Gold Miners Backtest
Use It Or Ignore It?
Last week I got a report of a Nuclear Options Subscriber who made 40K in profits based on our recent posts and Emergency Broadcasts on Gold and Gold Mining Shares. Also last week the outstanding You Got This Trading Substack posted a backtest of Gold Mining Shares, with a cautionary note for existing holders. This post examines the implications of this backtest for subscribers sitting on big gains. And also ideas for what to do if you missed the big move.
Readers know that at Nuclear Option we are very skeptical of backtests in general and NEVER use them to develop new trading strategies. The one valid Use Case that we see for backtests is this: to invalidate a trading strategy that looks good in theory but might be a big loser in reality. A negative backtest forces us to reevaluate the strategy, look for something we missed, and and shut it down or better yet, prevent it from going live in the first place. Since we are sitting on big profits in miners, and taking profits is ALWAYS a good idea, it makes sense to look at a backtest for an additional factor in deciding when to take profits.
Here is the critical excerpt from the You Got This Trading Analysis:
The momentum on these things [ed: GDX Miners ETF] is pretty remarkable. I had to go into the weekly charts to be able to kind of find something useful here for us. I’ve marked the only other 2 times I can find since this ETF started trading back in 2006 when momentum was like this. Both times saw immediate drawdowns over the next 6 months or so of 40+%. It’s time to wrap it up over there if you are pressing gold miners or you are a gold bug. Trees don’t grow to the sky and greedy pigs get slaughtered.
Readers of a certain age know all about these two episodes in the backtest and this passage will usually trigger either fond memories of trades that haven’t happened for a long time, or Post Traumatic Stress, depending on how they traded it. Yours truly went into both of these episodes at the max position limit my clearing firm would let me get away with, took in huge profits, and got out after the first big drawdown from the high. Yes it was a big hit each time when the market reversed, but I was sitting on a big profit cushion, and more importantly, I expected it.
If you are even older than traders in this backtest period (like me) you also recall that these moves were microscopic compared to the huge moves in Gold, Silver and Miners in the late 1970s. We didn't have ETFs for precious metals back then so traders were forced into the extremely dangerous futures markets to enjoy the big moves, if they survived.
What was the big difference back in the 1970s? Inflation. High inflation is really difficult to get started, and it took the Vietnam War, the Space Program and the War On Poverty to get the 1970s inflation fire started. The problem is, once inflation ignites, it is even harder to stop than it was to start. Right now, we aren’t even in the first inning of the coming inflation. We are sitting in the stands, drinking beer and listening to the National Anthem. First inning starts when the Fed INCREASES rates in a desperate attempt to stop inflation. Second inning is when they have to increase them again. Third inning is when they announce “temporary” price controls. Fourth inning is when price controls fail and are discretely forgotten. Fifth inning is social unrest. Sixth inning is the crackdown against the social unrest. You get the picture.
So, should you take profits based on the GDX backtest?
At Nuclear Option, we usually believe that it is ALWAYS ALWAYS ALWAYS a good idea to take profits. The old floor trader saying is, “No One Ever Went Broke Making Money.”
With this advice in mind, and in view of the backtest results our current positioning is this :
Take All Of The Money We Can Afford To Lose And Put It Into Gold Miner/Silver/Uranium Call Options
Turn Off All Risk Controls
Add To the Position On Declines
Have Dramamine Pills Ready, We Will Need Them
Future posts will look at how to manage the chaos. The key factor is to avoid being blown out before we see hit the Top In Gold.
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Disclaimer : All Content on the Nuclear Option Substack is for Education and Information Purposes only. It does not a soliciatation or recommendation to buy or sell any security. Before trading, consult with your Professional Financial Advisor and read the booklet Characteristics and Risks of Standardized Options Contracts, available from the Options Clearing Corporation.