The Weekly Missive, which usually arrives over the weekend (sometimes on Friday, sometimes on Sunday) was delayed this weekend for one reason: I had to change it.
I started out last week with an idea that was leaning in the direction of full-on capitulation in the sense that this latest, three-month, Fed-fueled rally was beginning to smell like 2009 and 2002 and 1988. All occurred after precipitous market plunges; all were the direct result of Fed policy actions; and all obliterated the shorts.
I have been very successful in 2020 in moving into markets gripped with fear and moving away from markets obsessed with greed, but of those two emotions that have always been the "controllers" of markets since the late 1800s, greed absolutely conflagrates during Fed "printing" orgies, while fear dissipates into only minor outbursts of selling. This has been the exact playbook by which the Fed (totally owned and operated by a consortium of publicly traded banks) has been able to change the "rules of engagement" by which traders and investors have operated since inception.
These two emotions are like the exertion required in weight training to move muscle efficiency to its maximum; muscles must be forced to strain against immovable mass to become "Olympian." However, remove "mass" from the exertion and you have zero result in muscle development and sculpture. Remove "fear" from the "free market capitalism" equation and you not only have a market completely hijacked by "greed," you have a "condition" whereby the buying and selling of stocks and bonds and gold and silver only resemble a "market." In reality, it is anything but a market. Athletic endeavor devoid of meaningful resistance is not "training;" the buying and selling of stocks devoid of meaningful risk carries no science, and therefore is not anything close to what we older guys used to call a "stock market."
I want to talk tonight about something that I hold remarkably close to my heart: Mother Nature. I was recently anchoring in a small baylet within the larger entity known as Georgian Bay when a rather larger turtle arrived at the side of the boat looking for some after-dinner food scraps. This beast had a head the size of a German shepherd, with a shell at least one foot in radius, and the way it moved around in its own environment was nothing less than impressive.
Upon sighting the creature, my fellow boaters bolted for dry land but as I was still in the water, I decided to swim toward the leviathan and see what his reaction might be to a curious neighbor, non-threatening in his 67-year-old body, and unquestionably at this prehistoric monster's beck and call.
What happened is the topic of tonight's missive. Did this 75-pound snapper look at me and decide that "Mama just rang the luncheon bell?" The answer is "Hell no!!!" This reptilian beast just turned and ran for the closest shoreline, scrambling up the banks with his prehistoric claws only to retract all arms, legs and heads into a shell totally impenetrable to human hand, foot or teeth (all of which our human ancestors have tried).
I was standing no more than six feet from the head of this creature, as he retreated in true "defensive posture," when it finally occurred to me that he has been forced to do this all of his life. He is like a seasoned stock trader that has learned all rules but is finally unable to apply them to the function of "making money." The term "defensive shell" has never carried more meaning.
Somewhere around the year 2002, the stock market stopped taking its cues from market mavens like Dan Farrell and Martin Zweig, and began to react to a new wave of market "rock stars"—only this time, the rocks stars weren't math wizards or ex-floor traders. The new breed of financial pied pipers were economists—the most boring group of academics on the planet. By and large, these newborn market messiahs had never had to meet a payroll; they had never been recipients of the dreaded margin calls issued by brokers in need of additional collateral for a failed trade.
In fact, from 2002 until today, the track record of this gaggle of prognosticating pitchmen has been as dreadful as any in the history of financial (and economic) forecasting. So, considering their meager business experience and poor results, how is it that they can still be relied upon for guidance? The reason is that they are "central bankers," the unelected chosen few bequeathed the elite privilege to be custodians of the creation of credit and the maintenance and longevity of bull markets in stocks.
Those born before 2002, and especially those trained in the Inflationary Seventies, would be hard-pressed to even name the Fed chairman of the era. The role of the Fed was different back then, as they cringed away from cameras and spotlights and were generally allergic to sunlight. You might have a comment on page 11 of the Wall Street Journal, but never, ever would you have a twenty-minute segment on "60 Minutes" with the Fed chairman, for two very strong reasons: 1) they were generally devoid of any semblance of charisma, and 2) there would be no viewers because no one cared.
