I want to go on the record and state categorically that,
in my opinion, technical analysis is of limited value when trying to predict
the short-term movements of precious metals. However, there are millions of
traders and investors out there who believe that it does work despite
interventions, manipulations, and the ability of the bullion banks to
fabricate a surrogate for actual physical gold by way of paper futures. In
light of that, the short-term technical set-ups for gold and silver and the
miners are all different in that after Friday's month-end bombardment, which
originated in the London options market, that formidable uptrend line that
began in December 2015 has finally been vanquished. The ramifications could
be nasty next week because for the second year in a row, the seasonally
strong month of September failed to shine (at least for gold). The big
question is now whether or not we get a follow-through to the 200-dma at
$1,252 before resuming the uptrend or will that large Commercial short
position serve as a demand catalyst and limit any meaningful downside?
Unlike gold, the silver market is in great shape
technically in that it has actually held its uptrend line dating back to the
December lows and could actually pull back to $18.20�18.25 and still be
intact bullishly. The fact that silver is outperforming gold is a bullish
confirmation in my world.
The Gold-to-Silver-Ratio (GTSR) continues in its
downtrend, which I believe is explained by the enormous Commercial short
position in silver, where one of two things are occurring. Either the big
base metal miners have mobilized their byproduct silver reserves by way of
the hedges or the bullion banks are playing games. Perhaps it is a
combination of both as it wouldn't be a terribly brave trade for a desk
trader to play "pile on" to a big base metal miner's orders. Or
maybe, just maybe, the physical demand for silver is finally pulling away
from the shenanigans that we have been dealing with for what seems like
forever. Any way you cut it, silver is outperforming gold and that usually
means that both metals are headed higher.
The Commercials appear to have been quite busy since the
Federal Reserve abandoned the rate cut idea; they capped the post FOMC rally
in gold at $1,340 and having closed the month of August at $1,311.40,
September's closing settlement at $1,317.10 was a fairly anemic showing given
that we just went through the best-performing month of the year. I don't
bother posting the silver COT because it's always a JP Morgan slugfest
riddled with little subtlety and an ample dollop of fraudulent activity.
The miners have had a pretty stiff correction and
actually closed out the month a tad better than one might have expected given
the gold price action. I bought the GDXJ (VanEck Vectors Junior Gold Miners
ETF) November $55 calls in mid-August (WAY too early) but then added the Nov
$45 at the end, but the GDXJ calls are going to need a big move in the
underlying ETF for me to pull a rabbit out of the hat. In fact, I am doubled
up on the ETF and leveraged and I am offside about $4 per share on the
non-core holding while the core bought in late 2015 is veritably free. As I
spoke about in an earlier missive, I need to see the HUI (NYSE Arca Gold BUGS
Index) hold 230 and the GDXJ must hold $41.76 (the end-of-August intraday
low) or I will be forced to throw them overboard and replace the hedges
lifted in mid-August. The U.S. political race, being about as ugly as one can
ever recall, will surely have the US Dollar Index weaving back and forth all
month and polls will surely be heeded closely. The Syrian situation is
getting a tad hairy and the Deutsche Bank gong show continues to roil all
markets with every sound bite emanating from the mouths of the ECB
snapperheads. The GDXJ, representing the junior gold miners, has been a
standout all year but I can't and won't let the big gains evaporate. I would
rather get whipsawed on a reversal than sit by aimlessly while it heads down
another 15% to the 200-dma. I'm using the $41.76 level as a point under which
I will place the stop loss order ($41.50).
Lastly, some of the biggest money made this year has been
in the "penny dreadful," many of which came out of the gate with
$0.05 and $0.10 financings and which have now become free-trading while up
between 500% and 1,000% for the year. Unlike the mid-year hysteria that
featured lithium stocks that screamed ahead with little fear of the
oversupplied market nor the lack of fundamentals, the last month has seen
sentiment cool substantially and the momentum trade which carried them in the
first half has now begun to demand results and rationale for maintaining
market capitalizations formerly reserved for producers or those with a 43-101
compliant resource.
As to trading ideas for the 357 Magnum portfolio, I am
adding a new name, Canuc Resources Ltd. (CDA:TSX.V),
which is currently halted in advance of regulatory approvals for the RTO
event with PrivateCo Santa Rosa Silver Mining Corp. whose San Javier property
in Sonora is classified as an advanced silver-gold epithermal system with
samples as high as 1,240 g/t Ag and 7.1 g/t Au. (I have no idea where it will
open and no idea as to target price but it is one fascinating project and one
which I believe will attract a great deal of investor interest once work
begins.)
In summary, I head into Q4/2016 firmly in the bullish
camp but mindful of the need to manage risk and temper enthusiasm until I can
see signs that investors are regaining those animal spirits of earlier 2016
days. In my perfect world, the intermediate term objective for gold is a
breakout through $1,400 and $25.45 silver, which assumes a GTSR of 55. The
long-term forecast implies a move equal in percentage to the move from $110
to $857 from 1976 to 1980 which was 6.79 times the low; using the
December/2015 low of $1,045 and extrapolating a 6.79 X's move, I arrive at
$7,095 per ounce gold with a silver price at 1/50 of gold or $142/ounce. Now,
before you get all giddy and start transferring funds into your online
trading accounts, I need to see a big volume reversal to the upside in the
miners while those Commercial short positions get unwound into RISING prices.
