Given the impressive reversal in gold last Monday, which appeared to occur
during the Asian and European trading sessions as opposed to the Crimex pit
session, it looks like the precious metals are adhering to the
well-broadcasted seasonality trade that has been fraught with random, rather
than dependable, trading results, especially in the last four years. 2014 and
2016 had poor second-half performances, while 2015 and 2017 were marginally
positive. What is reliable is that gold purchases in July have a greater
chance for a successful trading outcome than any other month of the year,
assuming, of course, that you took profits when gold popped in one of the
following five months.
Seasonality
You can see from the chart posted below that in the months that follow July,
five out of six have returns that exceed the monthly average, with the
standout, September, being followed by corrective behavior in October. It has
been postulated that accelerated and highly competitive buying by the Italian
jewelry trade and Diwali in India accounts for strong September showings.
Oversold Conditions
Conditions in the gold pit are identical to those encountered at major
bottoms in the past three years, with RSI (relative strength index), MACD
(moving average convergence divergence), and the histograms all in troughs
that have led to strong and very tradeable rallies. This is where I take some
additional positions on as "trades" and others as
"put-aways." If I can afford a $50,000 bite, $25,000 goes to a
trade and $25,000 to put-aways, but the first tranche is designed for a
scalp.
Gold Miners (Warning!)
I have been staunch believer in the predictive nature of gold mining stocks
since I first began tracking them in 1978. However, the usual Internet
blogosphere is once again bountiful with opinionados that think they know
more than they actually do. I have used the ratio of gold bullion to gold
mining shares in the past and the GTSR (gold-to-silver ratio has usually
been strongly reliable in calling the turns, but they are not always
reliable as shown by the incredible "fake-out" that nailed us in
2015-2016.
In late summer 2015, I was buying the JNUG and NUGT calls for February and
June expiry all based upon the growing outperformance in November of the
miners compared to the metals. However, I stood by horrified in the very
early New Year when they started to not just correct, but actually crash.
By January 19, 2016, the HUI had broken 100 and the GDX:GOLD ratio was the
lowest reading in over twenty-five years.
Gold versus Silver (GTSR)
I am currently short the GTSR, and early last week came very close to lifting
the "short gold" leg of that very successful paired trade put on in
April at 82.75. I tried to lift it by buying back the GLD shorts, but I was
bidding too far under the market ($117.20). The best it could do was $118 on
Thursday, only to sag to $117.40 on Monday while I was on the boat in the
Massassauga Provincial Park with only intermittent Internet signals. I fear
that I may have to simply ride out the paired trade to my 65 target, but that
will take a major assault on $21.15 silver and $1,375 gold. If I simply lift
the gold short at $1,250 (GLD $118.00), I only need $19.35 silver (SLV
$18.10) to accomplish my objective.
Strategy
Before I embark on some dogmatic diatribe on the precious metals outlook and
who and what are responsible for the unyielding assault on prices since last
April, look no further than the base metals, where copper and zinc have once
again entered bear market territories. It was only four months ago that I was
debating a few of the clowns in the CEO.CA forum about "The Zinc
Trade" and why at $1.66/lb. supply would magically appear out of nowhere
forcing the LME (London Metal Exchange) inventories upward and negatively
affecting price. All they could spin out was the same bullish case based on
supply disruptions that I was writing about in 2011, when Tinka Resources
Ltd. (TK:TSX.V; TLD:FSE; TKRFF:OTCPK) discovered the Ayawilca zinc deposit.
As I have always maintained, when the reasons for owning a stock show up in
the bullboards or chatrooms of the Internet cesspool, it is time to go the
other way.
Dr. Copper has really taken it on the chin lately, and you can lay the
blame squarely in the lap of the U.S. president, who is determined to
penalize countries that have executed "The Art of the Deal" better
than any previous American politician could ever have imagined. While the
U.S. has been running around the globe for the last twenty years playing
schoolyard bully, invading sovereign nations without provocation and forcing
millions of Middle Eastern refugees from the region, China and Russia have
been solidifying allegiances by way of good old-fashioned "business
deals." Those deals are now no different than military alliances, and
the Chinese have become masters at dangling gilded carrots in front of
starving and destitute mules to win respect and ensure servitude. Adherence
to the generational objectives of Chinese negotiators has become a fearsome
fly in the ointment of Western business leaders. Whereas the corporate
leaders in the U.S. and Europe must please only their shareholders, whose
idea of a long-range plan is the closing bell of the NYSE, the CEOs of
Chinese companies need only look to the Party for approval and tenure.
