August 23, 2016
Short Gold and Silver
When I entered this business in August, 1980, there weren’t two people in a hundred who were bearish the Gold and Silver markets. Gold had already peaked earlier that year at $875, and Silver at $50, and both markets had backed off substantially by late summer when I entered the employ of Merrill Lynch. As I had zero knowledge of the commodity markets, and more importantly, how they actually worked, I naively assumed that all of the investors I was hired to prospect DID understand the markets…So…when EVERYBODY I talked to was of the opinion that both markets could only be going roaringly higher, I naturally assumed this MUST be the case…How could all those people be wrong? I mean, NOBODY, and I mean NOBODY, thought they were going down, much less that they would be doing so for almost 20 years.
I mention this simply because it has lately seemed obvious to me that Gold and Silver have now become virtually devoid of bearish sentiment…And while the bullish opinion/”logic” I hear in the precious metals is nothing like it was back in the early 1980’s, most recently, my very impartial “antennae” (I really NEVER care which way any market is going…I just want to be right) have led me to conclude that, once again, same as it was way it was back in the 1980’s…and 1990’s… nobody is really thinking these markets could be going down…Nobody is really thinking that all we’ve seen since January is a bear market rally…
AND I DO. I THINK THAT $1900 GOLD AND $50 SILVER BACK IN 2011 REPRESENTED (ONCE AGAIN) ONE OF THE BIGGEST BUBBLES EVER SEEN IN THE COMMODITY MARKETS…AND WITH VIRTUALLY EVERY BROKERAGE HOUSE ON THE PLANET AT THAT TIME SCREAMING, “BUY IT!”, I THINK IT IS LIKELY THAT WE STILL HAVE YEARS TO GO BEFORE EVERYBODY HAS BEEN LIQUIDATED OUT OF THAT TRADE…
I AM BEARISH GOLD AND SILVER BUT I AM FOCUSING ON SILVER…THROUGHOUT THE YEARS, I HAVE OBSERVED THAT SILVER (THE POOR MAN’S GOLD) TENDS TO GET MAJOR LEAGUE “OVERDONE” ON BOTH THE UP AND DOWN SIDES RELATIVE TO GOLD…THE RESULT BEING SILVER OFTEN HAS A LOT MORE VOLATILITY…AND LEVERAGE...THAN IN GOLD…ESPECIALLY IF YOU ARE USING OPTIONS…I HAVE SEEN MORE CRAZY MOVES IN THIS MARKET THAN ANY OTHER…EVEN AT PRICES SUBSTANTIALLY BELOW WHERE WE ARE NOW.
SILVER, NOW TRADING ABOUT $19.00, WAS DOWN AROUND $14.00 BACK IN JANUARY AND I AM MAKING THIS TRADE WITH THE BELIEF THAT LOW WILL BE TAKEN OUT.
Here are the charts…
First up…Who is long? Looks like everybody…And let’s get real…Back in January, with Silver at $14, they WEREN’T. Now Speculators are long in record numbers with the Commercials dead opposite them…
And do NOT think that just because Wheat hasn’t gone up YET that Commitments of Traders are not a valid tool…All those people who have been buyers this year are basically speculating that the world is falling apart…and that this shiny piece of metal is going to be a safe haven…In fact, this absurd fear drove Silver up almost $4.00 in the 7 trading days following the nonsense about the Brexit vote (FOUR DOLLARS?) potentially shattering the world economy…and in reality, just served to set the hook for all the last gasp buyers before they really slam Silver back DOWN…and HARD I think…and therefore, you WILL, I believe, see a massive reversal in the commitments charts in the next few months as all those specs find themselves losing big money.
The markets go up and down as traders buy and sell, getting in and getting out of positions…Open Interest (next chart) is a measure of how many traders are actually in a market…
Here’s one option I like here…You can buy more time or less time…As noted, these options are not cheap…but this is a 5000 ounce contract so $1 moves (not uncommon to see this in a single day) represent $5000 per futures contract…Not small change…
I started this last week and missed getting it out ahead of the recent drop…and then considered canning the idea…BUT, as I think the move is only just beginning…and I DO think this market can absolutely crash (I’ve seen it too many times, including one “little” day when it went from $11.00 to $7.00), so I am pushing this newsletter out today…And yes, this is expensive and this IS a short term trade…but from a risk-reward standpoint, I think it is definitely worth it…And I DO THINK WE COULD SEE $15.00 FAIRLY QUICKLY…IT’S JUST THE NATURE OF THIS MARKET.
And, for the record, I FULLY EXPECT TO SEE GOLD TAKE OUT THE $1000 MARK.
Not expecting ANY takers but do give me a call if you are interested…
All option prices in this newsletter include all fees and commissions.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Silver