For me, the greatest asset my dog Fido, a German Rottweiler and French Poodle mix, is his uncanny ability to sense when the gold and silver markets are going to turn. Whenever gold runs into its generally accepted waves of interventionalist price "management" (otherwise known as "manipulation") by the unregulated and under-sanctioned bullion banks, Fido has usually retreated to the safety of the crawl space beneath my tool shed. Conversely, when the metals have just endured their most-recent bout of vicious declines and I have cleaned up all of the broken bottles and shattered quote screens in my workspace, Fido is usually to be found outside my office door with wagging tail and tongue, fully aware that the raging tempest had passed and it was safe to be near that lunatic that yells and screams at those funny little characters on his computer screen.
It was just a few days ago with gold threatening to "break out" (Gawd, how I loathe that phrase) above $1,375 and I was on the phone laughing because the Fortuna Silver trade I put on had doubled when I looked for Fido and he was nowhere to be found. I hung the phone up and looked high and low for the cunning canine to no avail when it struck me that perhaps I had better nail down some profits because when Fido goes AWOL, the raid is near. Like clockwork, here we are with gold a full $60 lower and silver hitting $16.10 yesterday after challenging $17.30 six days ago. As of this morning, Fido has come out from under the tool shed but has yet to brave the perimeter of the house, which tells me that while the worst of the decline is probably over, it is still too early to replace the Fortuna or take on new SLV (iShares Silver Trust) positions. I want to see the RSI for July Silver in the 30's before I venture into the market.
One benefit of Tuesday's rout was that I was able to sell the GTSR (gold-to-silver-ratio) above 81 and with the 1.54% pop in silver and the .11% drop in gold, the ratio is back at 79.69:1. Forgive the redundancy but anything north of 80 for the GTSR is at once positive for both the silver price and the metals as a group. I get a great many email questions from the gold bug community asking why I am shorting gold against silver and "Why not just own silver?" The reason lies in the necessity to manage risk in that I am already long silver to the extent of 100% of investible risk capital and 30% of total capital. In order to avoid directional risk, I opted to sell the GTSR rather than adding to the precious metals en masse.
That was nine sessions ago with silver roughly $1.00 higher and gold $60 higher. Gold has since been hit for 4.38% and silver 5.79% but the GTSR sale nine sessions ago was at 82.30 so at 79.69, I actually have a 3.17% GAIN on 70% of my capital, which offsets the 5% drawdown on 30% of my money. So, on each $100,000 increment of total investible capital, I am ahead $2,170 on the $70,000 (70%) and I am down $1,500 on the $30,000 (30%) so the portfolio as of right now is up $670 per $100,000 despite an absolute walloping of a move since one week ago.
Furthermore, it makes for easier slumber with that $16.15–$16.20 support in jeopardy yesterday with the regurgitation to $16.10 intraday. TF Metals Report founder Craig Hemke figures that since the last three times gold broke the 200-dma resulted in a $30–35 drop, we could get an additional downdraft in gold to $1,275–1,280 before gravity (and the oversold condition) reverses. Stated another way, since the RSI for gold is now at 37, another $25 drop would plunge the RSI to well under 30 and set up yet another (sigh…) buying opportunity for both gold and silver. The chart posted below is the property of Craig Hemke whose website can be found at www.tfmetalsreport.com.
While we have had a really steep correction in the metals through month-end, and although silver is undeniably cheap, (Read this article by Jeff Clark, "The Coming Silver Supply Crunch Is Worse Than You Know") history would prove that after violent takedowns such as the past week, I am better off waiting for the Relative Strength Index (RSI) to move to an extreme position before adding. I have seen the silver RSI in the teens during particularly vicious routs and while this is not (yet) one of those, a number in the mid-to-high 20s would be a great entry point.
So now that you know the history of Man's Best Friend as it relates to securities analysis, let me say that he is right now "on patrol" with ears up, nose pointed and eyes forward, constantly peering in the direction of the side door entrance to my office. The moment he pokes his head around the corner and actually looks at me, if I see a wagging tail I will know that his canine sixth sense will tell him that I will be "properly behaved" for awhile and that can only mean that the metals are due to rally. However, he is still outside which begs caution, his and ours.
Late Note:
The mighty U.S. dollar sold off after the Fed minutes were released causing a quick pop in precious metals as the machines scrambled for cover but the big story was the VIX (CBOE Volatility Index). The VIX dropped like a stone after the 2:15 event to 14.75 but is going out late in the day up 0.28 at 15.77—a fairly significant reversal. I took a 20% position in the UVXY (Proshares Trust Ultra VIX Short) yesterday because at $15, it appeared to have found its floor.
Most importantly, what was a 100-point Dow rally at 2:30 has morphed into a 175-point decline (down 245 in the after-hours trading) and one of the things I learned a long time ago was that "last hour action" in the stock market is a valuable tool for gauging both sentiment and health as it pertains to stocks. These rallies are not only achieving lower highs on each pop but they are being faded in the last hour on many sessions.
Also, the first three days of the month are usually positive because of institutional money flows from pension funds or buybacks or employee savings plans but when the first three days are negative, the ensuing month is usually a bad one. Yesterday we went out with a loss on Day One and today is going out with a larger loss and that is despite blowout earnings and guidance from AAPL. Finally, we have now entered a six-month period that is historically the worst in terms of seasonality.
Add all of these factors together and you have a perfect formula for "enhanced volatility" (which in the 1980's was called "falling stock prices"). Accordingly, I have added a second 20% tranche in the UVXY—the triple leverage ETF tracking the VIX—and if my analysis of this dreadful early May tape action is correct, there is going to be one whopper of a sell-off by month-end. Average cost on this 40% position is at $14.90, keeping in mind that the post-February lows were $13.52 and that is my stop-loss level. The February spike was north of $30 and that was in advance of all of these "record earnings" giving me optimism in a $35 target price which could easily arrive by month-end.
As you all know, past performance is no guarantee of future returns (which means that just because I fell upon some "Bullsh*t luck last February doesn't mean I'll fall into it again) but forty years of trading markets has my own sixth sense activated so I am risking 9.26% down to $13.52 and as they say, damn the torpedoes and pass the Jim Beam.
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.
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1) Michael Ballanger: Through my company Bonaventure Explorations Ltd., I own shares of the following companies mentioned in this article: Fortuna Silver. 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 mentioned in this article: None. Additional disclosures are below.
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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.
