A few nights back, a good friend of mine from Perth, Australia, e-mailed
me an article skillfully written by someone from the firm of Goehring &
Rozencwajg, in which the lead story was entitled, "The Bell Has Rung:
the Contrarian Power of Magazine Covers." In this really good body of
work was a magnificent flashback to a Businessweek cover that I actually cut
out in 1979 and had Xerox'd and mailed to all of my clients (numbering 27) by
the following weekend.
It was a Businessweek cover that had on it "The Death of
Equities," and as it was within literally three years of the beginning
of the greatest bull market in stocks ever, it also marked the top of
the "non-equities" cycle, whose main component was the commodities
sector—led, of course, by gold. The firm juxtaposed their review of the 1979
article against the recent April 2019 Bloomberg Businessweek cover page
entitled, "The Death of Inflation," in which the authors point to
the myriad of reasons why inflation rates are declining and why they will continue
to decline. The implied conclusion is that one should avoid inflation hedges
(like gold and silver, and to a larger degree commodities) and instead stay
with stocks and bonds and live long and prosper.
It was a wonderfully written article. After I calmed down and got down
from the table upon which I was jumping, I found myself in conflict. Upon the
conclusion of the fourth reading, it hit me. As much as it had me cheering
from the sidelines that finally we were overdue for a bona fide
commodities cycle, I found myself glued to the frailties of the thesis.
The article "The Death of Inflation" is, in a word, wrong. It
assumes (and asks you and I to assume) that the published "inflation
rate," which emanates from the U.S. Commerce Department and excludes
food and energy, is a solid number. I submit to all of you that the published
"rate of inflation" is nothing but rubbish. It is a contrived,
fabricated number designed to, at first glance, placate the masses. Far more
importantly, it placates the investor class and cajoles them into believing
that the rate of producer and consumer price advances is "muted,"
thus justifying ownership of U.S. Treasuries and common stocks.
Let me give you a classic example of the hidden effects of inflation. You
have all noticed how supermarket items have masked price increases through
reduced volumes. The 10-pack of Ivory soap is today priced a tad higher than
in 2010 but each bar of soap has been reduced in size by around 30%. That
is inflation.
A better example is the marina where I dock my boat in the summer. In
2014, when we first joined, there were a number of perks, including Wi-Fi,
free newspapers, complimentary coffee, and cable TV hook-ups. Dockage fees
have risen around 10% in a five-year time frame but gone are all of the amenities
that made one content to pay premium dollars to become a member. That, too,
is inflation.
The slow creep of these cuts is also seen in the real estate market, where
lot sizes are the size of postage stamps while running water is considered an
upgrade. Everywhere you turn, you see a carefully contrived pattern where
whatever the bankers have in inventory or pledged as collateral against their
mortgage book is inflating while all of the traditional inflation hedges
(such as commodities) are deflating. That is "targeted" inflation,
and make no mistake, it is the continuum of interventions that are training
the investor class where to place their bets.
Whenever I read an article that tries to draw a parallel between today's
markets and virtually anything prior to the election of Ronald Reagan
(and appointment of Alan Greenspan), I am forced to ignore the assumptions.
The assumptions to which I refer are those that choose to discount the
interventions in day-to-day trading as a rationale for supporting the
conclusion. If the published numbers surrounding what constitutes our
"cost of living" are frail, frayed and flawed, how, pray tell, is
one able to model a "real" rate of return (ROR)? How, when the
risk-free rate of return (typically the 2-year US Treasury) is being clouded
by a rate of inflation that lies between "corrupted" and
"connived?"
There is nothing more sobering than doing one's bookkeeping. When I am
forced to sit down and go through all of the statements and all of the tax
returns and every single trade in any given tax year, it is like putting a
volume accelerator in each of my ears and then screeching fingernails down
the entire length of a blackboard over and over and over again, all the while
playing a Barry Manilow album in the background. Nothing—repeat—nothing
sends me into madness more rapidly than looking back upon trades or deals or
drilling programs that have dominated my portfolio especially over the last
five years, because what always begins with optimism and excitement, has
tended to devolve into pessimism and boredom.
When we are finally able to look back upon the 2009–2018 era of "buy
the f---ing dip" methodology, with financial assets in complete and
total meltdown and hard assets in early-stage, hard-fought acceptance, very few
of us have the energy nor the tolerance to rise up on any sort of soapbox and
claim victory. What the bankers have done, with the aid of regulators and
elected officials, has been nothing short of criminal, but in the court of
public opinion, they gave the younger generation a glimpse at
"controlled" (as opposed to "free market") capitalism.
Now we have all of these Millennial and Gen-Y traders swooping in and out of
markets like birds in a marsh at sunset, and all that matters is that the
"system" remains intact and the banks remain solvent so that
the campaign contributions will continue to flow and the status quo is
allowed to prevail.
I continue to proffer the thesis that gold (and that ridiculously
underpriced stepchild silver) are in good shape technically, with
relative strength index (RSI), moving average convergence/divergence (MACD),
and histograms all trending higher but nowhere close to even mildly
overbought. The graphic below lays out my 2019–2021 thesis, as I believe the
late 2018 "pivot" by the central bankers was a carbon copy of the
one that occurred in Q1/2009. If investors wade into the precious metals in
the second half of 2019 the way they pounced in Q3/2010, they will be doing
so with an additional $9 trillion of credit creation as armament for the
assault.
