people I follow on twitter saying something about how there is still a lot of protection bought on this market (as in short positions and puts) which is plenty strong enough to provide another bounce. Anyway, I’ll likely wait for a good time in the charts to buy more puts, and I’ll likely have less money in them when I do, but I really want some flexibility to add to my favorite mining stocks when they get smashed again.

Last note, I am not calling a bottom in precious metals or miners. I am very bullish on both this coming decade, but I have no idea how far they’ll drop or how long it will take. As such, my strategy is to simply buy more every time they get smashed, then wait and accumulate cash when they go back up. I do not plan on using leverage, I plan to stick mainly with shares because they don’t expire, and I plan to limit my call options to the highest duration possible (generally Jan 2023). Many people blindly put money into index funds and mutual funds month after month in their 401k’s, and I simply plan on doing that with mining stocks for a while.

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at gluskinsheff.com. Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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2 Responses to Gold and Silver Miners get Crushed

  1. phusg says:

    Thanks again for sharing your trading insights.

    > My favorite [long-term] narrative is the de-dollarization of foreign trade.

    What do you make of the shorter term narrative of the US dollar having bottomed and also getting taper support soon?

    I’m currently still short PM and leaning towards another leg down before switching to long for the longer term.

    • johnonstocks says:

      I don’t expect the Fed to taper. I’m thinking that they talk about it a bit more forcefully at most, but that the first taper doesn’t happen until 2022.

      If they do taper though, I think the main direct result will be muted by a reduction in the reverse repo market. The question is how big would the psychological effect be, would it spark selling and other risk-off activity.

      As for gold, I am fully prepared for another leg lower, but I’m more worried about missing the later move if I don’t have a position now.

      Markets bottom when there is still good reason to fear drops in the future, and I just plan to buy junior miners on each dip and save unallocated cash with some market hedges like puts and TLT calls in between. When the final bottom hits, I want to be adding even though everyone will be convinced it’s early.

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