"The desire for gold is the most universal and deeply rooted
commercial instinct of the human race."—Gerald M. Loeb
One of the finest books ever written on investing was "The Battle for
Investment Survival," by Gerald M. Loeb, the provider of today's quote
and a true legend in the distant, long-forgotten world of free market
capitalism. Also credited with "Put all of your eggs in one basket and
watch the basket," it was an obvious slap-in-the-face to those who eat,
drink and breathe the diversification mantra.
Having avoided disaster in the 1929 market crash, Loeb was deeply affected
by the devastating swath it cut through the economic field of vision and was
one of the first of his era to debunk the "long-term investing" track
record, choosing instead to trade positions rather than hold. I remember
reading the book in 1974 and marveled at how, thirty-nine years after its
initial publishing run, it still retained relevancy, a quality that many
professional investors lack given the rapidly changed/changing universe of
financial products available to generations of new investors around the
globe. From time to time, I will take it down from the bookshelf in my study,
pour a glass (or two) of fine wine and browse the many chapters in search of
old, time-honoured lessons and rules that I deem still absolutely relevant
here in the Year of our Lord 2019.
The fact that gold remains "the most universal and deeply rooted
commercial instinct of the human race" defines the reason why the paper
merchants (bankers, brokers) detest its very existence. Since 1977, when I
joined the Canadian securities industry, I have watched with abject horror
the concerted campaign of misinformation, disinformation, propaganda and
fraud condoned, promoted and executed by the "destroyers" (as Ayn
Rand called them) as a means of swaying the "desire" mentioned by
Loeb from gold to"financial assets" (including stocks and bonds).
Financial news networks, not to be found anywhere until the 1980s, served to
deify stock ownership, and the proof of that is the rise in household
ownership of stocks from 4% in 1974 to over 50% by the year 2000.
In light of the intensity of the message being broadcast by the elitist
bankers and politicians, gold has been an unwanted house guest, rarely if
ever to be invited to any of the celebrations such as the "all-time
highs!" or "Dow 30,000" parties so common in this period of
insane currency debasement operating under the alias of "easy
money." Today, there is a generational tendency that allows the
"most universal and deeply rooted commercial instinct of the human
race" to be the desire for paper wealth through stocks, a trait held by
over 65% of all Millennials, who in a recent survey said that they preferred
computer-generated "BUY" recommendations rather than those by
highly educated, brilliantly trained carbon units.
The reason I write this missive is that being a gold or silver
"expert" provides a function to an increasingly shrinking market,
in the same sad manner in which buggy-whip manufacturers were forced from
relevancy by the invention of the automobile. Being brilliantly trained by
brilliant mentors in the importance of anchoring one's wealth in solid,
time-tested stores of value such as gold and silver carries little or no
usefulness in a world managed, manipulated and molded by the paper merchants,
as year upon year upon year the suppression of precious metals marches on.
However, in June 2019, there was an event that broke the shackles of price
management for gold with the near-magical surge to $1,442/ounce, finally
vacating a six-year band of resistance despite heavy shorting by the
Commercials and a seriously underperforming silver market. With the HUI now
above 200 for the first time since January 2018, it needs to get above 225 to
set up the assault on 280, the August 2016 high. Of major significance
to the physical metals is this: The miners must lead the charge to the
2016 highs, assuming the leadership role and the gold-to-silver ratio (GTSR)
must be in full descent as it happens.
This brings us right back to the term "relevancy," and the
debate over whether any real bull market in gold can sustain itself without
participation by silver. You notice I use the term "participation"
as opposed to"outperformance," and that is noteworthy because
integral to any sustainable and trustable advance in gold has historically
been silver's role as the superstar.
In 2009, I was long gold, and every morning I looked at the percentage
gain in both metals and was delighted to see silver consistently
outperforming gold on its advance post-GFC from under $9/ounce to nearly
$50/ounce by 2011. The great debate going on with technical types,
fundamentalists, CTAs, and historians (like me) is whether or not the silver
price is today relevant to gold's future performance. It is no longer a
question of why silver has lagged so dreadfully; everyone points to JP
Morgan or China or base metal byproduct supply as possible answers. But for
me, anchored perhaps incorrectly in the biases of past bull markets, it is
especially difficult to charge into a 50-car position in August gold with the
GTSR over 90. For me, the silver price is absolutely relevant to the gold
price, but more so to the gold price risk—and for all of us so
unmercifully bludgeoned by precious metals drawdowns over the years, no
amount of megaphone-fueled, pom-pom waving, siss-boom-bah cheerleading will
remove silver's relevancy from my analytical cement mixer.
