Gold Mining Stocks Poised for Gains
Time flies. A month ago, I offered Profit Confidential readers my “Longshot Pick of 2016” based on a combination of technical and fundamental analysis of my favorite gold mining exchange-traded fund (ETF)—the Direxion Daily Jr Gold Miners Bull 3X ETF (NYSEArca:JNUG).
The subsequent crazy action in the gold pits took everyone by surprise, including me. At one point, the pick was up more than 200% in just a few trading sessions from the date of the article, nicely took out its first resistance level, and now needs to take out the $61.00 level to continue moving up the profit ladder (see chart below).
The good news is that JNUG did manage to hold on to most of its gains, even when the inevitable “retest” of the sector breakout began, while both the yellow metal and the miners settled back to Earth a bit.
Such is the bizarre nature of the gold space that, even though all the pick has done so far is retrace to its price level of October 2015—just a few short months ago—the anti-gold crowd is busily penning editorials suggesting “the move” is already over and if you blinked, you missed it. The truth is that on a longer-term chart of JNUG, the action so far is barely a fly-speck and almost insignificant.
This is, of course, hypocrisy of the very highest order. It is completely acceptable, and politically correct, in today’s market to hype common stocks long after their price-to-earnings (P/E) ratios have leapt higher than the moon and long after their organic (non-buyback!) earnings have started to implode. But say a single kind word about the gold sector and you immediately are in the running for the title of “Village Idiot.”
My purpose in this essay is to re-examine why I picked JNUG in the first place, update the pick, and to speculate as to where the gold market might be headed.
And Now for Something Completely Different…
One of the wisest aphorisms I have ever heard is “fish have no opinions about water.” In other words, you cannot see what you are unable to see or simply do not want to see. I have been writing about the gold market for several decades and have spent more hours watching the gold tape—which trades 24 hours a day except for weekends and is an excellent cure for insomnia—than I care to admit.
What perhaps separates my work from that of most of my peers is that I personally have no doubt, not the slightest, that the “fat thumbs” of the central banks and their pals have been weighing on the gold scales for the last five years, since late 2011.
I am not looking to get into an existential debate, nor am I interested in calculating how many angels can dance on the head of a pin. I am simply saying that for those who take the time to do the research, the evidence is fairly overwhelming. (See, for example, my essay “Something Weird is Happening to Gold Prices.”)
Dang Those Guys are Good!
Nor can I completely fathom why the central planners are so reticent and circumspect about taking proper credit for their amazing ability to keep gold down. Is it not true that we, in the West, cherish nothing more than a winner? Isn’t that why Hollywood has (at last count) almost a dozen separate award systems to remind itself how clever it really is in a dozen different and colorful ways? Isn’t that why we have the Superbowl and the Stanley Cup?
Again, for those who have taken the time to do the research, this “Third Great Gold Smash” (the first was the London Gold Pool in the 60s; and the second was in the 1990s, literally the entire decade) is nothing short of brilliant. It represents a coordinated series of attacks on multiple fronts over a period of years, is funded by institutions that can print money at will, incorporates a major “psy-op” component designed to both capture and hold the attention of the mo-mo crowd, and is backstopped by legislation that not only exempts the chief operators from the rule of law, but (typically) can actually make life unpleasant for those who question the status quo. (Dr. Michael Burry, the “hero” of the hit film The Big Short, tried to offer his help to Washington to ensure the MBS/CDO/CLO problem did not repeat. For his concern and compassion, he received a handful of simultaneous audits that cost him more than $1.0 million in legal fees. [Source: “Dr. M. Burry Commencement Speech,” Zerohedge, June 22, 2012.])
In fact, the more you delve into this issue, the more dirt you find. Craig Hemke just recently penned an analysis where he showed graphically how the suppressors had deliberately “aligned” themselves with the HFTs (“fast boys”) and Algos to make sure that many popular pair-trades placed gold as the underdog, on the short side of the fight-card, competing daily against strong momentum-driven currencies and instruments (e.g., “long the buck, short gold,” a pair-trade almost guaranteed to send the yellow metal to the sick ward over the last 12–24 months). If accurate, this reasoning would go a long way toward explaining the persistent rumor among top traders that those who short gold have “low friends in high places.” (Source: “The Illegitimacy of Comex Pricing,” Zerohedge, February 19, 2016.)
