Another Nervous Gold Breakout

You’ve probably heard about the rough week in markets from the perspective of the tech-heavy indexes, but it’s actually been fantastic for precious metals and Uranium. I can’t help but wonder though whether that geopolitical spike we saw on Friday will fade like all the other attempted rallies or if it’s really getting set for a breakout.

It has actually been a fantastic week for my portfolio performance. With my heavy allocation of small cap stocks peppered with large swaths of long-dated call options, my volatile portfolio is actually up 12.5% on the week. Don’t get me wrong, they’re still way down on the year. In fact, I was disappointed to find that my portfolio value 2 weeks ago was about the same as it had been when I started logging it back in October 2019, despite all of the money I’ve been plowing in from paychecks in the interim. Still, I like to think that patience will eventually pay off in these unloved sectors, and that outsized gains are ahead.

The way I see it, I need to pile on serious risk if I want to get anywhere. Logging about it, tweeting about it, and writing about it helps me beat down emotions and navigate this minefield of risk with an optimistic outlook. You really have to be nimble with your thinking to survive the world of investing. The dot-com crash followed by the great financial crisis taught me that you need to look for money-making opportunities on the downside as well as the upside. That lesson proved devastating post 2020 when the bear market turned into a parabolic run higher.

My new lesson is to look for gains on the upside, and trim risk to prepare for the downside but don’t short. Don’t bother with over-priced puts in anything – TLT calls can be a good enough hedge. I just need to find the next sectors with bullish promise, buy the dips, lever up with long-dated calls when I see a big oversold dip, and reduce the rallies to get leverage back down, and make sure at overbought tops I’m only holding shares and mostly with covered calls sold on them. In fact, this strategy has done really well for me while most of my losses have been from buying puts in stocks, then indexes, then piling into too many TLT calls at the wrong time.

Here are my current thoughts on my holdings:

Right now I still see a recession as inevitable when you combine a worldwide reduction in fiscal stimulus with a worldwide focus on tightening financial conditions to combat CPI inflation. I still don’t think tightening will work very well when the prices are driven by chronic shortages. We still haven’t been investing in keeping up our fracking wells or any new oil production, so the costs have been soaring despite Omicron crimping world travel and the construction slowdown in China. Nor have we been investing in mining even though copper, nickel, and others have been breaking out while the biggest producing countries discuss raising taxes on the sector.

The only way to balance supply and demand in the future without increasing production is a prolonged recession. This seems to be our favored course of action, with central banks stepping in when asset prices react too much. So, I see interest rates ultimately hitting the floor again while money rotates into undervalued hard assets. Public anger is palpable in many countries as the wealthy overclass demands continual sacrifice to fulfill their environmental dreams. This won’t last; sooner or later they’ll finally have to ramp up production of hard assets, especially as this artificial scarcity leads to geopolitical tensions and wars. Unfortunately I see this as a likely outcome as our energy scarcity has led to an enormous shortage of fertilizer which will lead to a shortage of food in next year’s harvest.

Here’s my latest allocations after this crazy week:

  • HEDGES (9.1%)
    • 9.1% TLT Calls
  • PRECIOUS METALS (48.1%)
    • 7.2% AG (Silver), shares
    • 6.8% AG (Silver), calls
    • 3.6% SAND (Gold, Silver & others), calls
    • 4.5% EQX (Gold), calls & shares
    • 4.3% LGDTF (Gold)
    • 4.4% SILV (Silver)
    • 3.6% SILVRF (Silver)
    • 3.3% MTA (Gold & Silver)
    • 3.4% MGMLF (Gold)
    • 1.8% RSNVF (Silver)
    • 2.0% SSVFF (Silver)
    • 2.4% HAMRF (Gold)
    • 0.8% DSVSF (Silver)
  • URANIUM (27.9%)
    • 13.6% CCJ, mainly shares & some calls
    • 6.8% UUUU
    • 2.9% UEC, shares & some calls
    • 1.8% BQSSF
    • 1.5% DNN
    • 1.3% ENCUF
  • US CANNABIS (17.5%)
    • 2.1% AYRWF
    • 2.1% CCHWF
    • 2.4% CRLBF
    • 2.1% CURLF
    • 2.1% GTBIF
    • 2.5% TCNNF
    • 2.0% TRSSF
    • 2.2% VRNOF
  • CRYPTO (1.1%)
    • 1.1% XRP
  • OTHER
    • 0.2% ATCO calls
  • CASH (-3.9%)

I reduced a bit more this week, selling a few things like AG calls and MTA, 1-month covered calls on some of my CCJ and UUUU, and so on. Next week my cash balance should be back to at least zero after options expiry. That puts me right on track where I need to be – the market could crash at any time, so I don’t want margin debt, but I think it will top within the next month and it won’t crash until late March, so I don’t want to sell everything. Besides, I really do have long-term bullish views on Gold, Silver, Uranium and US Cannabis.

