Another Labor Day has come and gone, and I sit here in the back of my boat
typing yet another rambling, rancorous recount of forty-one years covering
the financial markets, and I have to tell you—I am depressed.
Don't get me wrong; this summer was yet another magnificent series of
forays into northern Georgian Bay, and despite fierce forest fires and
terribly dry conditions, there was just so much to explore that I come away
damning Mother Nature for making Canadian summers so short.
Despite that, I look at the global fiscal situation and am constantly
amazed that the world's stock exchanges remain elevated. What is even more
puzzling is that the only market celebrities left that are able to show their
faces on CNBC these days are the thirty-something permabulls who forge ahead
buying any and all dips because "the Fed has our back," and who
have never experienced crashes even vaguely resembling 1987, 1998, 2001, or
2008. All of the old stock market "gurus," like Robert Farrell or
David Stovall, have moved along and even the more recent superstars, like
David Einhorn or Doug Kass, are hiding. Truly smart, experienced managers are
being left behind in the performance race due to their unwillingness to
ignore history in terms of both valuation and risk. Poor Dennis Gartman has
flip-flopped from bull to bear to bull no fewer than a dozen times since
2008, each time admitting his errors but failing to explain why he
keeps getting whipsawed.
As I explained a few weeks ago, we all look at the same data and read all
the same headlines, all failing en masse to accept that the fuzzy-cheeked
kids buying stocks on margin day in and day out are actually the "smart
money." With their thirty-something brethren manning the computer
terminals, they are seen using trained algobots to decipher all the patterns
and analyze all the word clouds before launching microbursts of buy orders
through microwave transmission systems many nanoseconds faster than anything
even remotely similar to the "Quotron" order execution terminals of
the 1970s and 1980s. So when I see the S&P down 3% with an hour of
trading left and leave for the day thinking that there is simply no way any
human trader would step into a market this bad, my jaw drops through the
floorboards when I see on the news that a "Late Rally Saves
Stocks." Therein lies the source of my angst (and anger).
Last Friday's COT report has now been the focus of more than fifty
breathless commentaries, complete with table-pounding and cymbal-clashing, as
the anticipation of a proctologically challenging short squeeze resembles a
"visions of sugar plums dancing in their heads" type of
expectational nirvana. Yes, it was noteworthy in that in the futures and options
portion, the Commercials are actually net long silver for the first time I
can ever recall. They are also pretty close in gold, creating one of the most
powerfully bullish set ups since the COT was introduced in 1986.
However, that was before the "machines" took over the trading
floors. What I think we are going to get is a retest of the August 16
capitulation lows, both precipitated and engineered by Primary Driver #1
(algobots) at the prompting of Primary Driver #2 (Sovereigns and Central Bankers).
You see, this type of "trading action"is about as unnatural
verging on the perverse as I have ever experienced. There is
indisputable evidence that conditions similar to December 2015 have arrived,
but the defining difference is that while the Commercials and the Large
Speculators are still in battle, the market is still reacting to external
factors rather than the bullish COT. It is beyond anything I have ever
studied in all my years studying the back pages of the Wall Street Journal
and Barron's Market Lab section on a Sunday afternoon, while listening
to Zeppelin (70s) and Supertramp (80s) and Nirvana (90s).
The maddening element in analyzing price action in gold and silver lies
within the realm of consistency, which is totally absent. The same applies to
stocks and bonds, where risk premiums should be skyrocketing due to the
likelihood of default, given the debt loads associated with stock buybacks
and, in the case of governments, the inability of the populace to generate
enough tax revenue to meet interest payments.
I usually include charts in my missives because they provide a visual
canvas upon which the analytical painting gains substance and form and allows
my readers to glean a sense of purpose in the assessment of the next
direction of whichever market I am viewing. However, irrespective of the
identity of the perpetrator, someone or something is influencing the
dollar-based prices of gold and silver.
In light of this, charts remain meaningless and ineffectual.
Head-and-shoulders, cup-and-saucer, gravestone dojis, hanging drunkards, and
whatever other technical formation, I absolutely refuse to make investment
decisions on their interpretations. In this day and age, it is the double
drivers of technology (algobots) and government (interventions) that have, as
their sole mission, the protection of the reserve-currency-status of the U.S.
dollar. This directive is indelibly etched into every facet of financial
market warfare by the U.S., while combatting it remains the sole mission of
Russia and China and a vast majority if the Islamic world.
Integral to all of this is the necessity of keeping a stranglehold on gold
and silver prices while juggling the stock and bond markets like a one-eyed
circus clown to maintain the status quo of how international money flows in
favor of the Americans. Specifically, it does not matter whether the
Commercials are long or short, or whether Large Speculators have amassed a
short position, the notional amount of which is larger than total global mine
production for the past year. The algobots simply wag the dog (physical gold
price) by controlling the tail (futures) under the full blessing of
government regulators and exchange officials.
