Sector expert Michael Ballanger discusses the influences on market trading and the status of a pair of small-cap miners.
Another Labor Day has come and gone, and I sit here in the back of my boat typing yet another rambling, rancorous recount of forty-one years covering the financial markets, and I have to tell youI am depressed.
Don’t get me wrong; this summer was yet another magnificent series of forays into northern Georgian Bay, and despite fierce forest fires and terribly dry conditions, there was just so much to explore that I come away damning Mother Nature for making Canadian summers so short.
Despite that, I look at the global fiscal situation and am constantly amazed that the world’s stock exchanges remain elevated. What is even more puzzling is that the only market celebrities left that are able to show their faces on CNBC these days are the thirty-something permabulls who forge ahead buying any and all dips because “the Fed has our back,” and who have never experienced crashes even vaguely resembling 1987, 1998, 2001, or 2008. All of the old stock market “gurus,” like Robert Farrell or David Stovall, have moved along and even the more recent superstars, like David Einhorn or Doug Kass, are hiding. Truly smart, experienced managers are being left behind in the performance race due to their unwillingness to ignore history in terms of both valuation and risk. Poor Dennis Gartman has flip-flopped from bull to bear to bull no fewer than a dozen times since 2008, each time admitting his errors but failing to explain why he keeps getting whipsawed.
As I explained a few weeks ago, we all look at the same data and read all the same headlines, all failing en masse to accept that the fuzzy-cheeked kids buying stocks on margin day in and day out are actually the “smart money.” With their thirty-something brethren manning the computer terminals, they are seen using trained algobots to decipher all the patterns and analyze all the word clouds before launching microbursts of buy orders through microwave transmission systems many nanoseconds faster than anything even remotely similar to the “Quotron” order execution terminals of the 1970s and 1980s. So when I see the S&P down 3% with an hour of trading left and leave for the day thinking that there is simply no way any human trader would step into a market this bad, my jaw drops through the floorboards when I see on the news that a “Late Rally Saves Stocks.” Therein lies the source of my angst (and anger).
Last Friday’s COT report has now been the focus of more than fifty breathless commentaries, complete with table-pounding and cymbal-clashing, as the anticipation of a proctologically challenging short squeeze resembles a “visions of sugar plums dancing in their heads” type of expectational nirvana. Yes, it was noteworthy in that in the futures and options portion, the Commercials are actually net long silver for the first time I can ever recall. They are also pretty close in gold, creating one of the most powerfully bullish set ups since the COT was introduced in 1986.
However, that was before the “machines” took over the trading floors. What I think we are going to get is a retest of the August 16 capitulation lows, both precipitated and engineered by Primary Driver #1 (algobots) at the prompting of Primary Driver #2 (Sovereigns and Central Bankers).
You see, this type of “trading action”is about as unnatural verging on the perverse as I have ever experienced. There is indisputable evidence that conditions similar to December 2015 have arrived, but the defining difference is that while the Commercials and the Large Speculators are still in battle, the market is still reacting to external factors rather than the bullish COT. It is beyond anything I have ever studied in all my years studying the back pages of the Wall Street Journal and Barron’s Market Lab section on a Sunday afternoon, while listening to Zeppelin (70s) and Supertramp (80s) and Nirvana (90s).
The maddening element in analyzing price action in gold and silver lies within the realm of consistency, which is totally absent. The same applies to stocks and bonds, where risk premiums should be skyrocketing due to the likelihood of default, given the debt loads associated with stock buybacks and, in the case of governments, the inability of the populace to generate enough tax revenue to meet interest payments.
I usually include charts in my missives because they provide a visual canvas upon which the analytical painting gains substance and form and allows my readers to glean a sense of purpose in the assessment of the next direction of whichever market I am viewing. However, irrespective of the identity of the perpetrator, someone or something is influencing the dollar-based prices of gold and silver.
In light of this, charts remain meaningless and ineffectual. Head-and-shoulders, cup-and-saucer, gravestone dojis, hanging drunkards, and whatever other technical formation, I absolutely refuse to make investment decisions on their interpretations. In this day and age, it is the double drivers of technology (algobots) and government (interventions) that have, as their sole mission, the protection of the reserve-currency-status of the U.S. dollar. This directive is indelibly etched into every facet of financial market warfare by the U.S., while combatting it remains the sole mission of Russia and China and a vast majority if the Islamic world.
Integral to all of this is the necessity of keeping a stranglehold on gold and silver prices while juggling the stock and bond markets like a one-eyed circus clown to maintain the status quo of how international money flows in favor of the Americans. Specifically, it does not matter whether the Commercials are long or short, or whether Large Speculators have amassed a short position, the notional amount of which is larger than total global mine production for the past year. The algobots simply wag the dog (physical gold price) by controlling the tail (futures) under the full blessing of government regulators and exchange officials.
The COT report began in 1986, and in the entire history of this report, there has never been an occasion when the Commercials were net long gold. Since they represent the bullion producers (hence the term “bullion bank”), it is an outrageously bullish development. However, unless the algos are in sync, and unless the sovereign market makers are OK with it, the power of this setup is going to be conflicted by the two primary drivers. I want to see a three-day close above $1,220, with persistently declining open interest with the next three COT reports, indicating that the algobots (Large Specs) are running for cover and capitulating. Then and only then will I place a tentative and very swollen toe back into the precious metals waters.