My base case on the market right now is as follows:

I believe we will see a significant rally over the next month which could hit a new high in March. Then markets will correct hard between late March and early April. This is my Q1 2000 model. My primary alternate is the Q1 1994 model, with a volatile chop to lower highs in March before a hard correction between late March and early April.

During this last rally, I expect a furious rotation beneath the surface which further hurts meme stonks and junk tech while money goes towards perceived safety in the big names, utilities, commodities, and value stocks.

My primary goal right now is to get my margin balance back to zero. This should happen next week after options expiry as the bulk of my AG shares get called.

If this gold breakout is just another fakeout, I’ll ride through the March/April disaster without selling anything. However, if this breakout really moves, then I’ll slowly reduce into it and build up my cash position. I won’t sell everything, but if the rally moves enough by next month I’ll probably sell a good chunk of my long-dated calls in gold and silver miners while I sell more covered calls on my Uranium shares. By mid-March I could sell off a good chunk of my Uranium position if the slightly out-of-the-money calls I sold on them expire in the money. I might cycle some of that into long-dated TLT calls but I probably won’t bother with puts unless they’re stupid cheap.

Well, that’s my outlook and my strategy. Good luck and happy trading!

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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4 Responses to Another Nervous Gold Breakout

  1. phusg says:

    Thanks again for candidly sharing your insights.

    > Public anger is palpable in many countries as the wealthy overclass demands continual sacrifice to fulfill their environmental dreams.

    I’m struggling to understand what you’re saying here. Yes, this is the narrative that anti-green parties are pushing, trying to link the cost-of-living crisis with the carbon reduction agenda, which they’ll probably be succesful at even across half of Europe, considering decarbonising costs money and/or reduced consumption, neither of which are particularly popular.

    The outcome of that, according to the best science available, is ‘runaway’ rises in global temperatures, which will surely lead to even more geopolitical tensions and wars?

    So I would say that public anger is palpable in many developing countries as the wealthy country overclass demands they also curtail emissions, whilst the wealthy coutries are the ones who generated the majority of the historic emmissions which brought us to this pivotal moment in the first place.

    So in my view it is the developed world that dreams of a stable climate in which to prosper and not losing their fertile land to desertification or sea level rises and having to fight a war or migrate to move up in the world.

    Do we have any common ground on this? Interested in your views.

    • johnonstocks says:

      I agree with Doomberg for the most part that energy is life, and that creating artificial energy shortages or shutting down key supply lines without a ready replacement is wrong.

      It seems to me that the wealthy love to get the working class to sacrifice through artificial energy/oil/food shortages while giving up nothing themselves. In fact it’s quite the opposite, as they have grown quite wealthy on insider trading, piling into small-time alt-energy companies and then handing those specific ones government contracts, investments, or subsidies. In addition, the whole carbon trading scheme reeks of rampant corruption as a tradeable commodity that politicians directly control the supply of. Carbon taxes would be predictable and fair, and they couldn’t be gamed the same way.

      We should make it convenient and free to dispose of hazardous waste, and charge at the purchase not the disposal. We should do our own recycling in top-notch government facilities. We should invest in an electric grid that makes more sense with our erratic wind and solar supplies. We should acknowledge the incredible use of resources and space in wind and solar – such as requiring oversized power cables over extremely long distances – and acknowledge that they only produce a quarter of their rated capacity on average. We should have the government help pay for some of the environmental measures needed to produce our own goods and our own raw materials, rather than importing them from countries without our environmental or human rights standards.

      There are solutions for all of these problems, but they cost money, and our leaders suddenly get fiscally conservative when it comes to paying for them. The Hoover Dam was a great government investment, as was the highway system. There are benefits to subway systems like manhattan has, but they have to be subsidized because they are working class transit. To me, the real waste is not measured in money so much as lost productivity of the many unemployed and underemployed – and the federal government needs to directly address the task of getting homeless people working again (I have ideas for that).

