On June 28, I published an interview with Rick Rule. We started with the significance of gold’s breakout above $1,400. Given that Rick said there wasn’t any—but that he believes gold is going much higher—his comments then are just as applicable to gold topping $1,500 now. But the thing that really stood out for me was his answer to my question (at the 12-minute mark) about how long short gold positions could hold out against higher prices. Rick said he thought a higher VIX would trigger short-covering.
For those new to the idea, gold shorts make promises to sell gold at lower prices in the future, thinking gold prices are sure to fall. It’s important to understand that these short sellers don’t actually have the gold they promise to sell. The plan is to buy gold when the contracts come due, at which time they think it will be even cheaper than their agreed-upon price.
But gold is rising this year. The longer the shorts wait to buy the gold they need to “cover” their contracts, the greater their losses. When they finally throw in the towel and cover—perhaps with the “help” of margin clerks—it will bring a large amount of forced buying to gold, regardless of price.
Here’s what Rick said:
The patience of margin clerks is in direct correlation with the VIX—the volatility index. If you see the VIX above 20, which I suspect you will in the next 90 days, you will see the patience that margin clerks exhibit with regard to short being really, really, really contracted. Ironically, I don’t think you’ll see short-covering decisions being made so much as functions of the momentum or technical in gold, as you will the perceived risks in the big financial institutions as exhibited by the VIX.
Well, last week we saw the VIX hit 24.59. That was its highest level since last December’s meltdown on Wall Street took the VIX to 36.20. But last December saw sustained high volatility, whereas last week’s flash above 20 was a brief intraday move on August 5.
I’m not sure many speculators short gold got margin calls that afternoon—but I think a lot more will if volatility remains high and the VIX stays over 20 for a couple weeks, as it did last December.
My friend Doug Casey always told me to “make volatility your friend.” That looks to be exactly what’s happening this year.
In this context, I found a MarketWatchreport on the many sources of higher volatility in the near term to be quite striking. From the new US tariffs taking effect on September 1 to the next ECB and FOMC meetings a couple weeks later, to a possible hard Brexit in late October, there’s a lot on the financial calendar that could send broader markets tumbling and the VIX higher. And that could trigger the short-covering Rick and I spoke of.
Short-covering at a time when both fear and greed are already driving gold higher could result in another 2011-style peak in gold and silver prices.
Honestly, I hope things don’t play out this way. A slower, steadier rise over many years would be more stable and durable. But Mr. Market doesn’t care what I want. If he’s going to go nuts on precious metals, that’s what he’s going to do. I can’t stop him.
But I can be ready to profit if gold is about to soar—and I am.
And I can buy more great gold and silver stocks should we be lucky enough to get a normal, healthy correction before gold’s next big move—which I certainly plan to do.
I want to stress that I’m not predicting that gold will keep rocketing up and hit $2,000 by the end of 2019. I do think that’s possible, and that gold will sell for much more than $2,000 per ounce before the end of this cycle. But the peak of 2011 took almost three years to form, with lots of ups and downs along the way. History may not repeat, but it does show us what’s possible, if not likely.
This brings us to the best news of all…
I don’t need gold to rise at all to make a heap of money.
The volatility and higher precious-metals prices we’ve already seen are going to greatly enhance the bottom lines of the better mining companies this quarter.
The companies advancing known deposits toward production will get a tailwind from metals prices well above those in their feasibility studies.
Even exploration companies with nothing but a geologist’s dream to their names would benefit if prices stabilize, bringing much-needed profitability to the sector—and speculative capital for exploration.
Remember that mining is, by its nature, a self-depleting business. If the industry doesn’t step up and pay for exploration, there won’t be new discoveries, and it will mine itself out of existence. And that’s not going to happen.
This is why I say that if gold goes nowhere for the rest of the year, I still expect to do quite well. Whether in exploration, development, or production, by picking companies that could do well at lower gold prices, I expect excellent gains this year at current prices.
But if gold and silver do leap again, I’m ready for that too.
Monday, August 12, 2:32am, EDT, 2019