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February 24, 2020 | Gold’s on a Tear. Worried About Correction? I Have an Idea…

Lobo Tiggre, aka Louis James, is the founder and CEO of Louis James LLC, and the principal analyst and editor of the Independent Speculator. He researched and recommended speculative opportunities in Casey Research publications from 2004 to 2018, writing under the name “Louis James.” While with Casey Research, he learned the ins and outs of resource speculation from the legendary speculator Doug Casey. Although frequently mistaken for one, Mr. Tiggre is not a professional geologist. However, his long tutelage under world-class geologists, writers, and investors resulted in an exceptional track record. The average of the yearly gains published for the flagship Casey publication, the International Speculator, was 18.5% per year during Tiggre’s time with the publication. A fully transparent, documented, and verifiable track record is a central feature of IndependentSpeculator.com services going forward. Another key feature is that Mr. Tiggre will put his own money into the speculations he writes about, so his readers will always know he has “skin in the game” with them

Gold shot up to within kissing distance of $1,700 this morning. I wish it were for different reasons, but it is what it is, and we have to ask what’s next. And that means asking if gold might be due for a correction.

I suspect that most people would rather hear me make clever-sounding arguments for why gold has to shoot straight up to $1,800, $2,000, and beyond. That’s certainly possible. And it’s true that I do think we’ll get there…but I doubt we’ll get to $2,000 gold without meaningful correction along the way.

It’s not my job to be a cheerleader.

I’m here to offer you valuable guidance that helps you make money—in the hope that to the degree I do, I earn your business in the future.

I want that understood up front because, with gold up $130 in the last three weeks, we risk a lot if we fail to consider the possibility of a correction, what it might look like, and what to do.

Let’s take that one piece at a time…

 

Will Gold Correct?

Before I answer, I want to say that with new COVID-19 epicenters shaping up in South Korea, Iran, and Italy, it’s possible that gold will go on a screaming tear this week. I am not predicting this. I’m not expecting it. But if fear really grips investors around the world, it would be absolutely no surprise to see gold leap another $100 per ounce in the days ahead. Maybe more.

That said, nothing goes straight up forever. Even if the overall trend remains upward—which I do expect—of course there will be retreats along the way. Whether it’s in the next weeks or months, there will be some correction ahead.

However, it’s not certain that we’ll actually see the 10% retreat that is the accepted definition of a market correction.

That would imply a retreat down to about the $1,500 level. That’s certainly easy to imagine—we were just there in late December.

Remember that when gold broke out of its multi-year prison in the $1,300 range and rose above $1,400, it never corrected 10% before heading higher again. After gold broke above $1,500 last summer, it shed a good $100 per ounce by last fall, but that never amounted to a 10% decline.

The last 10% correction in gold was during the summer of 2018—before the Powell Pivot ushered in a new phase of easy money in the US.

It’s simply not the same market it was before.

 

What Would a Correction Look Like?

With the COVID-19 scare roiling global markets, I think it’s unlikely that the easy-money spigots will do anything but remain wide open over the months ahead. There is no question in my mind that balance sheet expansion and negative (real or nominal) rates maintained by the Fed, the ECB, and other major central banks are the most powerful force driving gold prices since 2019. And the easy-money “pedal to the metal” this summer should prop gold up at exactly the time we’d typically expect to see it correct.

So no, I don’t actually expect a major correction.

My default expectation is a period of largely sideways volatility over this summer with some slump in gold prices, but I wouldn’t bet on gold dropping below $1,500.

I wouldn’t be at all surprised to see it stay above $1,550… and it might even hold the $1,600 line.

Part of me almost hopes I’m wrong. I’ve got some great stocks on my Shopping List that I would love to have a chance to buy at much cheaper prices.

 

What to Do?

As far as the basics go, I don’t think anything I plan to do will surprise you:

  • If gold keeps rising, I’m not chasing anything. I’m waiting for the next correction and making decisions on current value propositions at that time.
  • If gold retreats, I will happily place stink bids well below market on the stocks atop my shopping list.
  • I may just add to my stash of silver bullion on the next dip, as it represents a better bargain than gold at this point.
  • I will not be buying any energy or industrial metals stocks until I see the global economy turning upward.
  • I’m going to hold my uranium stocks, because I’m happy with my positions and I think uranium will be the one energy/industrial mineral that marches to the beat of a different drummer this year.
  • I’m implementing my Upside Maximizer strategy to lock in my big wins, in case gold does retreat sharply.

 

Gold Insurance

I have another idea for you. Back in my Casey days, we had to find ways for our many gold bug readers to make money while gold was suffering its prolonged bear market. Apart from participating in dirt-cheap private placements, the most successful strategy we employed was something we called “gold Insurance.”

This was done via puts on the SPDR Gold Shares ETF (GLD). (A put is an option that gives you the right—but not the obligation—to sell something at a set price in the future. It’s the financial inverse of a call option.)

The key was that when gold would rally sharply, out-of-the-money puts would get really cheap.

If gold kept going up, we dropped our options and lost a small amount. That was like paying for insurance. But if the rally failed and gold dropped well below our put’s price, we’d be able to make money selling GLD at a price higher than current market. That would be like the insurance paying off because something bad had happened. In practice, it was easy to exit the put trade at a handsome profit before expiry, rather than going through with the buying and selling of the GLD shares.

I no longer have access to track-record data from my former employment, so I can’t quote any actual results for you. If memory serves, most of these trades were highly profitable—on the order of a double. I think we got one wrong and lost money on the put—but we didn’t mind, because it meant that gold and our gold stocks were rising.

Now, I know that many readers don’t feel comfortable trading call and put options. I’m not planning to sell any puts myself, as I’m highly confident of where gold is going over the next year or two. I’m happy to ride out the volatility and just buy more great stocks if I should be lucky enough to have a chance to do so at lower prices.

But for any of you who are worried that gold has risen too far or too fast, this put strategy can be a way to take out insurance against a possible sudden reversal.

That’s my take,

 

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February 24th, 2020

Posted In: Louis James

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