Even the psy-op component is ongoing and relentless. As Zerohedge just reported, on February 10, 2016, Goldman Sachs told its clients that gold looked like a “Buy” and had “considerably more upside”—followed by an inexplicable change of heart only five days later on February 15, 2016, when those very same clients were warned that gold was to be shorted at all costs, with a new target way down in the $1,000 range. (Source: “Five Days Later Goldman Changes Opinion,” Zerohedge, February 15, 2016.)
Every War Has Two Sides
Every war has two sides, however, and lately we are seeing increasing activity from players who are decidedly more gold-friendly. I detailed the possible repercussions of the upcoming, much-anticipated SGE Gold Fix in my earlier essay on gold price manipulation—a daily gold fix from China with no paper trading component, one which, via arbitrage, will ultimately suck the very oxygen from the nostrils of Comex and LBMA. (Source: Ibid.)
Although the SGE Fix appears to be still a few months away yet, we did recently see another inkling that there may possibly be a new sheriff in town:
On February 12, 2016, King World News did a major (and rare) interview with top-tier London gold trader Andrew Maguire. In it, Maguire revealed that the much-anticipated Allocated Bullion Exchange (ABX.COM) had just done a “soft launch,” with agents already established in 11 countries and more on the way. (Source: “Maguire on Launch of ABX,” King World News, February 12, 2016.)
The stated purpose of the upstart ABX exchange is nothing less than to provide an end-to-end (supplier-to-buyer and vice versa) physical-only alternative to the traditional worldwide gold pricing/trading system. The present system is itself more than a century old and run as opaquely as possible out of (mainly) London and New York. (Coincidentally, both are sites where the ratio of actual gold traded, relative to “make-believe” or paper gold, is something in the magnitude of one-to-500.)
It is important to understand that these bourses (and the private banks that compose them) are not exactly beloved institutions. In fact, they are especially unique in that both the buyers and sellers who are compelled to deal with these bourses feel they are not getting a fair deal. For example, producers are convinced they are getting a price below true (physical) market, and successful buyers are often forced to settle their trade in cash instead of actual metal.
Think about that for a moment. In any bargain or market, it is not uncommon for one party to a deal to believe they have been taken advantage of. But both parties at the same time…? Seriously?
Maguire himself described what he considers to be the coming seachange in the gold market: “Synthetic or infinite paper gold is deliberately created in sufficient supply to backstop the billions of dollars of naked (paper) short sales created by the colluding bullion banks…but physical gold is unleveraged and finite, and we are finally seeing physical demand overwhelming the paper traders.” (Source: Ibid.)
One of the most eloquent “rants” on this same topic is from professional money manager Jeff Nielson:
“[…] These Big Banks are the ‘hit men’ in these markets, who perennially prevent price-discovery (and thus legitimate prices) in global bullion markets, through a variety of forms of illegal manipulation.
“[…] One of their favorite methods of market-rigging is through ‘shorting’ these markets, with massive, illegal trading, where the illegality could not be more obvious. How obvious? In 1971, the Hunt Brothers were convicted of ‘cornering the silver market,’ at a time when their total holdings represented less than 20% of available inventories. Today, the four Big Shorts in the silver market, all Western Big Banks, have ‘cornered’ roughly 80% of the trading on the short side of the market. This means that each of those four criminal institutions holds a larger concentration in this market than the percentage which earned the Hunt Brothers their criminal conviction.
“[…] More to the point; (we) are fully aware that all of these Western banks are, in fact, nothing but tentacles of one, gigantic, financial behemoth: the One Bank. This single crime syndicate is allowed to permanently hold a short position in the silver market more than four times more concentrated than what U.S. courts have already ruled is illegal.” (Source: “China Flexes Its Muscles at the SGE,” Sprott Money, January 13, 2016.)
My own observations, over a period of years, suggest that, on average, during at least three of the five gold trading sessions in London each week, 52 weeks a year, gold will suffer a “mystery” hit of between $5.00 and $10.00 per ounce within the very first hour of trading, regardless of any other independent fundamental or technical indicators, or any current news. Other than ongoing promises to “become more transparent,” the LBMA has never offered any explanation for this odd and mindlessly repetitive behavior. Nor do I expect they ever will, neither in my lifetime nor yours.
