With gold enjoying its best week of the year, with the Daily Sentiment
Index charging northward, with the Relative Strength Index (RSI) pressing 72
for the GLD, with the RSI for GDX pushing 75, and finally, with the
newsletter community all falling on top of themselves with self-laudatory
backslaps, I think it is time to adopt the contrarian view and step back.
It was less than five weeks ago, with gold and the miners all coming off
sharply oversold conditions (RSI in the mid-high 30s), that I wrote that
"carpe diem" in reference to ownership of GLD calls and my two
favorite leveraged miners, NUGT and JNUG. Sure enough, JNUG has moved from
$6.50 to $9.50 and NUGT from $14.50 to $22.10, while the GLD July $120 calls
rocketed from $2.20 to $7.60. (Note: I did not get "top tick" for
any of them, but did bank yet another decent 40% return on the miners, and a
double and a half on the GLD calls).
The point is that while I would love for gold to break out of this bullion
bank headlock at the $1,350–$1,375 band of resistance, history has proven it
to be a formidable obstacle and one that you absolutely must face.
Here are a few charts illustrating my point:
First, the GLD, hated by many, traded by most, and an excellent proxy for
the "paper gold" market, the second-most corrupt market in the
world and runner-up to the most corrupt market in the world, the Comex
("Crimex") futures market in Chicago. Right up there beside it is
the HUI, the unhedged gold miners index that represents the vast universe of
gold mining entities around the world, and another great proxy for a vastly
hated group of companies whose collective market cap losses in the past eight
years has been colossal.
Many, many new millionaire investors have sprung up from owning these
lifestyle-preserving dinosaurs, having been formerly billionaire
investors prior to taking the gold miner plunge. The HUI has had no fewer
than six rallies since the top in August 2016, but each rally was followed by
new lows, with the most recent low coming last September. The RSI and moving
average convergence-divergence (MACD)/histogram combo currently reside in
"overbought" territory, and if history proves as reliable today as
it was at every other visit to the $1,350–$1,375 resistance zone, we should
don the personalities of the hideous bullion bank traders and sell that which
we own in the paper markets to adopt their illicit yet enormously profitable
tactics and executions.
The next two charts are my favorite vehicles for
dice-rolling. . .er. . .speculation in the miners because they are extremely
liquid and they report to oversold and overbought conditions appropriately to
the extent that you can buy 100,000 shares with an RSI around 30, as I did in
May with JNUG and NUGT, and then let it fly when the RSI exceeds 70, as I did
last week. Because I subscribe to the view that most successful traders earn
their stripes by always selling too soon, I was a week early in pulling the
JNUG and NUGT triggers, but as I never buy 100% positions in one fell swoop,
I also never sell 100% positions in the same manner. I scale in and I scale
out because no one indicator is infallible. All data is freely available to
literally everyone, but I have learned over the many years of trading (and
losing) that it is the interpretation of the indicator, as opposed to the
level, that defines the trade's set-up. Please allow me to elaborate.
George Soros once wrote that he would experience back
pain whenever he entered a trade that was suspect. Rather than rejecting it
as a psychosomatic illusion, he learned to trust the back pain as a definable
premonition of unfavorable outcome. It was his brain telling him to exit the
trade by way of his body and despite the voodoo-ism in the explanation, I
totally agree with him.
On Friday the 14th, I arose from slumber at roughly 5 a.m. and proceeded
to check the markets while luxuriating in some lovely new 400-thread sheets
recently introduced to me by my partner. As I had already started to exit my
leveraged gold and gold miner positions, I was stricken with a sharp pain of
panic as gold was trading in the $1,355–$1,360 range. Not only had I gone on
record as a seller of the move to $1,350, I was tweeting out all week warning
after warning in the $1,340–$1,350 range. So to say that the June 14 3:00
a.m. Globex print at $1,361.20 was problematic is an understatement.
Nevertheless, here is the tweet I sent out: Initiating 50% position in
GLD July $127 puts @ $1.42...Lord hates a coward.
That was delivered at 11:30 a.m.. By 3:00 p.m. gold had dropped $14 per
ounce and my puts traded up to $1.94, finally closing at $1.85. I am
currently looking for a $40–$60 drop in gold and an RSI in the
high-20s/low-30s by mid-August. If that occurs quickly, the puts will trade
$4.50–$6.50 and I will be a reluctant hero. Repeat—a reluctant hero,
and here is why.