I mentioned Western Uranium Corp. (WUC:CSE; WSTRF:OTCQX) and Aben Resources Ltd. (ABN:TSX.V; ABNAF:OTCQB) in recent commentaries, with the former hitting a 52-week high at $1.84 while the latter has retraced from the $0.38 level to today’s low of $0.28. I continue to accumulate ABN on weakness and am looking for similar opportunities for WUC.
While ABN is a drill-hole play with an extremely high-risk/high-reward profile, WUC is a value play, with a market cap at 1.23% of the in-ground value of seventy-five million pounds of uranium (@$26.30/lb.) and thirty-five million pounds of vanadium (@$18.60/lb.). The combined uranium/vanadium portfolio of assets is worth US$2.62 billion, versus the current $32.3 million market value of the shares (which seems somewhat out of whack).
The pullback in ABN is related to the length of time that has passed since the August 10 announcement of 62.4 g/t Au over 6 meters in the first hole. Tremendous volumes have passed through the ABN turnstiles (62,272,372 shares) since the discovery was announced, and all of the chatrooms are rife with the usual pro-con banter that typically accompanies exploration plays but which usually take on the distinctive odor of a horse paddock. As I wrote about a few weeks back, I had great success in the Golden Triangle with Stikine back in 1989 with the Eskay Creek discovery, so at a $33 million market cap, there is a great deal of upside should the North Boundary Zone become part of, or secondary to, the new South Boundary Zone, where three holes intersected “quartz-sulfide veins containing abundant pyrite and copper (chalcopyrite) mineralization.”However, the trading natives are restless and without the usual dosages of Ritalin (drill results) to settle them down, the traders will be as nervous as a cat in a room full of rocking chairs.
I have been reading blog after blog chortling on and on about September’s reputation as the best month of the year for gold and silver and the worst for stocks, but once again I remind you that seasonality trades have been and will continue to be divorcee-makers, while the algobots and central bank desks are in full operation and control. We have the most bullish setup in nearly two decades for the PMs, and with seasonality and COT structures positive, yet gold and silver continue to have great difficulty in attracting interest.
By contrast, in looking at the NYSE Advance-Decline Line (A/D line) year to date, it is apparent that the ETFs now run the market, as “passive investing”is the only possible explanation for an A/D line so perfectly symmetrical with stock prices. In a normal, non-manipulated market, one sees numerous divergences over a year of trading, a signal that money is flowing in or out of stocks. In fact, one of the great sell signals I used to watch out for was an big up-move in the stock market that would go unconfirmed by a failure to do the same for the A/D line. Legendary Robert Farrell’s Rule #7 is “Markets are strongest when they are broad and weakest when they are narrow,”and while many like to use the FANG stocks’impact on the averages as an example of a narrow market, that A/D line shown above looks superb. Conclusion: Don’t be too confident in September rewarding the bears.
My model portfolio is 65% invested today, with 50% in gold, silver, and a basket of the juniors (Stakeholder Gold Corp. (SRC:TSX.V), Canuc Resources Corp. (CDA:TSX.V), WUC, ABN), as well as one private. I have 15% invested in highly speculative call and put option strategies on silver and the S&P 500. The 35% cash is targeting silver calls on the basis that if all of the celestial bodies align in the next week or so, a $3-5 per ounce move is entirely possible.
Ladies and gentlemen, if there was ever a super-spring-loaded trade setup in the history of markets, it is silver. With the crashes in copper, zinc and lead in the last year, base metal production is coming down, and with it the arrival of these biproduct supplies that have a negative AISC. While I acknowledge that my normally bullish enthusiasm has been somewhat tepid over the summer, it is because of an analytical paralysis brought on by the perfidiousness of our financial markets. And despite that, I am steadfastly, shoe-bang-the-podium, nutbar positive on the outlook for the precious metals (and particularly silver) going into the last third of the year. In the hierarchy of needs, one needs food, shelter, warmth and water to survive. In my world, one needs fine spirits and ample medicines to survive, as well as a well-timed entry point.
A pittance to ask, in my opinion, a mere pittance.
Originally trained during the inflationary 1970s, Michael Ballanger is a graduate of Saint Louis University where he earned a Bachelor of Science in finance and a Bachelor of Art in marketing before completing post-graduate work at the Wharton School of Finance. With more than 30 years of experience as a junior mining and exploration specialist, as well as a solid background in corporate finance, Ballanger’s adherence to the concept of “Hard Assets” allows him to focus the practice on selecting opportunities in the global resource sector with emphasis on the precious metals exploration and development sector. Ballanger takes great pleasure in visiting mineral properties around the globe in the never-ending hunt for early-stage opportunities.[NLINSERT]
1) Michael J. Ballanger: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Western Uranium & Vanadium Corp., Aben Resources, Stakeholder Gold and Canuc Resources I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies referred to in this article: Western Uranium & Vanadium. I determined which companies would be included in this article based on my research and understanding of the sector. Additional disclosures are below.
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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.