Actually…There Really Is a Method to the Madness
Again, life would be so much easier if the barkers running the carnival would—just as they did with quantitative easing (QE), “Operation Twist,” ZIRPs (zero interest rate policies), and, most recently, NIRPs (negative interest rate policies)—come out from behind the curtain and simply say, “Heck yes, it really is us, your pals in the central banking system. We are indeed running this magic show; but take comfort in that we truly believe we are very competent at what we do, and we are doing this entirely for your own good. And someday, you, or maybe your children, or possibly your grandchildren, will thank us. Maybe not today. Maybe not tomorrow. But someday.”
Instead, governments and their central banks keep pushing the unsettling and implausible narrative that they are mucking about like headless chickens trying to solve each individual problem as it pops up, anointing each with a sort of Rube Goldberg, custom-made fix. And then, like in the movie Forrest Gump, stuff just happens afterward and, of course, it is never their fault…?
My own view? I believe that the intentional implication of randomness is deliberately misleading.
In the 1970s, two clever economists at Stanford thoroughly documented and blueprinted an economic “regime” that governments invariably turn to when they have gotten themselves in a hole so deep that the only way out is to slowly and gradually, over a long period of time, pass along to their citizens the ultimate costs of their profligate ways. (The “slowly and gradually” part is really important, because if they move too quickly, they could accidentally trigger some sort of harsh reaction from the citizenry, and that would be considered by their strategists to be an “undesirable outcome.”)
I should emphasize that the economists in question did not invent this regime—which they dubbed “financial repression”—but merely documented for posterity things that many governments had already been doing, knowingly, for a very long time.
Looked upon in this light, initiatives like QE, ZIRPs, NIRPs, bail-ins—plus the entire arsenal of “financial controls,” such as going cashless, removing large bills from circulation, and (da-dah!) the attempted suppression of the precious metals complex—are neither unusual nor strange. Rather, they are an expected and predictable part of how the regime actually works. (Source: Ibid.)
What About All Those Charts “Confirming” the Gold Bear?
I know what you are thinking. What about all those dozens (if not hundreds) of essays you have been reading since 2011, showing you charts and graphs confirming that the PM sector was dying a natural death, fully in sync with the other commodities…? The same mantra over and over. You can almost hear the imaginary policeman yelling, “Nothing to see here folks, just keep moving along…”
Well, every branch of science has an Achilles heel, a built-in assumption so critical that if the assumption is flawed, the science itself falls. Medical research, for example, is based on the notion that given a choice, its agents will devote more of their time and resources to seeking a cure than to simply seeking a treatment. Remove this cornerstone and havoc reigns. To posit an even more esoteric example, Egyptology is based on a series of constructs (timelines) very similar, metaphorically, to the actual buildings and artifacts they study. If just one of these timelines proves seriously incorrect or even flat out wrong, the entire structure of the science topples like a house of cards.
“Technical analysis”—the science of investment charts and graphs—is, at its core, an attempt to quantify and measure the preferences of crowds in a manner that allows past behavior to possibly predict future outcomes. More than a century of hard data makes it look invulnerable.
But in fact, it is not. If a person or persons unknown enter the market with overpowering “blunt force trades”—backed by the ability to create infinite money at will and with immunity from prosecution—then the potential exists to deliberately move prices to “known” inflection points that are religiously followed by traders around the world—traders who, for whatever reason, have yet to conclude they are being “gamed.”
In effect, under such a scenario, technical analysis morphs from tool to weapon, and the weapon, ironically, has the greatest impact on those who are most addicted to the tool.
While an argument can be made that a slowdown in China reduced organic demand for “building” commodities like steel, copper, and zinc, the facts show that demand for the PM complex has been consistently strong right through this so-called “gold bear.” The numbers simply don’t make sense. (Sources: “Supply & Demand For PMs: The Numbers Don’t Add Up!,” Silverdoctors, February 16, 2016; “2012-2015 U.S. GOLD SUPPLY DEFICIT: One Hell Of A Lot Of Gold,” Silverdoctors, February 18, 2016.)
So…Why Fight City Hall?
Looked upon in this new light—a perspective very few writers have offered—the obvious question becomes…why fight the most powerful forces on the planet, the people who make the laws, the people who print the money? Why not just stay away from the precious metals complex entirely?
