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It's Time To Lever Up On Gold

Mar. 06, 2020 10:41 AM ETGLD, JNUG, NUGT, UGL20 Comments


  • The Fed's overnight repo auction was oversubscribed for the first time since the September 17, 2019 "repocalypse." A total $120B in liquidity was offered.
  • One hour and 15 minutes after the close of that auction, the Fed announced a 50bp rate cut, which will require it to hand out even more repo liquidity.
  • Combined open interest in gold on the COMEX continues to climb to new records, increasing the chances of a short squeeze on bullion banks.
  • The recent selloff in gold only took 2 days to completely retrace.
  • Conservative positions in UGL look tantalizing, but stay far away from leveraged mining funds.

By this time next year, I believe that gold is going to be above $2,000 an ounce, at least. From what I am seeing, the final blow-off top in the bond market is commencing. Gold is rising with it. The panic over coronavirus is shutting down the global economy, and even if this is only temporary, the weakest European banks are not in a situation to be able to handle it. When the first one falls, the bailouts and money printing will begin from central banks the world over, and gold will explode higher still. This is why I am long the ProShares Ultra Gold (UGL) as of market open March 5, and I advise my followers to be long this fund as well. Do not, however, go long leveraged mining funds like JNUG or NUGT or the triple leveraged gold fund (UGLD). These are too dangerous and cannot handle even short-term volatility. Below I explain this thesis in more detail.

Repo Explosion

March 3, 2020 was a crazy morning for me. As is my habit since the September 17th, 2019 “repocalypse” liquidity crisis that pushed overnight rights to 10%, I check the daily repo auction figures when they are published every morning on the New York Fed’s website. I found to my shock that the Federal Reserve provided more emergency liquidity on March 3 than it did even during the immediate aftermath of the September 17th repocalypse.

On March 3, a record $108.608 billion was submitted in overnight bids by repo market makers, $8.608 billion more than the Fed’s limit of $100 billion a day. That is the first time an overnight auction has been oversubscribed since the initial crisis. Plus, $70.95 billion in bids were submitted for the 14-day term repo limited to $20 billion, for a record grand total of $179.558 billion in bids and $120 billion in

This article was written by

Austrolib profile picture

I invest in the light of Austrian Business Cycle Theory and cover monetary trends for the purpose of timing the credit cycle. My marketplace service The End Game Investor helps subscribers manage the risks of, and profit from the ongoing fiscal and monetary crisis precipitated by the COVID-19 pandemic. I use gold, silver, and associated stocks and investment vehicles in a low-risk high-return setup.

Analyst’s Disclosure: I am/we are long GLD, UGL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (20)

Brian Cellars profile picture
Pretty incredible timing for the article, Mon. Mar.6, where GLD and UGL made their high and have been crashing since. The miners have been infinitely worse, so good call telling readers to stay out of them. Hope you had stop sells in place and bought this morning for a trade, sold and be safely on the sidelines again.
14 Mar. 2020
Austrolib, I've been doing a lot of reading to try to make sense of the sell off in mining shares and ran across your article. Thanks for writing it. Regarding the leveraged ETFs, one thing I've read from a number of people who follow the industry (e.g. Fred Hickey, Bill Fleckenstein) is that they believe these leveraged ETFs are causing a lot of the carnage. I thought this quote from Fleckenstein's Friday column was interesting:

"I think the mechanics of the miner ETFs are largely responsible for the incredible smashing that the underlying stocks have had, especially the 3x-leveraged ones, NUGT and JNUG, which were completely destroyed. The latter has fallen over 95% in the last two-and-a-half weeks, losing $2 billion in market cap, which equals $6 billion worth of liquidation."

If the above is true and this was mostly forced selling, I think (or hope) we could be looking at a meaningful bottom in the mining shares soon.
Austrolib profile picture
I warned not to touch the 3x funds. They are toxic. UGL is holding up ok and should do great once the margin calls are liquidated.
DaveG99 profile picture
I'm also baffled why GDX and its components - except for Barrick and Newmont are being ignored by institutional traders and investors at this point. It is as though the last $200 in POG did not happen. A gold reserve should be the same whether it is in situ (less the costs of production) or in a vault in London(or possibly not if you bought unallocated). Further, companies that have higher cash flow and earnings due to greater revenues rise in value. So what's different about this?
DB C00per profile picture
Tree huggers eating gold miners lunch. Market expects regulations and outright closures of operations in some cases. Not to mention potential reparations to "first nations" and what not.
alan shapiro profile picture
Excellent report. Appreciate your effort.
Could you expand upon the following?

"We’ll see if it holds, but still I wasn’t expecting it to be this quick. Gold stocks, however, are still wishy-washy and looking like they want to sell off at any excuse, so I will not be going long any leveraged mining ETFs."

The way I think about it is if GLD is headed up, then miners too will be headed up, especially with oil headed down as mining costs should fall. I agree the miners are risky bets, but if there's a sell-off while GLD continues to rise I'd be surprised by that. What makes you believe miners are headed down while the metal is headed up? Thanks.
DayRalio, I agree: my favorites are: NEM, AEM, GOLD & FNV.
Add PAAS for gold & silver exposure with the Gold/Silver Ratio now above 96! - mid 50s - 62 is the long- term average, so silver is really cheap to gold.
Austrolib profile picture
Yes I believe gold stocks will eventually break free. Until they do I advise against taking any position in specifically leveraged mining funds. GDX is OK. NUGT, JNUG, not so much.
Brian Cellars profile picture
Very good advice not to go long miners and especially leveraged miner ETFs. I'd also be keeping a tight stop on GLD and UGL now as then could take another hard tumble as they did the end of February.
I decided to put a tiny amount into the ETF suggested in the article in my Vanguard brokerage account. I was surprised to receive this message on Vanguard's site: "Buy orders are not permitted on leveraged and inverse products."
DB C00per profile picture
LOL. Vanguard don't do trash.
If you want to lever up on gold, buy Gold futures on NYMEX (GC contracts). Not these ripoff products issued by banks. There's been tons of articles (including on SA) explaining why those leveraged ETF tend to zero over time due to attrition as the underlying moves up and down. The only one to make money on this is the issuer as the product price withers away.
Other than that, I agree that gold is the big trade of the moment.
Abel+ profile picture
Same with Chase, neither leveraged or inverse. E*TRADE and Interactive Brokers, 0 problems. Regardless, there's nothing like options.
Abel+ profile picture
@DB C00per
Good point, not to mention Michael Burry's mention on ETFs..


The correlation across global markets are too high, this Feb/March correction hinted us just that. Although it will not head to a recession, this correction just warned us about the nature of ETFs.
JackWolf profile picture
Funny, but the biggest risk is the one never talked about and one that is accelerating. Furthermore, the process is irreversible. Good luck.
What risk is that?
doug5380 profile picture
As always thanks!
realestatewhidbey profile picture
If you hear about it here you were the last one to know.
Better late than never...I would rather have 60-70% of something, than 100% of nothing.
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