Notes From the Drawdown
Still Bullish, Still Bleeding
The boys after today
Is this the end of the gold and miner cycle?
Of course not. An exogenous event has rattled stocks and spooked retail sentiment, and now people on Twitter are panicking about fuel costs and inflation, when energy is maybe 10–30% of a miner’s OPEX. Double it. You’re still printing huge margins at these prices.
A correction was warranted. Sentiment was frothy, and a wave of retail came into the trade in January/February via the most illiquid garbage they could find. That unwind was going to happen one way or another, and as ever, all boats rise and all boats sink. Your Agnico Eagle won’t save you in a correction, but at least there’s liquidity to get out.
I had just started doing work on the Australian names when this hit, and they’ve fallen comparatively harder, which to me screams value. Vault in particular, an old flame, looks poised to return to the portfolio.
My read is that we’re very close to an intermediate bottom. What concerns me is that support levels got blown through cleanly on the way down. I’m not a technical analyst, but in my experience, this kind of sell-off takes time to repair, even if we get a de-escalation we won't just snap back to a roaring bull market, expect months of consolidation. In that scenario, M&A becomes the thing to watch. A wave of deals would signal that the majors are ready to deploy capital and the next leg of the cycle is underway. No M&A? Then the cycle simply runs longer. Either way, the thesis holds, the timeline just shifts.
A running observation of mine from talking to brokers and management teams: doing deals in a raging bull market is genuinely hard. The VWAP keeps gapping up, you agreed on terms two weeks ago, and now the target feels they are being lowballed before the ink is dry. Strange, perhaps, you'd think asset quality is what matters, not where the stock is trading on any given Tuesday — but that's the reality. Which means a sideways consolidation, which is my base case for the next quarter or so, could be a surprisingly constructive environment for M&A.
This is just how gold and miner cycles work. The question I keep asking myself: have the fundamental reasons I bought these stocks changed? No. Full stop.
I knew going in that staying this long means suffering large drawdowns. Should I have lightened up? Maybe. Earlier this year I had convinced myself that post-Beaver Creek would be the right moment to trim, all the news flow gets pumped into that conference, but we saw nothing but strong performance post beaver. Now everyone wants to crowbar in a “told you PDAC was frothy.” Sure. But you’ve been calling frothy for eight months. Survivorship bias with a megaphone.
We’re in a bull market. It gets frothy. Retail joins in. We get a sharp wash. And then, if the cycle holds, we set up for a more sustainable leg higher. The capital markets cycle is still well advanced and I’m not seeing large warning signals on the horizon. I’m probably high on my own supply, but after thinking it through yesterday, this is where I land.
A short geopolitical note.
My tweet could have been worded better. The main point was simple: nobody is served by a closed Suez, and we have not seen a closed Suez. Twenty million barrels a day flow through there; around ten are impacted as of now. Iranian oil is still moving, ships are getting out, and certain owners are still transiting albeit slowly, but it’s happening.
My broader point is that at some stage this becomes too painful for the global economy and for Washington, and we get some form of de-escalation and resumption. I think that moment is very close, possibly as soon as this Sunday. The US is not looking for a kinetic war. The last thing they want is a tanker war like the 1980s.
The market was completely asleep to the oil risk for weeks, and honestly, that’s on me too. Insurance was sitting there cheap and I didn’t buy it. Stupid. Then the CNBC anchors woke up and suddenly it’s wall-to-wall catastrophism. Gold held reasonably well while miners were gapping down daily, so I held off selling and then both got slaughtered simultaneously. As Sinatra put it best: “that’s life”. If you can’t stand the heat get out of the kitchen.
When my entire Twitter feed and every CNBC anchor is screaming “the end is nigh” and “this will take five years to fix” it’s worth considering the other side of that trade. Is that long gold? I’m not sure it is at all, probably short some oil and thermal coal producers with puts a few months out. But the sentiment is very lopsided, and it’s worth asking why because as I wrote, nobody actually wants the Suez closed and oil at the moon.
Walk through the strategic interests: the US doesn’t want high oil prices, China doesn’t, India doesn’t, the Gulf states don’t, and even Iran’s primary concern is getting their barrels out to China and India, not a prolonged closure that chokes their own revenue. Russia probably benefits at the margin, but that’s about it. No serious strategic actor wants that strait shut for any meaningful length of time which was my main point.
Meanwhile, the Iranians have been taking a sustained hammering for over two weeks. Their navy is gutted, their leadership decimated, their proxy network dismantled. The US might sustain another week or two of bombardment, but a ground invasion is simply not on the table, politically or militarily. This is a lawn-mowing operation, the same playbook Israel ran against Hezbollah and Gaza on rolling cycles for years. Support for the Gaza campaign has already eroded significantly inside Israel; boots on the ground in Iran would be political suicide, full stop. Some US SOF operations alongside the Israelis, perhaps. Anything beyond that I consider effectively impossible.
The inversion here is that Trump thought grabbing Maduro was cool, so why not go further, “let’s do Iran boys” 100 dollar oil? “I was expecting 150 by now.” The long term upside of actually “controlling” the Strait of Hormuz is so great that planting troops on the islands to secure it becomes tempting. This scenario and thinking cannot be entirely ruled out but I am not his shrink, just trying to read some tea leaves.
That said, there is a notable absence of attacks on energy infrastructure, which would be the rational move if the objective were maximum pain and regime change from the sky. The current Iranian state would likely collapse if the US went full tilt, attacking energy infra for example. This has not happened. Why? Because they are not going for regime change, and they are not looking for 200 dollar oil. Trump was seemingly very unhappy when Israel struck Iranian oil production facilities yesterday, that tells you something about where the ceiling is.
So what comes next? De escalation, and probably sooner than the market thinks. They are not going to let oil go to $200. People need to stop doomposting as though Mad Max is forty eight hours away from becoming reality.
Just had to hammer this out, more commentary to follow, stay frosty.