To wit, the one argument to which I am oh-so-slowly swinging is that gold
can be a leader in the early stages of precious metals bulls, with silver
being the late-cycle bloomer that at once captivates the retail hordes and
signals the maturity of the bull move. Since 2015, I have been using a set of
rules that blissfully allowed me to avoid the drawdowns that have sent so
many gold/silver bulls to the emergency room with terminal injuries to net
worth, from which recovery would be impossible. While the rules worked
wonderfully, the June skew in their predictive value was an important omen
for me, so I have no choice but to revert back to "full-on" bull
market tactics, as opposed to "protect-principal" trading range
tactics.
So, here is what I am driving at: The trade that I am slowly teeing up is
in silver. Gold is in an unbridled, unassailable, accelerating bull
market and one that will drag silver, irrespective of JPMorgan or China
or base metals supply, to new recovery highs above the 2016 highs at $20.26.
Gold is the fleeting leader that will forfeit its dominance to silver as the
second major up-wave kicks into gear. Silver should be able to seize the
mantle of dominance by the end of the summer, and the key will be its
performance during the seasonally weak month of July. So far, it has been a
distinct improvement over the May-June window.
The COT structure for silver is far friendlier than it is for gold;
Commercials appear poised to let silver advance while they are markedly
hostile to gold. As you can see from the red rectangles shown above, the
alligator jaws depicting heavy Commercial shorting into heavy Large Spec
buying in April 2017 and February 2019 are today muted and indicative of a
price shock to the upside.
That is what I am predicting and that is why I am accumulating the iShares
Silver Trust (SLV:US), as well as the August and December $15 calls. Now, the
true silver aficionados would tell you that SLV has zero physical silver and
therefore is devoid of purpose relative to our mission to protect against the
debasement of purchasing power of currency. However, if in U.S.
dollar-denominated terms SLV moves from $14.54 to 24.54, the trade will be
satisfactory to the extent that the profits from the paper trade will allow
me to exchange paper for physical silver, thus enabling the safe-haven
utility while increasing the number of silver ounces sitting instructively
idle in my safe.
The time to have been aggressive was in that first explosive shot to
$1,375 off the December 2015 bottom at $1,045, and make no mistake, I was. I
rode the wave until mid-May 2016 and then exited when the Commercials decided
to lower the boom, which they certainly did by August. Four more times the
cretins capped assaults to $1,350–1,375 and all four times, I was flat all of
the leveraged positions before they took them right back down.
Since the top in 2016 at 280 the HUI has tried to rally four times, and
all four times, the HUI crashed right back down again. For this advance to be
truly different, silver must take the reins of the beast and simply take off,
and therein lies the speculative shot I am taking. Tactics from pre-June 2019
are to be discarded in favor of those from pre-August 2011. Dips—any and
all—are to be bought, with sales only into relative strength index (RSI)
spikes into the 85-90 ranges.
Ladies and gentlemen, conditions have changed; the tone and texture of the
market has changed; and I have changed in all aspects related to strategy as
we move forward. The current consolidation for gold is more so a particularly
compelling buying opportunity for silver, on the expectation that silver
rejects the gold correction and instead leads the entire complex out of this
pregnant pause and upward to new recovery highs, flipping the algobots and
the Millennial traders to "bullish" while forcing tens of millions
of social media sheep into the silver trade thanks to their undying loyalty
to the "safety of crowd investing."
With the Fed about to cleave another fifty beeps off the funds rate in an
effort to drive down the U.S. dollar, aiding U.S. exports while attempting to
steepen the yield curve, it is obvious to me that they are completely out of
control as to policy, as to purpose, and as to implementation. The conclusion
I draw is that it is not the hard assets investor that is rapidly becoming
irrelevant; it is the Fed. Once recognized, it is important. Once acted upon,
it is crucial.
I leave you with a memorable quote from Ayn Rand, with the suggestion that
everywhere you see the word "gold," simply insert
"silver":
"Whenever destroyers appear among men, they start by destroying
money, for money is men's protection and the base of a moral existence.
Destroyers seize gold and leave to its owners a counterfeit pile of paper.
This kills all objective standards and delivers men into the arbitrary power
of an arbitrary setter of values. Gold was an objective value, an equivalent
of wealth produced. Paper is a mortgage on wealth that does not exist, backed
by a gun aimed at those who are expected to produce it. Paper is a check
drawn by legal looters upon an account which is not theirs: upon the virtue
of the victims. Watch for the day when it bounces, marked: 'Account
Overdrawn'." —Ayn Rand
Buy silver.
[NLINSERT]
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.