Excellent question. Purely and simply, if all the world governments were of like mind and that mind was to force-feed the “financial repression” solution upon their respective constituencies, moving inevitably toward its ultimate (and very unpleasant) endgame…then, yes, investing in gold or the mines might be perceived as the investment equivalent of first self-administering an ink-blot test and then failing it.
But here is the rub: As near as I can tell, not all the governments on the planet are of like mind. In my exclusive interview with Willem Middelkoop published to Profit Confidential (see “Profit Confidential Interviews Willem Middelkoop”), I drew attention to the fact that, not only was Middelkoop an expert on the theoretical notion of an upcoming “financial reset,” but he had inadvertently been invited to one of a series of rotating top-secret meetings on the coming reset hosted at that particular time by the Chinese right on their home turf.
In that interview, I underscored the fact that, subsequent to that invitation, Middelkoop was no longer merely an academician and theorist, he was in actuality a reporter and historian, writing about something that had not yet happened…but most certainly was going to.
And according to his Chinese hosts, gold was intended to play a big part in that coming reset and was going to come back into the financial system for the first time since Nixon slammed the “gold window” in 1971. (Source: “The Big Reset and $8,000 Gold,” Zerohedge, February 1, 2016.)
The significance of this fact cannot be overstated; it is a game-changer.
Understanding the “Lower Base” Theory
Here is a secret the greatest negotiators understand—the key to determining a go-forward strategy in an antagonistic situation is to look at things from the perspective of the person sitting on the other side of the table from you.
If you were the U.S. government, if you had miraculously held onto your reserve currency status for almost a half-century after decoupling from gold, if you had come to rely on that privilege in order to work your will on other countries…how thrilled would you be to learn that some of those other countries, especially those “of growing influence,” were looking to suddenly make gold relevant again…while you yourself no longer had as much of the yellow metal as you used to?
(Note: I absolutely cannot comment on how much gold the U.S. actually has left because I do not know. That is considered a military-level secret. That is why planes flying over Fort Knox can be shot down without warning. However, simply Google the words “German gold repatriation” and you find a suggestion that, at the very least, American gold stores are not as high as they once were. Contrast this to China, where, currently, unofficial estimates suggest the Chinese have at least 20X more gold than they are admitting to and they are adding more every day. [Source: “China has 30,000 Tons of Gold,” Pravda, May 15, 2015.])
If you noodle on this quandary, you might conclude that U.S. interests had only one clear solution open to them. Using any means possible, they needed to force the price of gold to the “lowest possible base” so that when the inevitable reset did finally arrive and gold moved higher, it would do so from the lowest conceivable point—and so make their job of meshing gears into the new system as painless as possible.
What’s Up with JNUG?
Off the top of this piece, I promised you an update on my longshot selection, JNUG. Here it is…
I originally presented the selection as a multiyear, long-term pick intended to mirror the seachange that I expect to occur in the gold pits gradually. The subsequent, wacky volatility the pick experienced was not unique to JNUG, but was reflected within the entire sector in early February. Plus, as a “synthetically leveraged” pick (explained in the original article) said volatility was significantly magnified in JNUG. Don’t forget, for every single dollar invested in JNUG, you are synthetically “controlling” three dollars of mining shares—similar to an option, perhaps, except with no expiry date.
Overall, however, nothing whatsoever has changed in my original reasoning. If anything, I would point to the action of gold in the post-2001 period—when the last gold-suppression scheme “broke”—and suggest that when this present “fat thumb” scheme breaks and gold returns to a value more in keeping with its traditional metrics (also discussed in the original article), a pick like JNUG should still offer a very favorable reward-to-risk ratio—in this case potentially extremely high reward in return for (only) very-high risk, with solid “risk mitigators” already baked into the pie.
Remember also that the gold bear market from 2011 to 2015 was not merely severe but historically unprecedented in terms of the degree too much negative sentiment and momentum shorting decimated the miners. This has been the worst beatdown the industry has seen since they first started keeping records.
Therefore, it can be argued that the single most important question prospective investors in the mining sector need to ask before going long is painfully simple: did the current gold bear finally hit bottom at the end of November 2015? Yes or no? There is no in-between.
Whatever happens, JNUG is now—and always will be—volatile, because it is a synthetic derivative and fast action was deliberately engineered into its leveraged construction. (“I am not bad… I am just drawn that way,” says Jessica Rabbit in the movie Who Framed Roger Rabbit.)
Do your own due diligence. And good luck.