To the surprise of the many and the chagrin of the few, the Fed opted to do nothing with policy today and left rates unchanged despite clarion calls for a cut. As I wrote about earlier, there was (and is) zero rationale for a rate cut, what with GDP humming along and the best employment numbers in fifty years (if you believe them). Stocks moved higher despite several attempts at profit-taking, but that was no surprise because the Fed wanted to make damn certain the response to the statement and the ensuing presser would be a positive outcome.
The victims were bond yields (lower) and the U.S. dollar (lower), but the S&P rose 8.71 (0.30%), while gold had at its highest close for 2019 at $1,364.45. The lower U.S. dollar contributed to the advance in the metals, but we are still caught in a resistance quagmire between $1,350 and $1,375, with the relative strength index (RSI) screaming "Overbought!" after an $80 advance.
I am modestly short (hedged) via the GLD puts and await a signal that all is well and good with the gold trade before giving the "all clear" sign. On five occasions dating back to August 2016 has RSI for the GLD hit 70+, and every single time we got a sharp decline immediately thereafter. Each one of those events saw a sharp increase in the Commercial aggregate short position, which advanced sharply into the rise and led to each of the crashes. In the past two weeks, the aggregate short position held by the bullion banks has exploded from under 80,000 to over 200,000, and that, if nothing else, calls for caution.
I also went back to our old friend Goldman Sachs and bought the Sept $180 puts for $3.70 in the morning, before the Fed decision was announced. It is noteworthy that the financials all sold off after 2:15, which was not the type of reaction I would have expected with rates remaining unchanged. Higher rates are bullish for banks, as their spreads are currently disastrous given the inversion of the yield curve. The "Squid" is right back to the zone where I got short back in May, and appears ready for another descent. We shall see. . .
Last point on gold: The singular greatest danger over the intermediate term is that there is no "breakout" on this run, and that it catches an entire generation of generalists long at the top. As gold investors, we need a breakout above $1,375 that decisively surpasses that band of resistance in increasing volume and momentum, such that resistance becomes support and the entire metals complex undergoes a structural lift in valuation and sponsorship.
I am currently hedging against that materializing but praying that it indeed happens, because the gold market since 2011 has been like eight years of root canal surgery without any sort of sedation or tranquilization (an experience that Melania Trump knows all too well). As I wrote about at $1,287 three weeks ago, we will have our day, and whether it is here in June or later on in 2019, it is coming.
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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Charts courtesy of Michael Ballanger.
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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.
