I shall pass along my thoughts on the tenth anniversary of the 2008 bank
bailouts, currency chaos and the un-precious metals in no particular order
and with no specific agenda. More important, I want to pay tribute to a
writer whose work I truly love, Rolling Stone magazine's Matt Taibbi.
Taibbi's work reminds me of an era-gone-by when reporters actually reported
and where "fake news" was at the least an excuse for the originator
to be blackballed from the journalistic fraternity and at the worst a jail
sentence. The senior editors in the newspaper business demanded that their
reporters verified facts by way of constant scrutinization of sources while
chasing down leads for days on end in order to allow something controversial
to hit the media screens. Matt covered the "Great Financial Crisis"
ten years ago and immediately after that, he was the chap that nicknamed
Goldman Sacks "a great vampire squid" whose claim to fame and prosperity
was how it was "wrapped around the face of humanity, relentlessly
jamming its blood funnel into anything that smells like money."
Matt has come out with his 10-year update on the anniversary of the
"Great American Taxpayer Rip-off" and I urge all of you to take the
time to read it. It is unlike the Wall-Street-sponsored CNBC anchor Andrew
Ross Sorkin's account by way of his best-seller "Too Big to Fail"
would up glamorized the key criminals in the heist including Hank Paulson,
Ben Bernanke and Tim Geithner. They have all since written books about how
they singlehandedly saved the financial system from certain peril while
conveniently omitting the billions upon billions of free money given to the
bankers in bonuses while trillions in real estate and pension losses by Middle
America remain. Here is the link and I offer a word of warning: Do not read this near
any small children or beloved pets. Your response will be, shall we say,
"unwelcomed."
The Friday COT was a non-event and therefore all that can be said is that
it remains in a massively bullish configuration in the manner of an
inordinately stretched elastic band reaching the end of its elongation: one
slip-up and the ensuing snapback will be violent and swift.
One of the classic buy signals I have used over the years has been the
GDX:$GOLD ratio, which replaced the $HUI:$GOLD ratio with the arrival of the
ETF's to the financial arena. Gold mining shares often represent a precursor
to trend changes in the underlying physical metals and while they do not
always do so, they are more right than wrong since I first began to monitor
the relationship between spot gold prices and the miners in early 1980s.
There have been occasions when they gave false signals and none more glaring
than in mid-January of 2016 when the $HUI crashed to 99.17 under the weight
of massive forced liquidation by one of the very large oil-sensitive
sovereign wealth funds despite rising gold and silver prices and a favorable COT
structure. Here in September 2018, it seems that the outperformance of the
GDX (Senior Miners ETF) is giving us a clue that the precious metals are
itching for a rally and if the COT set-up is any clue, it will be a
rip-your-face-off event with Large Spec shorts scrambling for safety while
Commercials nudge prices higher and just "out of reach."
The highly volatile TSX Venture Exchange has been outperforming the gold
and silver markets since mid-August but then again there is nothing
surprising in that trend. I learned a great many years ago that the best
buying opportunities for the junior exploration issues—the "penny
dreadfuls"—usually found lurking in the TSXV shadows arrive about two to
three weeks before the kids are back in school but the bell that rings to
mark the beginning of the junior exploration season goes off after the
arrival of autumn as the lazy days of summer are replaced by
"Back-to-Work" psychology and much more active TSXV markets.
Despite the injection of non-precious metals components in the TSXV index in
recent years, gold and silver issues still play a dominant role so the
outperformance remains an important indicator and helpful tool in timing the
turn in the metals.
This past weekend I was fortunate enough to have been able to grab a
cellular signal while moored in the lovely Indian Harbour located in eastern
Georgian Bay where the sunsets are as good as anywhere in the world and the
water as clear as can be. I was able to enjoy three days of +25C weather
during which I must have read over 50 research reports by the big banks,
brokers and bloggers all waxing eloquently on the "next big trade."
What is consistent is that North American investors have a certain bias while
Europeans have a distinctively different one. When the topic of gold and
silver arises, it becomes blatantly obvious that the singular most important
factor in whether or not one should own gold and silver is location, location,
location. If you pay bills in emerging market locales where currency chaos
can arrive at your doorstep literally overnight, there is a profound urgency
to shift one's bill-paying currency into gold on a regular basis in order to
avoid calamitous declines in one's purchasing power. This not because you
expect volatility in your domestic currency; it is because you expect lunacy
in the actions of politicians and central bankers in their responses to
declining rates of exchange, which THEN results in erosion of the purchasing
power of your savings. In other words, politicians purposely debase
currencies in order to manage debt and when that debt is U.S. dollar-based,
the printing presses are working overtime to make up the shortfall in
interest coverage after which they panic when they estimate the length of
time it will take to retire the principal.
We in North America have been blessed/cursed with relatively strong
currencies and with the exception of the massive debt-GDP spike in the late
1970s in Canada, Canadians have never really had to worry that much about
hyperinflationary chaos, the likes of which we have seen consistently in
Zimbabwe, Argentina, Venezuela and now Turkey. If you were a hard-working
Turkish citizen trying like the rest of the world to earn a living and create
some savings over time, had you taken 10% of your take-home pay in 2013 and
purchased gold every month, you would be staying ahead of inflation and
actually thriving. 300% increases in gold-in-lira pricing is a survival strategy.
Here are four more charts for gold priced in Canadian dollars, Brazilian
real, Venezuelan bolivars and Argentine pesos in which uptrends exist across
the board. Citizens living in all of those countries (including Canada) are
experiencing domestic bull markets in gold. It is obviously most acute in the
troubled countries like Venezuela and Argentina but even Brazil is rewarding
gold investors handsomely. It seems, my friends, that wherever fiscal
profligacy exists, citizens have learned over time that "gold versus paper"
is a sound strategy.
However, the one country that has experienced the worst extremes of fiscal
misadventure, at least in terms of sheer magnitude of dollars, has been the
U.S. and yet U.S. citizens continue to be penalized for owning bullion as
shown in the chart below. We have seen paper after paper and report after
report condemning U.S. fiscal policy with the unfunded entitlements in the
many trillions of dollars and looming on the horizon. Notwithstanding the
gargantuan cost of maintaining a global military machine in order to remain
the world's uncontested policeman, the U.S. Office of Budget and Management
estimated massive shortfalls in Social Security and Medicare as early as 2020
and yet the U.S. currency continue to reign supreme against the ultimate form
of constitutional money, gold.
Now, these are all things that you all know and have read before so I
offer no surprises in these observations. However, Newton's Third Law states,
"For every action, there is an equal and opposite reaction." So if
gold and silver saw (bullish) extremes in their COT setups in late 2015 and
opposite (bearish) extremes occurring in late summer 2016 resulting in price
movements in line with normal behaviors, then this was the Third Law agendo
("in action"). To wit, whatever it is exerting pressure to
contain price and suppress bullish forces, then it is in direct violation of
Newton's Third Law. To hold an inflated beach ball under the surface of the
water is an attempt to defy that law and once released, the equal and
opposite reactions tends to overshoot, taking the ball out of the water only
to gravitate back down as the violence of the reaction dissipates. While I
can't give a date and time for the move, logic dictates that such a violent
move is indeed coming and when it does, you want to be positioned. The GDX is
telling you that; the TSXV is telling you that; the Investors Intelligence
sentiment numbers are telling you that; and the COT setup is screaming it
from the top of the highest yardarm.
Precious metals enthusiasts should ensure that they are positioned
accordingly.
[NLINSERT]
Images and charts provided by the author.
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.