      I am a social libertarian/ fiscal progressive. In my view, our current system only works with continuous debt growth, and because the interest payments such cash flows out of the system the high debt levels require more spending. The only way around this, to go back to a low debt world, is a major fiscal transfer like a UBI that allows debt to be paid down – whereas QE is counter-productive. QE boosts asset values and thus the wealth of the top, while forcing those at the bottom to live with less. Consider the incremental farm land that makes more sense as a vacation home because that rich family has much more money while ordinary workers don’t.

      Anyway, sorry if it seems a bit of a rant, but I do hold a lot of political views that neither party supports at all. I also believe that our problems are easily fixable with modern technology and a competitive capitalism guided by taxes, subsidies, and regulations. I’m full of ideas on this, like a sliding monopoly tax based on market share, or eliminating the low-end payroll tax to make it cheaper to hire employees, or removing the healthcare and retirement responsibilities from the employer to make it cheaper to keep employees while increasing individual choice in those areas.

      I’d better stop or I’ll go on all night. I’m not anti-environment though, I just think the burden of these policies should not be borne by the bottom 50%. Anyways, I hope you find some of these ideas interesting.

      • phusg says:

        Thanks for sharing, interesting stuff indeed.

        Agreed that in our system the ultra-wealthy can easily get wealthier and that they need to contribute more through for example taxation of monopolies and better policing of insider trading and the like. That would give the government more room to fund decarbonisation.

        This page and the Rules for rulers video inspired by Bruce Bueno de Mesquita’s work probably summarizes our common ground pretty well I think https://www.peakprosperity.com/understanding-the-keys-to-power/

        Also agreed that we need to ween ourselves off continuous debt growth, which for me is stealing growth from the future. Do you also agree that our current outsize carbon emmissions create a future decarbonisation debt?

        > I agree with Doomberg for the most part that energy is life, and that creating artificial energy shortages or shutting down key supply lines without a ready replacement is wrong.

        I don’t know Doomberg but on the face of it I’d have to say that putting a little artificial shortage pressure on some carbon emission intensive energy sources is a good thing, as it drives innovation. Isn’t that exactly what carbon taxes do, which you are in favour of?

        > I also believe that our problems are easily fixable with modern technology and a competitive capitalism guided by taxes, subsidies, and regulations.

        I think this is where our views may differ as I don’t see any easy fixes. Only if nuclear fusion really comes of age and is massively online in the coming decade, which I think is very unlikely, do I see an easy technology fix.

        Isn’t modern technology a double edged sword? It just as easily allows us to ramp up our emissions through cheap flights and meat consumption, as it allows us to decarbonise. Low carbon lab grown meats and renewable power flights for all are further away than medium term irreversible climate change.

        Please don’t take me the wrong way, as I’m not trying to play a holier than thou virtue signaling game; we both like to travel and eat meat and have enough disposable income to be able to ‘invest’ in the markets. But AFAIK that does put us in at least the top 10% globally https://howrichami.givingwhatwecan.org/

        > I’m not anti-environment though, I just think the burden of these policies should not be borne by the bottom 50%.

        The bottom 50% globally or in the West? In other words, do you think we middle class Westeners should be burdened with decarbonisation costs or just the top 1% globally?

      • johnonstocks says:

        Nuclear Fission is the obvious solution for our energy problems. If we reprocess the fuel like the French do, then the waste is much smaller and much less dangerous (fissile waste is much more dangerous).

        Desalination plants should be used more for water to preserve our rivers and lakes. We can mine the salt waste and dispose of it properly.

        Weaning off debt use means changing the whole monetary system. Debt always rises because it has to, not because people are irresponsible. We need better measures than GDP and CPI to show the real productivity of the physical economy, not just the current spending. Building ghost cities for investment or overbuilding wind/solar that our grids cannot handle is extremely wasteful and environmentally damaging, yet this is not reflected in GDP.

        Ancient systems used to tax labor which the poor can produce rather than a currency which they can’t and which becomes deflationary (more centralized and less per person) over time. Biblical Jews had a Jubilee Year to address the issue of debt always rising in an ~80 year growth cycle. We can either use drastic tools – redistribution and default (we tend to do this for major wars like WW2), or we can do a more controlled UBI to pump money to the bottom so that needs for the bottom can be economically addressed within our current system.

        WW2 fixed things before as follows: Labor was oversupplied and discarded in the Great Depression because the rich had all the assets and few direct needs for it. Suddenly they needed people to join the army and produce war material. Money flooded to the bottom for this work, while artificially low interest rates taxed the rich and the cycle reset.

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