The COT report began in 1986, and in the entire history of this report,
there has never been an occasion when the Commercials were net long
gold. Since they represent the bullion producers (hence the term
"bullion bank"), it is an outrageously bullish development.
However, unless the algos are in sync, and unless the sovereign market makers
are OK with it, the power of this setup is going to be conflicted by the two
primary drivers. I want to see a three-day close above $1,220, with
persistently declining open interest with the next three COT reports,
indicating that the algobots (Large Specs) are running for cover and capitulating.
Then and only then will I place a tentative and very swollen toe back
into the precious metals waters.
I mentioned Western Uranium Corp. (WUC:CSE; WSTRF:OTCQX) and Aben Resources
Ltd. (ABN:TSX.V; ABNAF:OTCQB) in recent commentaries, with the former
hitting a 52-week high at $1.84 while the latter has retraced from the $0.38
level to today's low of $0.28. I continue to accumulate ABN on weakness and
am looking for similar opportunities for WUC.
While ABN is a drill-hole play with an extremely high-risk/high-reward
profile, WUC is a value play, with a market cap at 1.23% of the in-ground
value of seventy-five million pounds of uranium (@$26.30/lb.) and thirty-five
million pounds of vanadium (@$18.60/lb.). The combined uranium/vanadium
portfolio of assets is worth US$2.62 billion, versus the current $32.3
million market value of the shares (which seems somewhat out of whack).
The pullback in ABN is related to the length of time that has passed since
the August 10 announcement of 62.4 g/t Au over 6 meters in the first hole.
Tremendous volumes have passed through the ABN turnstiles (62,272,372 shares)
since the discovery was announced, and all of the chatrooms are rife with the
usual pro-con banter that typically accompanies exploration plays but which
usually take on the distinctive odor of a horse paddock. As I wrote about a
few weeks back, I had great success in the Golden Triangle with Stikine back
in 1989 with the Eskay Creek discovery, so at a $33 million market cap, there
is a great deal of upside should the North Boundary Zone become part of, or
secondary to, the new South Boundary Zone, where three holes intersected
"quartz-sulfide veins containing abundant pyrite and copper
(chalcopyrite) mineralization."However, the trading natives are restless
and without the usual dosages of Ritalin (drill results) to settle them down,
the traders will be as nervous as a cat in a room full of rocking chairs.
I have been reading blog after blog chortling on and on about September's
reputation as the best month of the year for gold and silver and the worst
for stocks, but once again I remind you that seasonality trades have been and
will continue to be divorcee-makers, while the algobots and central bank
desks are in full operation and control. We have the most bullish setup in
nearly two decades for the PMs, and with seasonality and COT structures
positive, yet gold and silver continue to have great difficulty in attracting
interest.
By contrast, in looking at the NYSE Advance-Decline Line (A/D line) year
to date, it is apparent that the ETFs now run the market, as "passive
investing"is the only possible explanation for an A/D line so perfectly
symmetrical with stock prices. In a normal, non-manipulated market, one sees
numerous divergences over a year of trading, a signal that money is flowing
in or out of stocks. In fact, one of the great sell signals I used to watch
out for was an big up-move in the stock market that would go unconfirmed by a
failure to do the same for the A/D line. Legendary Robert Farrell's Rule #7
is "Markets are strongest when they are broad and weakest when they are
narrow,"and while many like to use the FANG stocks'impact on the
averages as an example of a narrow market, that A/D line shown above looks
superb. Conclusion: Don't be too confident in September rewarding the bears.
My model portfolio is 65% invested today, with 50% in gold, silver, and a
basket of the juniors (Stakeholder Gold Corp. (SRC:TSX.V), Canuc
Resources Corp. (CDA:TSX.V), WUC, ABN), as well as one private. I have
15% invested in highly speculative call and put option strategies on silver
and the S&P 500. The 35% cash is targeting silver calls on the basis that
if all of the celestial bodies align in the next week or so, a $3-5 per ounce
move is entirely possible.
Ladies and gentlemen, if there was ever a super-spring-loaded trade
setup in the history of markets, it is silver. With the crashes in copper,
zinc and lead in the last year, base metal production is coming down, and
with it the arrival of these biproduct supplies that have a negative AISC.
While I acknowledge that my normally bullish enthusiasm has been somewhat
tepid over the summer, it is because of an analytical paralysis brought on by
the perfidiousness of our financial markets. And despite that, I am
steadfastly, shoe-bang-the-podium, nutbar positive on the outlook for the
precious metals (and particularly silver) going into the last third of the
year. In the hierarchy of needs, one needs food, shelter, warmth and water to
survive. In my world, one needs fine spirits and ample medicines to survive,
as well as a well-timed entry point.
A pittance to ask, in my opinion, a mere pittance.
[NLINSERT]