If you had asked me in 2001 what I thought would drive gold to $5,000 per
ounce, I would have responded with a list of economic, financial and
geopolitical events such as terrorist attacks, war, debt defaults, stock
market volatility, currency crises, accelerating inflation rates and fraud,
all driving investors to the time-tested safe havens of precious metals. It
all started with the 9/11 Twin Towers attack in NYC, and then escalated from
there, taking us through nearly two decades of turmoil in all of the
aforementioned areas.
Well, ladies and gentlemen, we have had multiple historical price drivers
for precious metals during that period but what we have also seen is a
massive, coordinated and fraudulent campaign to control investor appetites
across a wide spectrum of asset classes, demographics and borders. The new
rock stars of the 2000s are now central bankers, whose mega-maniacal actions
move markets and create or destroy trillions of dollars of citizenry wealth
with their utterances, written words and, more recently, social media
"bulletins." It is as if central bankers from all Western nations
met in Basel in 2001 and decided where they had the greatest collateral
exposure (think real estate and bonds), then proceeded to map out a plan
designed to foster confidence in stocks, bonds, U.S. dollars and real estate
while crushing investor demand for hard assets like silver and gold and
finally cryptocurrencies, whose fate was sealed in late 2018 with its listing
on the "Crimex," fully endorsed by the Commodity Futures Trading
Commission (CFTC).
I fully expected this turmoil back in 2001, after the dot.com bubble
popped, sending an entire tech-loving generation to the poorhouse. But the
problem was that the playbook, which had included fifty years of knowledge,
omitted the new rules concerning cause and effect. By example, if you think
it is going to rain, you take steps to stay dry by way of rain gear and
umbrella; if you think that the U.S. banking system is going to be vaporized
through greed and malfeasance, you load up on gold.
However, if it starts to rain and an invisible hand removes your rain gear
and destroys the umbrella, you are suddenly drenched. You correctly predicted
and prepared for the event (rain), thus identifying the cause, but despite
such preparations protecting you for the past fifty years every time it
rained, you got wet. The effect was distorted by forces over which you had no
control. Similarly, despite correctly identifying multiple causes that should
have driven gold to $5,000/ounce, forces over which I had no control
conspired to distort investor demand, and instead of stocks crashing and precious
metals soaring, the exact reverse occurred, beginning in 2011 and continuing
to this very day.
So when I use the term "reluctant hero," it is because I have
trained myself to think and act like a bullion bank trader, complete with
unregulated license and unrelenting bravado. Aligning one's trade setups to
coincide with the Commercials is by no means a guarantee of profit, but
refusing to take the other side of a bullion bank trade setup does, at the
very least, dramatically improve one's probability of success.
The downside is that acting and behaving like a bullion bank thief is an
unhealthy and unrewarding exercise. You run the risk of assuming that 5,000
years of history confirming the wondrous utility of gold ownership will never
return, and that the only history that matters is that which began on
December 23, 1913, on Jekyll Island. The financial risk is borne out the
moment you wake up and gold is at $1,450, and there are no offers and your
trade alignment with the bullion banks has suddenly and viciously bankrupted
you. And with what is happening today around the world, it is a serious risk.
This chart is an illustration of the massive response by
gold to the subprime bailout in 2009, and the subsequent smothering of any
type of response whatsoever from 2011 until today. As of the close of
business on Friday, June 14, gold went out just below that formidable band of
resistance at $1,350–$1,375, and I expect it will be a battle for the ages as
pro-gold forces wage war with the bullion bank behemoths. Judging from the
open interest surge late last week, it appears as though it is more than
likely a repeat of past interventions, with downside risk to $1,315–$1,320.
However, gold is going higher over the longer term and that's why I maintain
positions in the portfolio shown below.
The cash position currently at around 27% is the total profits from trades
made in 2019 less two hedges put on last week, the most impactive to date
being the purchase of 100 Goldman Sachs July $180 puts in May for $2.20, and
then sold in June at $6.60 for a 200% return or $44,000 (U.S.) in profits.
You will note that I do not trade physical gold and silver, and I
rarely trade the unleveraged ETFs (GDX and GDXJ), while using the leveraged
ETFs (JNUG and NUGT) as trading vehicles and the DUST as a hedge. The
remaining cash will be deployed on a correction in gold, which I expect next
week, or in the event that the bullion banks get caught short and we
scream through $1,375.
As can be seen from the GGMA portfolio, I stand to benefit far more on a
gold breakout that lasts rather than from a corrective move favoring the
bullion banks.
Damn the torpedoes and pass the tequila. Let's see what this week brings.
[NLINSERT]
Charts and images 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.