Investing in 2020 has become an exercise in mind-reading, body language interpretation and tie color guessing. Jerome Powell seems to prefer grey suits and purple ties, but he also prefers lights, cameras and a great deal of action as he carves out his well-earned legacy as "Savior of the 2012–???? bull market in everything."
I guess that is why I have such a difficult time capitulating to the status quo of "don't fight the Fed." It is not as if I disagree with it; I learned it back in the 1980s from my hero and popular guest Martin Zweig on what was the only television show in the U.S. covering stocks (and, to a lesser degree, bonds) at the time. It was Louis Rukeyser's "Wall Street Week."
Not surprisingly, it wasn't some CNBC anchor or "guest commentator" that invented the phrase; it was Zweig's double-pronged rule, which I continue to obey to this very day, that says "You don't fight the Fed and you don't fight the tape."
And when I tell you that even rules as simple as these have been rendered obsolete, I will also tell you that the reason they are obsolete is that in 2020, the Fed is the "tape." Absent the natural flow of resistance, the muscle that gets flexed every time the markets enter a corrective phase is the money-printing bicep, and it matters not whether you called economic activity correctly, you will get killed if you take a position counter-friendly to the whims of Powell and Company.
However, it is my considered view that this love affair with central banking's caretaking role of salvaging markets and prolonging periods of obvious over-valuation is about to come to a resounding halt. The brainwashing of the younger generation of Fed-fondling opportunists has made them like the rats following the piper off the pier and into the canal. The musical narcotic of free money and upwardly manipulated prices is at once captivating and intoxicating, and it is only when the drip from these intravenous stimuli is removed that the markets relapse into convulsive spasms of reality-check liquidation.
That is what I see happening over the second half of 2020, as either rampant inflation or devastating deflation descends upon the valuation landscape. In either event, of course, gold and silver will undoubtedly outperform, so long-term holders should be rewarded in spades. For new investors coming into the markets, they have to ask themselves whether they are late or early in establishing their initial precious metals positions.
More than a few subscribers have asked me what it will take for me to revisit my two favorite gold miner exchange-traded funds (ETFs), the Senior Gold Miner (GDX:US) and the Junior Gold Miner (GDXJ:US). The answer is twofold: First, I want to exit the period of seasonal weakness, which some would say is the end of June, but my experience says is in late July or early August.
Second, getting back to the Marty Zweig rule, we know that both fiscal and monetary conditions are wildly bullish for precious metals, which means that we don't fight the Fed. Since gold is still in a trading range, the tape is not completely friendly. While it is by no means hostile, I would change my stance and go long GLD, SLV, and the GDX/GDXJ dynamic duo if gold enters an extension move above the April 14 intraday high at US$1,789/ounce. By that, I mean at least two or three daily closes above that level, lest we get hit with a whipsaw reversal.
In the interim, I continue to accumulate gold and silver developers with ounces in the ground and dynamic leverage to any upside in precious metals prices. There are also more than a few exploration issues that have once again pulled back to levels from which there is minimal downside versus significant upside in the event of a discovery. These will be ideal purchase candidates in August and subscribers will receive the complete list at that time.
It is the junior gold developers that are going to get the most love once the precious metals' trading ranges are vacated. Silver certainly has the leverage to explode from here given the gold-silver ratio (GSR) at 98. But when the legions of new precious metals enthusiasts enter the battlefield, it is the gold stocks that will be most sought after. Hence, my largest holding remains Getchell Gold Corp. (GTCH:CSE) (US$0.195), whose 1,069,000 ounces at Fondaway Canyon, Nevada, are valued at roughly US$14.60 per ounce (cheap by any and all measurements).
We are now officially into the seasonally quiet period (summer markets are boring), so I will continue to accumulate in anticipation of an explosive conclusion to 2020, as the unintended consequences of central bank insanity weighs heavily on purchasing power fragility in the global currency arena. Supply shocks are starting to impact food prices, so if you think that protests over police misbehavior are alarming, watch the incendiary acceleration in pitchforks and torches once milk and bread prices start to double. Will the restless masses be willing to accept rampant inflation on top of disappearing jobs? There is only one answer:
Hell no!
Originally published June 20, 2020.
Follow Michael Ballanger on Twitter @MiningJunkie.
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]Disclosure:
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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.
