On the heels of the Dow tumbling another 139 points, today a legendary short seller warned we will see crazy action when money starts pouring into the gold & silver complex.
By Bill Fleckenstein President Of Fleckenstein Capital
April 13 (King World News) – The market was slightly higher through midday and apparently for the last 16 years the day before the Good Friday holiday has been up. I was unaware of this until Fred Hickey told me, but I’m sure all the computers knew that…
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In the afternoon, however, more “progress” was made, as the market rolled over and was about 0.5% lower with 30 minutes to go, when I had to leave. So while the tape wasn’t buried in the afternoon, it didn’t bounce, which I consider a moral victory from a sanity standpoint.
Away from stocks, green paper was mixed, oil was flat, fixed income was higher, and the metals were initially higher, then lower, then closed unchanged.
A Fine Mess
The metals complex was particularly wild, as gyrations between the ETFs, the inverse ETFs, and the leveraged versions of the same precipitated more than their usual amount of chaos. Part of the reason could be because that there is a big rebalancing of the GDXJ coming up.
I am not going to go into all the gory details, because there will be plenty of stories written about that. The bottom line is that, with almost no money in the sector, the GDXJ already can’t function as it was designed to, and one of its biggest holdings is the GDX. You can just imagine what sort of crazy action we will see when money starts pouring into the metals complex down the road. My guess is, as hard as it was to be bullish on the sector over the last couple of years, hanging on to this stuff is going to be a real chore when the party gets wild.
But It Can Have a Nice Ring To It
That, however, is a problem for another day, even if it’s a nice one to have. Folks should just be prepared for absolutely wild volatility, as this underscores a point I’ve made many times before, which is that the noise in the metals is immense. Thus, most of the time when stock XYZ is behaving in an odd fashion it has little to do with the company and a lot to do with machinations amongst the ETFs.
Included below are four questions and answers from the Q&A’s with Bill Fleckenstein.
Bonus Q&A
Question: Good morning bill, do you like to see miners lead gold as far as price appreciation or does it matter in the scheme of the big picture? e.g. does appreciation in gold prices followed by appreciation in miners give less conviction/confirmation as opposed to miners rising in prices which is then followed by gold prices? generally what do you like to see to become more comfortable and perhaps increase your sizing with all other variables being equal? Thanks so much.
Answer from Fleck: “In the last group of years, the metals complex has done far better when miners have led, but there is no absolute reason why that must always be the case, it is just a useful guide. I like to see consistent reactions to news that I understand and a good chart pattern when pressing speculative positions, long or short.”
Question: What makes Jim Cramer an expert?
Answer from Fleck: “Nothing.”
Question: Pardon me for being an idiot but is there a reason why PAAS is up 5% today? I couldn’t find any news on it. If you have already answered this question, please disregard. Thanks for all you do….
Answer from Fleck: “As I have said many times (though usually on the downside), the random noise in this sector caused by ETFs is just huge. No reason at all, except ETF insanity.”
Question: Hi Bill, below is a very interesting article (in case you have not seen it) on how the GDXJ is now running into problems due to the size of the companies in the index. According to the story, Van Eck, which runs both GDX and GDXJ, is now funneling money into GDX when money comes into GDXJ because GDXJ is now an 18% holder of several index members. Seems like this is the classic “index tracking” issue you have been talking about. With 35% of GDX comprised of Barrick, Newmont, Goldcorp and Newcrest, it appears the GDXJ has gotten away from a proxy for the junior sector. How An ETF Gets Too Big For Its Index Ok so I have 1 observation and 1 question: Observation: I find it incredible that the GDXJ is having problems with only $3.3 billion of inflows since 1/1/2016 that it is has had to put 25% of its assets in 5 holdings that fall outside of its mandate. (I am assuming this means GDX and 4 intermediate to senior gold stocks.) Question: What do think are Van Eck’s options? Since it is very unlikely to close it off to new money, do you think it will do more of the same or will it open a slightly different new fund? Thanks
Answer from Fleck: “There isn’t any real market cap in this sector. When it finally gets really popular, the fireworks will be huge. It will be difficult to stay aboard the train, I suspect. I dislike both GDX and GDXJ. Van Eck will do whatever makes it the most money.”
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