February 28, 2020
People have been losing their minds
recently over the “forecasted” pullbacks in metals and miners. The
waste-of-space trolls are out in force. As I said just last week, “a dump in
stocks could weigh on metals and miners in the short-term.” Guess what? Stocks
just had their fastest decline in the past six days since December 1928. Given
the extent of that drop, why on earth do those in the precious metals and
miners space seem so shocked and confused? Time to put things into perspective.
Gold has rallied 9% since February 5th,
17% since November 12
th, 35% since May 2nd, and 45% since
August 16, 2018. By contrast, it has fallen just 3.8% from high to low since it
hit a 7-year high on Monday. Furthermore, the GLD ETF has actually closed up
for the past two days in row. Where is the fire? Everyone needs to take a step
back and look at the big picture, especially when they get emotional about
short-term reversals. No major support has been broken so far. Last week I
shared that the first level of support to watch is 1602-05, and below there,
1590. We haven’t even come close. Could we fall further? Sure. We could also go
straight back up to new highs.
The recent drop in stocks was triggered by
the FOMC minutes released on February 19, which cited concerns about “elevated
valuations” and the “taper” of their massive repo interventions beginning in
May. That was the day the S&P peaked. This stock market is a Ponzi scheme.
The only reason stocks have climbed since December 24
th, 2018 is
that the Fed’s 180 from rate hikes and balance sheet reduction to rate cuts and
balance sheet expansion was as fast, if not faster than any of QE 1, 2, or 3.
Is it so difficult to understand that stocks plummet on news that the Fed is
getting ready to take away the punchbowl? Especially when the world is
supposedly coming to an end due to the coronavirus?
So stocks dump when the liquidity flows
into the Ponzi scheme are scheduled to be reduced. What do you think will
happen when the Fed switches the spigots back on? The only questions that
matter are: when and at what level? It’s inevitable. What happens to stocks
then? The Ponzi scheme is back on track, and up we go. What do you think
happens to Gold, Silver, and the miners too? Patience. It’s like it is raining
buckets outside now, but you know it is going to stop and the sun will start
beaming again. We goldbugs should be used to enduring such pain before gain. We’ve
been waiting a long time for this rally. Only a break below key support levels
and a change in the trend to the downside warrants concern. We haven’t seen
either yet.
A quick word on Silver and the miners too.
Silver has fallen harder than Gold, but it
has still not broken the first key support level of 17.30-40 yet, although it
is perilously close to doing so. Below there is the prior low of 16.57. The
peak on February 20, 2019, at 16.20 is critical support. That said, we rallied
38% from the low of 14.35 last May and we’re still up 22% since then despite
the recent decline.
Most of the recent complaints are with
respect to the miners, but this is where perspective truly matters. GDX is still
above its February 4
th low of 27.77 less than a month ago. People
seem to forget that we shot up 13% in just five days to the peak of February 24
th.
All we have done since is give that back again. A new higher high was put in
place, and the trend remains up for now. We’re also still up 9% since November
and 41% since May. Support is at 27.70 and below there at ~25.
SILJ, my preferred trading vehicle in the
miners, got royally crushed this week, down 20% in four days! But we’re still
above the October low of 9.12. That said, if we break and close below 9.12, I
will likely take a step back and wait and see how this develops, knowing that
even if I miss the bottom, the upside when this does finally take off will be
beyond belief.
CONCLUSION
It’s been a tough week for us all, and the
pain may not be done yet. I still see the risk of the S&P falling to the
2600s before we’re done. Yet I do expect the Fed to ride to the rescue again
soon—the alternative is collapse, and it’s an election year. Once that happens,
I expect metals and miners to bottom out and rally to new highs. Precious
metals may even anticipate this outcome and rally ahead of the bottom in
stocks.
Also keep in mind that with the Fed
planning to cap bond yields should they ever rise to 2% or higher, there is an
asymmetric risk to the downside in real yields, which should also put a floor
under the metals.
Once again, we have to endure short-term
pain for long-term gain. Until then, watch those support levels.
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