Upside for Gold Prices
Two months ago, I offered Profit Confidential readers my “Longshot Pick of 2016” and gold price analysis based on a combination of technical and fundamental analyses of my favorite gold mining stock exchange-traded fund (ETF), the Direxion Daily Jr Gld Mnrs Bull 3X ETF (NYSEArca:JNUG).
Here is the updated chart with notes as of close on Friday, March 18:
Chart courtesy of TC2000.com
Whatta ride! Even if technical analysis is not your thing, you have to notice that the volatility here exceeds what you would expect even from a derivative instrument specifically engineered with a triple (300%) multiplier to the GDX, the leading senior gold mining index.
The explanation? No, your eyes are not deceiving you. The chart is crazy because the price action is crazy. Gold mines used to be dull and boring. No longer. Now they are caught up in the invisible and often-denied “gold wars” that are taking place daily in markets around the world. (A topic I have covered in prior essays as the central planners impose their clandestine regime of “financial repression” on their host countries, principally to bury mistakes that they themselves made. Attempted suppression of the PM complex is a “de rigueur” component of that program. See, for example, “Economic Collapse: This Growing Trend Should Terrify Every American.”)
Let’s Play Devil’s Advocate…
When gold was off everyone’s radar, this writer was one of the only scribes in town saying positive things about the yellow metal and singing its virtues. Today, when everyone and their dog and cat are suddenly gold bulls (even CNBC is doing occasional pro-gold editorials!) I will obligingly take the contrarian side and suggest reasons why gold remains a longer-term play and why investors should not get too excited, too soon:
The central planners, representing literally the richest and most powerful players on the planet, are still of the view that gold is not for the hoi polloi, a.k.a. the common folk. The importance of this cannot be understated. Like Pharaoh in the biblical story of the Exodus, “their hearts have been hardened” and it will take more than rhetoric to move them—locusts, maybe, but not just words.
Despite the daily inventory stats on Comex being watched more closely than “The Donald,” and despite many near misses (at least on paper), there has been no obvious “delivery failure” in New York or in London—at least not yet. So the “paper gold” biz is alive and well and very, very dangerous to the longs.
This (last paragraph) was never clearer than the nonsense earlier this month when, after touching $1,280 post-Draghi—but before Yellen—gold took a $50.00 swan dive to $1,230 an ounce. Even better, the so-called commercials (who had pre-broadcast their bearish intentions in the COT reports at the time) pulled a move similar to that classic scene in Billy Jack where Tom Laughlin first tells the villain precisely the spot where his face-kick will land…and then lands the kick in that exact spot! Here, the big players warned you in advance that their shorts would soon be falling from the skies like rain, and indeed, they were, at least for a few sessions.
The common wisdom is that the commercial traders wait until the speculators become overly enthusiastic on the long side, and then they use their ability to act as a group with a single purpose—plus their ability to instantly create/short “paper gold” contracts insanely in excess of the actual amount of physical bullion available for trading—to fleece those aforesaid speculators. This odd tale could be dismissed as mere market mythology were it not for the fact that it tends to happen at least once a month, like clockwork, sometimes even more often than that. (For more on these reports, see “COT Reports.”)
The physical-only ABX opened (a so-called “soft launch”) but London and New York are still in business, still selling fresh dreams and dancing unicorns (i.e., paper gold) to traders.
The latest “China inside source” says their SGE gold fix launches April 19, even though it is already a full year late, has missed two prior launch dates, and is burning cash every day it sits idle. (Source: “China Ready to Launch SGE Fix,” Bullion Desk, February 25, 2016.) A cynic might argue that the Chinese, currently up to their necks in alligators, may be using the fix as a “bargaining chip” yet again.
Maybe something like, “Leave us alone in the South China Sea and we will accidentally fry a circuit board and have to delay the launch of the fix another year, until 2017.” Are you laughing? If this pops up as an actual headline in the weeks ahead, you won’t be!
(On the other hand, and I have covered this in detail in prior essays, the day the SGE fix launches will mark the beginning of the end of the “paper gold insanity” that the Western power brokers have used to dramatically underprice gold within the confines of their financial repression schemes. And no, I am not calling for $9,000 gold; I never have. China is looking for gold to be a servant, not a master. The new fix, plus China’s estimated massive, covert gold holdings—estimated to be 20X what the country is admitting to—will allow the PBOC (People’s Bank of China) to set a stable and conservative gold price that everyone can live with. My expectation is a gradual rise to the $2,500 area.)