It is important to recall that in 2010, the investing public was still
reeling from the all-out devastation wrought upon them by the bankers, and
did not have nearly the liquidity then that they have today. Yet, in the
final analysis, forecasting gold's direction, amplitude and timing is an
exercise in handicapping the odds in the same manner that you try to predict
the outcome of a horse race—and as everyone learned too painfully from this
year's Kentucky Derby, you can pick the horse and still lose all of your
money if someone intercedes and disqualifies the winner. That is exactly what
has happened to investors in gold that correctly predicted the monetary and
fiscal turmoil that unfolded in 2009: They picked the right horse but the
central bank racing stewards disqualified it in 2011. Total, complete,
unadulterated disqualification the likes of which we are encountering here in
2019.
You really cannot imagine what is was like to be writing about the events
leading up to the $1,900 peak in gold prices in 2011. Many of us had the move
absolutely nailed and that included the top in silver in April 2011. At the
time, I was buying a friend of mine a one-ounce silver birthday gift at
Scotia-Mocatta in downtown Toronto, and as I walked into the bank, I was
surprised by the line-up, which included no fewer than perhaps thirty people.
Sales staff equipped with pens and clipboards moved up and down the line
asking, "Buying or selling?" followed by "Gold or
silver?"
But what grabbed me by the throat was that every single answer was
"Buying!" and then "Silver!" That week, silver had
approached $45/ounce, having advanced from $25 in late 2010, and I remember
calling my good friend, who ran a superb blog called "The Fundamental
View," warning him to scrap his plans for a bullish report on silver due
to hit the blog that weekend. It was within literally days of the top in
silver at $50, and while it was a fairly easy call based upon the unanimity
of opinion (by those that normally lose money), the violence with which it
occurred evoked the same emotions as watching the Zapruder film years after
the JFK assassination.
It was a blatant, criminal, orchestrated intervention by the Crimex racing
stewards; they decided that Silver Streak was not to be the winner, so they
disqualified it in favor of StockRoach. Down went the precious metals in
April 2011, and up went the S&P500, all because of the importance of
deflecting attention away from sound money and toward financial
"assets." The interventions of April 2011 will remain forever
etched in the collective psyches of precious metals investors the world over,
and the long-term generational impact is still looming large eight years
later.
The Q2/2009 correction in gold was an April–June event that was the
precursor to the move from the mid-$800s through $1,100 by the end of the
year. If I am correct, that is exactly where we are today, only the 2019 lows
have seen three assaults of $1,267, and all three have been soundly rejected.
It evokes memories of December 2015, when gold probed the $1,045 level before
being soundly rejected, then exploding higher for the next six months.
I am accumulating gold and silver here in the spring of 2019 not because
of the "Thirty-Five Reasons to Own Gold NOW!!" e-mail blasts nor
the interviews with billionaire gold bugs who have now been wrong since 2011.
I am accumulating gold because it is ridiculously cheap as measured against
the inflation spoken of earlier in this missive. To "inflate" is to
"blow up" or "fill with matter" or "make full,"
as in a balloon or a series of blood vessels connected to an organ or the
amount of "currency in circulation." But whatever the intended
recipient, it is a purely "relative" event because, unlike a tree
that inflates through organically created matter that stays for hundreds of
years, monetary inflation is at once both temporary (in that it can be
removed by central bank "RePo" operations) and static (in that,
like a tube of toothpaste, once squeezed, the paste is impossible to return
to its vessel).
The world in which we all dwell is at once both difficult and wondrous, in
that those who have been living in the Western World of lifestyle advancement
and luxury are now frightened by the arrival of others of our species who
would covet the same. However, what we all seek as investors is not a title
nor a moniker nor a reference number; what we all need is the assurance that
we are all investing and trading under the umbrella of "free markets,"
and absent the hovering, scolding, finger-wagging of a seemingly entitled
member of the elitist class. If any of you revered readers can offer me some
insight, please do. ([email protected])
COT Report
They sold the crap out of it last week at $1,300; they covered it all this
week at $1,270. They pocketed $30/ounce on nearly 30,000 ounces, and that is
a US$90 million payday, no matter what you say and how it sounds.
To my fellow gold and silver bulls I say this: When I was inhaling the
KoolAid at $857 gold in 1979, I was a 26-year-old freshman in the space. When
I was selling silver and gold near the top in 2011, I thought I was a
"veteran," but I did it for all of the wrong reasons. When I went
bullish at the seven-year lows in December 2015 at $1,050, I was pounding the
table. Every trade I make is constructed on the basis of history, and what I
believe to be true today is that this love affair with central banks and
financial assets is coming to a thunderous end. It will probably take a
two-year advance in gold, to test the all-time highs, to convince the
Millennials to get on board, just as it did for them to inhale the Bitcoin
story. When this all happens, there will be nary a party, nary a tribute, and
certainly nothing resembling a celebration. The interventionalists will be
grasping at anything resembling a "control string" to regain the reins
of order in their petty little arena of Pavlovian indoctrination and
training.
Take heart in your research; take solace in your resolve; and take courage
in our collective convictions. Our day is very, very close.
[NLINSERT]
Charts and images 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.