Long-range corporate objectives remain generational for China, and that is
why a severe market correction is not only possible, it is probable, with the
debilitating effects being painfully more impactful upon Western markets and
corporations than it would (and will be) for their Chinese counterparts.
The strategy for my personal portfolio has three basic objectives, and
they are as follows:
1. Focus on preservation of capital
2. Focus on preservation of capital
3. Refer to points 1 and 2.
That is most certainly an old and very corny joke but I simply cannot
overemphasize the need for prudence and caution in all areas of investment
selection. Markets are no longer a battle between humans and the dual enemies
of fear and greed. It is no longer about being the strongest and the smartest
and the fastest in terms of intellect and perseverance. Machines can
do all of that, and way better than we can. To which you counter: "But
machines cannot predict human emotion because they do not experience
it." To which I reply: "They see the emotional response to a
price-changing event in nano-seconds and then move with such high-frequency
velocity that they are able to front-run the human decision and skip to the
front of the analytical queue without the silliness of any actual
analysis."
To that, I say: "Hand your money over to the quant-geeks and let the
machines battle it out." Think about it. To allow a HFT (high-frequency
trading algobot the ability to analyze your order to an exchange and execute
before you is essentially stealing your proprietary research. It is corporate
and intellectual thievery of the highest order, and it is what is ruining
markets and driving thousands of brilliant analysts out of the business.
Here is the head of the nail meeting the claw of the hammer: If we don't
extract the dominance of technology from the investment industry, idealists
will no longer seek to use financial markets as conduits for the life blood
of innovation. The liquidity event that is the sensible and infinitely
logical reward of the retail speculator is being denied to them by
interventions in markets that used to be driven by an absolutely wonderful
combination of very healthy fear and greed. In the days before the algobots
and central-banking-edict-driven markets, there was a palpable excitement in
the air as the only "Fear" in the room was that you would miss your
fill on 100,000 shares of Foofoo Mines, which was charging on drill hole
speculation. Not to be outdone, Fear's nose-picking twin brother was inciting
the investment crowd to riotous deportment, as "Greed" poured
gallon after gallon of avaricious fuel on the tinderbox of raging human
desire for recognition and advancement, and took away your 100,000 shares of
Foofoo.
Alas, the outcome was always the same: Some won; some lost; but copious
amounts of money were raised and commerce prevailed. Through the mechanism of
the venture capital markets in Canada and Australia, the wealth created
through this process created entire industries in remote regions, enriching
local indigenous peoples completely removed from the mainstream of public
interest and commentary. The explorationists that I have known and admired in
my career have always said that the most enjoyment they ever experienced was before
they made the discovery and before they had acquired wealth. Most
refer to wealth within the context of family and friends, and need not refer
to a net worth statement as it was the direct result of capital markets
functioning in the manner in which they were ideated.
The problem that remains today is that no rational human will invest in a
private company if he knows that the exit mechanism is flawed. In medical
marijauna deals, there is a ton of liquidity and everything is functioning.
In mining, it is absent. That, in itself, is bullish.
In sum, the time to be buying Gold and Gold Miners is right now.
Sentiment, which you will recall was my primary driver for going
"all-in" in 2015, is now fully in the category of
"brutal," and as you all know, the equal and opposite reaction is
always to "buy brutal" and "sell ecstatic," or as many of
my penmanship brethren would say, "You want to be sellin' when they're
yellin' and buyin' when they're cryin'. . ."
Happy Fourth to all of my numerous and wonderful American friends. The six
years I lived in the Midwest, within the Heartland of the U.S.A., carry the
second-best memories of my life, the first being finding my keys and my
wallet two days ago in the boat with zero need from any one else. God Bless
America.
Charts courtesy of Michael Ballanger.
Michael Ballanger Disclaimer:
This letter makes no guarantee or warranty on the accuracy or completeness of
the data provided. Nothing contained herein is intended or shall be deemed to
be investment advice, implied or otherwise. This letter represents my views
and replicates trades that I am making but nothing more than that. Always
consult your registered advisor to assist you with your investments. I accept
no liability for any loss arising from the use of the data contained on this
letter. Options and junior mining stocks contain a high level of risk that
may result in the loss of part or all invested capital and therefore are
suitable for experienced and professional investors and traders only. One
should be familiar with the risks involved in junior mining and options
trading and we recommend consulting a financial adviser if you feel you do
not understand the risks involved.