Speaking of China, while the best “inside” intel assures us that China will indeed seek to bring gold back into the world monetary system, the timing is wobbly. It could be tomorrow—probably the only thing I can think of that could “pop” gold to $1,000 overnight—or it could be as late as 2049, the 100th anniversary of Mao’s victory. Or it could be literally anywhere in between those dates! So, you have to figure, if you don’t get maximum traction from your gold plays, at least your great-grandkids will.
A lot of senior mines were stripped of their hi-grade ore between 2011 and 2015 just so the owners could stay in business and not have to undergo the high cost of mothballing. This means that even if the gold price rises significantly, the “good stuff” is no longer there. Similarly, a lot of junior mines conducted fundraising at distress prices just to stay alive. When the long-term shareholders figure this out and grasp the extent of the dilution, the reaction will not be pretty.
The move on the chart so far has been slightly curved or parabolic and, as any good TA analyst will tell you, such moves are not sustainable over time. To meet our goal of a true “longshot” pick (with, as explained in the original article, a potential 75X gain to the old high) this uptrend line desperately needs to convert to a more gradual 45-degree slope.
Finally, and some of you may have encountered this already, JNUG may be the highest-priced stock you will encounter in your lifetime, which most (if not all) brokers will not accept for margin. The explanation usually is “too volatile.” But for investors who consider margin part of their lifeblood, part of their investing DNA, this quirk may make this oddball stock/ETF much more “expensive” to trade than expected.
Behind the Scenes a Secret War Rages…
Short-term, a major behind-the-scenes battle is taking place at the $1,250 gold price level. Coincidentally, this is the key price level that most experts believe to be the inflection point for gold and, correspondingly, the mines. Above that point, the bull is back. Below that point, the gold wars grind on. It’s that simple.
(Hard-core TA fans might add that $1,250 is the top of the range bounded at the low end by $1,180—in the event of a free-fall through $1,250, even a temporary one, $1,180 would be expected to offer drop-dead support. A number you will often see mentioned on the opinion sites, $1,200 has no real TA weight but does serve as a “handle” for psychological support only.)
What’s also interesting is that as we move into the spring, we are seeing reports from multiple sources that investors are moving into precious metal ETFs with more vigor than at anytime since 2011.
According to the way these funds are designed, this in turn requires the fund managers to purchase silver and/or gold to backstop these funds and rebalance the books each day. One small problem, though—we have anecdotal evidence that the PM markets are now so “tight” (after four years of artificially “forced” pricing) that simply not enough physical metal exists on the market to cover these ongoing new unit purchases.
In fact, this past weekend, Eric Sprott—one of the most experienced and respected precious metal traders on the planet—specifically opined that he considers these alleged purchases highly suspect and suggested that “all they probably have is a contract from someone for the metal at some point in the future.” Should anyone ever actually try to collect on such a contract, said Sprott, fireworks would result. (Source: “Interview with Eric Sprott,” SilverDoctors, March 20, 2016.)
And here is something else to chew on. If you look really closely at the chart I provided at the beginning of this article, you will see that as the price of JNUG rose from January to March, the color of the bars on the chart changed from green to black. This indicates that, even as the price was headed higher and higher, there were, on average, more sellers than buyers in the trade; that is, buyers who got in at lower prices had no core confidence in the move and were cashing out.
This phenomenon is not unique to JNUG! If you were to take the time to look at dozens of gold stock charts (which, in fact, I did), you would see the very same thing—as mining share prices rise, sellers are taking the money…and running.
Overall, this lack of conviction in the gold stock rally, the feeling that interest in gold is merely a temporary spike, is very bullish. If gold consolidates without dropping/correcting and then continues to move higher, a lot of traders will be in dire anguish and will rush back in to catch the rest of the move before the proverbial train leaves the station without them. Overall, it’s a situation worth watching.
The Bottom Line on JNUG?
Bottom line: In an era of ZIRPs (zero interest rate policies) and NIRPs (negative interest rate policies), we are only two months into this oddball play and frankly, we are not doing too badly. (It could be worse; you could be a bond buyer in Europe picking up bonds that are guaranteed in writing to return less capital to you than you invested!)
As gold continues to creep back into the public asylum that we unselfconsciously call “the financial markets,” the pick should, I think, continue to produce very significant gains in the months ahead.