While the moniker for this missive is "Gold and Gold Miners," I just sit back in absolute AWE as the global equity investors (otherwise known as "Stock jockeys") have decided that "cash is TRASH!" and despite a massive "miss" in the employment numbers this morning, within seconds of the release, the spin doctors manning the equity trading desks deemed that number "bullish" because it is less inflationary and may cause the Fed to "pause." So dollar-yen rallies, the USD index has a minor pop, gold sells off, and stocks come out of the gate up another 0.25% with all of the bubblicious bravado of a high school quarterback getting his first win.
The chart of the S&P shown below is a classic illustration of what occurs when global central banks open up the monetary spigots and flood the world financial markets with unchallenged credit and liability-free liquidity. It is this "inflationary spiral" that enhances "the replacement value of equities" and sends literally everything skyward. Since the two biggest collateral risks to the banks are real estate and stock buyback loans, it is no surprise that this tsunami of phony, counterfeit currency of all colors indiscriminate of flag has not only mitigated those risks but also floated the underlying collateral into the ozone layer. Don't forget that even Ben Bernanke admitted that no one could predict the outcome of all of that "quantitative easing" that saved JPM and Goldman and Citi and BofA from disappearing from the face of the earth and now we are seeing what currency debasement exercises are truly all about. Record highs EVERYWHERE (except gold and silver) as monetary inflation sows its price inflation seeds.
My buddy David Chapman was the first to predict this final-stage blow-off top or "melt-up" and is quick to remind me that RSI has stayed in the 70s for the S&P and NASDAQ for many, many weeks before succumbing to profit-taking and that if this truly is a new bull move for gold, the HUI [Amex Gold BUGS Index] (and the Gold and Gold Miner ETFs) can too stay elevated above 70 for quite awhile. I can't recall the period of time when the RSI resided in or neared 70 for more than a few weeks before correcting but the S&P chart illustrates overbought conditions starting in the typically weak October period with RSI breaking above 70 six times by year-end. That, my friends, was too much liquidity chasing too few stocks—and it isn't the "too few stocks" that should be deemed the scapegoat.
David Tepper came out this morning with the "stocks are as cheap today as they were in 2016" mantra, citing "extraordinarily low interest rates" and "low inflation" as the reasons for this call but as I hurled a half-eaten Western sandwich at the monitor sending Fido and the missus running for the sanctuary of locked powder rooms and subterranean foxholes, the sounds of exploding coffee mugs and shattering ceramic plates reverberating throughout the halls, I was immediately screaming back at him that he should "come down off that cloud of reefer smoke" and recognize that low yields are a function of one thing and one thing alone—government intervention. The "low inflation" meme is a function of manufactured CPI and PPI numbers not even remotely close to reality. However, stocks are now gunning for Dow 26,000 so my emotive protests and vitriolic outbursts are useless and a waste of time and breath. I am NOT playing in the Wall Street cesspool and there is NOTHING that will deter me.
Another headline that caught me off guard tonight was the ZeroHedge article stating that incoming Fed Chairman Jerome Powell has admitted that "The Fed Has A Short Volatility Position" and it can be accessed here. This incredible admission basically throws down the gauntlet and says "Do we manipulate markets? Of COURSE we do or stocks would CRASH!" Read the part in the article where he says that Fed behavior is "encouraging risk-taking" and then let's have a debate over why market forecasters (including technical analysts) stand zero chance in calling a top to this current fiasco. Not one CNBC commentator could ever offer anything of value other than predicting when the Fed was going to cease and desist in tampering with what should be free market economics. Earnings, cash flow, price-to-book, price-to-sales, dividends—wrap them all up and throw them into the waste bin of stock market analysis whose traditional tools have gone the way of the buggy whip, the corset, and the trusted Hollywood executive.
I thought to myself that the very second that Powell allowed that statement to be entered into the FOMC minutes, it was the final thumb-nosing of the die-hard free market advocates like me. The blatancy of that admission is due now to be followed up with a comment like "Why on earth would anyone not want to own stocks?" And Donald Trumps tweeting that "Dow 30,000 is next" really sounds like the passions of a true swamp-drainer, doesn't it? Lastly, to read all of this and maintain that gold and silver are NOT interfered with by the 33 Liberty Street robots is to maintain that the world is flat and Trump still has all his hair.
Tonight's COT was pretty much as expected for gold with the Commercials providing all of the supply sought after by the big speculator accounts such as technical funds and of course the hedgies. I still look for a strong January but as I said in the above COT notes, this could turn south in a heartbeat so call options have been trimmed to reflect zero costs and leverage has now been removed. I have a $17.50 stop on the remaining JNUG (Direxion Daily Junior Gold Miners Bull 3X ETF) and a $32 stop on NUGT (Direxion Daily Gold Miners Bull 3X ETF). I would not short gold or silver in here despite the return of Commercial trader hostilities because there appears to be some serious money piling into the long side. Even the COT report showed that gross longs by the Large Specs was 11,072 contracts greater then gross sales by the bullion banks and that is pretty impressive.
With everything in full "melt-up mode," one might have expected that the gold and silver stocks would be able to join in the fun but as we have discussed countless times, with the cryptos on fire and small caps finally participating, the competition remains fierce keeping the HUI under 200 and mildly lower on the day.
All in all, to close out the first trading week of 2018 north of $1,320 bodes well for our sector. If we can apply the "January Barometer" to gold, a close above $1,320 January 15 and a subsequent higher close at month-end would be a superb omen for the balance of the year. In fact, it has been such an abnormally decent week that I looked down to see Fido resting in the hallway and my partner out of the powder room and puttering in the kitchen. It would appear that she was rooting around in the drawers looking for that old venerable rolling pin she affectionately named "The Attitude Changer."
I will now be forced to pray for better markets or retrieve my old leather hockey helmet from the attic. Such is the lot of the precious metals bull.
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 and images courtesy of Michael Ballanger.