As I watched Wednesday's CPI (inflation) number reported by the Commerce
Department, I was immediately reminded of that classic scene from legendary
WWII flick "Casablanca," where Claude Rains, playing police Captain
Renault, shuts down Humphrey Bogart's casino/nightclub with the immortal
words, "I shocked—SHOCKED—to find out that gambling is going on in
here!" The croupier hands him a wad of bills—"Your winnings,
sir"—to which he says, "Oh thank you very much. Now everyone out of
here!"
Well, I was shocked—SHOCKED, I tell you—to see that the U.S. inflation
numbers came in a tad "hot." After all, the Fed has added some $5
trillion in additional "assets" to its balance sheet since 2008 and
encouraged its foreign central bank cousins to do the same, which they have
done with even greater enthusiasm. The movement toward serial
currency-trashing has had us all awaiting the inevitable return of
1970s-style inflation, but thanks to the creative accounting and fictitious
reporting, inflation is seen as "tame" by mostly everyone—but
especially the financial media and "bond-badeers."
The U.S. debt-to-GDP ratio has been increasing every year since 1980 with
only a brief respite during the tech boom of the late '90s, and that has been
a global theme of commonality as fiscal recklessness became the clarion call
for Baby Boomers the world over. Nearly 10 years of financial repression has
finally lifted as bond yields are rising to levels never quite seen by the
legions of Millennials now trading for their livelihoods.
The expansion of the Fed balance sheet has long been a source of
fascination for me as I could never understand how any entity owned by its
members (which are banks that are required to keep a minimum of reserves on
hand and must report financial positions) could be allowed to buy trillions
of dollars of toxic paper from its members in order for those members
to avoid bankruptcy—and then report those noxious purchases as
"assets" that remain on the books at book value. If they were
threatening to sink the member banks, how can they be booked at face value or
par? Should the Fed not report them as "non-performing loans,"
leaving a large hole in that balance sheet? Should the Fed, which is not a
part of the U.S. government, not be audited, as are its members
("owners")? Why can the Fed buy, sell, and short (think
volatility and gold) infinite amounts of anything and everything without ever
getting a margin call? Are you not shocked—SHOCKED—that the Captain Renault
of bond vigilante-ism isn't closing down that casino?
Stocks caught an enormous bid this past week after the ice-water wake-up
call of the previous week, but as I wrote about in last week's missive, you would have to be a complete fool to think
that there would not be a "response" from 33 Liberty (NY Fed) and
from the various serial interveners around the world. The volatility we saw
last week spooked the politico-banker elite to the extent that we immediately
witnessed dramatic moves to suppress the sudden and violent short covering in
the VIX derivatives attached to equity market volatility. The 1,500-point
swings in the Dow Jones were moved upon quickly, and by Monday afternoon, the
"Buy-the-Dippers" had absorbed literally all of the panicky supply
and voila! The Dow Jones now resides some 1,500 points off the lows
and about 1,500 points from the all-time high. You see, everyone now agrees
that one must never, ever underestimate the replacement power of
stocks in a (hyper) inflationary spiral. So a "hot CPI" is bullish
as hell, right?
Platitudes aside, I want to put to rest any notions that I have changed my
opinion in any way on gold and silver looking out to the balance of 2018.
Just to review, in late January I posted the chart shown below and made the
case that no matter what the bloggers will tell you, the miners have a
history of getting sold when the RSI moves above 70. The high for the
December-January rally for NUGT was $37.96; the sell point for me was $35.80.
The low print last Friday was $21.40; my entry was $23.80.
One week ago, I was a buyer of the leveraged Junior Miner ETF (JNUG) at
$13.35 (20%) and watched it crater to $11.34, creating all sorts of problems
for canine pets, adoring spouses, FedEx delivery personnel, and call-center
employees. In dealing with issues related to "poor trading," I
often times get caught up in semi-violent mood swings resulting in harsh
responses to challenges such as overly-bound, impossible-to-open FedEx
packages and overly-polite, impossible-to-understand bank support staff.
Owing these emotional whipsaws to my way-too-early JNUG entry, all around
me had to suffer until the past couple of days, because today NUGT closed at
$28.91 and the JNUG at $15.91. Needless to say, calm has now returned to the
household as the miners are hitting on all cylinders; the metals are again
firming up, and Fido has returned from under the toolshed.
I eagerly anticipate results from Stakeholder
Gold Corp.'s (SRC:TSX.V) Goldstorm project, where the first hole in a
10-hole project has been drilled to an elevation of just above the water
table at 6,000 feet (above sea level). Fingers and toes are crossed but since
the shares have now pulled back from the $13M to $8M of market cap last week
during the meltdown, there is no longer any speculative anticipation built
into the share price. The company is spending $$2.5M over the next three
years to earn 100%, so there is a lot of drilling ahead. And with such a big
land position tied on Seabridge Gold Inc.'s (SEA:TSX; SA:NYSE.MKT) Snowstorm
Project, 2018 will be an active exploration year for the area.
As this is being finished, gold is trading up through $1,360 again, but
once again silver is lagging, taking the silver:gold ratio to 80.71. Hard to
believe that in 2001, I was buying silver in the $4.00 range at the same
ratio to gold—10 years later, it was at $50.
By the way, remember that package that was driving me crazy on Wednesday
with industrial-strength packing tape resisting my sharpest box cutters? It
was the most beautiful set of five 100-ounce silver bars from the Royal
Canadian Mint. My money resides resolutely in the vicinity of my mouth.
All charts and images 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.
