"Never underestimate the replacement power of stocks within a RE-flationary spiral." - Michael J. Ballanger
Four weeks ago, after gold had corrected down from nearly $1,300 to around $1,240, I tweeted out that I was thinking about re-entering the JNUG (Direxion Daily Junior Gold Miners Index Bull 3X ETF) market and proceeded to launch into one of my classic invectives on why the Commercials were going to get toasted and why I should be considered the Crown Prince of non-Linear Thinking in my self-amused prowess in "smoking the criminals."
I was early—which means I was wrong, dead wrong. So deadly wrong that notwithstanding the hit I took in my net worth statement, I took a hit in the Achilles Heels of self-esteem, ego and female adoration, all of which are completely devoid of any meaningful correlation with accomplishment. By now, you all know me. You know how woefully humble I am during down markets and how embarrassingly brass I am in up markets. That is just the nature of the addiction that we all share. It is not entirely accurate to classify me as an "addict," but it is nevertheless important that I be classified as a "junkie", a "Mining Junkie" that was born a victim of improperly aligned DNA strands that tilted the genes of obsession in the direction of mineral exploration and the concomitant search for stock market windfalls. So be it.
I am sufficiently humbled, yet again, by the unfathomable power of the men and women who control our currencies, the men and women of the global banking system. They are unrelenting; they are insistent; and they are seemingly unstoppable. At the very heart of the debate, they are, quite simply, criminals—and until opportunists such as the legion of technical analysts admit this fact, our collective debate remains moot.
One of my very good friends is David Chapman, an incredibly well-read gentleman and, more importantly, a man who tends goal in pick-up hockey at the age of 70. Now, for you youngsters, it is an effort to tie up your shoes when you hit 60, let alone lace up skates and buckle up those enormous pads. This man still plays the game after completing his sexagenarian decade and he is also a fine technical analyst. However, it is not always wine and roses as we have perpetual swordfights over my unwavering belief that technical analysis is useless when trying to predict the movements in the precious metals.
Now that I have buttered Mr. Chapman up to the point of embarrassment, I shall now describe to you all where the technical analysts go awry; it lies in the realm of "data." Where they all fall upon sharpened Swords of Damocles is in their total and uncompromised abilities to worship at the altar of raw data in the form of "charts" or, as an old mentor used to say, "tea-leaf reading." Their arguments are that interventions fall into the category of "events" and that the term "manipulation" is irrelevant because of the duality of both bearish and bullish manipulations.
I argue that the bullion bank traders working in the space as "Commercials" have unfair advantage in that they are permitted (and some would say "encouraged") to orchestrate price movements that create the illusion of technical "events" such as breakdowns or breakouts. These events are designed to trigger buying by technical funds, by algorithm-driven funds, by Large Speculators, and by private investors. This happened back in early June when Commercials nudged gold through a technical "resistance" level around $1,260 and then fed thousands of ounces of synthetic "gold" into the market to do two things: 1. Satisfy all demand generated within the traditional technical funds, Large Specs and private investors, and 2. Cap the rally. By definition, point 2 falls into the category of "manipulation."
Here is the COT report from May 16 with aggregate Commercial shorts at 142,859 and the gold price at around $1,230. There is no evidence of an impending rally based on the activities of either the Commercials or the Large Speculators. In other words, there is no "event" that would imply a bullish intervention.
The next COT is from June 6 with the gold price approaching $1,290 after a $60 per ounce advance in gold. Commercial traders moved to aggressively cap the advance by way of a 73,495 contract increase in net shorts. That represented over 7,349,500 ounces of synthetic paper gold and marked an interventional "event" that technical analysts would dismiss when presented with the evidence of a manipulation of sorts.
This next COT is from June 20 with gold at $1,240 just before a $20 per ounce "bounce" in gold and one that saw the Commercials reduce the net shorts to 175,000 but, as encouraging as it looked from afar, the Commercial Cretins were not done yet with my final note that day being "Caveat Emptor." Despite that, I attempted to establish long positions in the JNUG and the USLV (VelocityShares 3x Long Silver ETN) at around $1,240 gold.
Finally we arrive at last week's numbers with the bullion bank behemoths down to 107,226 contracts, a 109,128 contract reduction in net shorts, which represents 10,722,600 ounces of gold or around 24 times the 2016 production by Newmont Mining. The debate I have with many of the technicians is that traditional T.A. does not work in markets dominated by regulatory-sponsored interventions that are referred to as "events." A 10-million-ounce swing in paper holdings in the accounts of a group of colluding banks skews the very fabric of traditional technical analysis, where the supply of stock is the ultimate offset to rising demand. However, even if you are correct in estimating the demand side of the gold market, the supply side is impossible to gauge because the bullion bank cartel can create synthetic gold with no requirement for procuring a loan of physical gold as is required when one shorts a stock.
There is no "loan post" for gold (and silver) and that is precisely the weakness in the bullish manipulation versus bearish manipulation argument. If a manipulator seeks to influence prices higher, all that is needed is money to meet the margin call and that is a very simple exercise. What is not so simple is being able to snap one's fingers and create 10 million ounces out of thin air and sell it into real demand and never be required to deliver. When one buys, one delivers cash; when the banks sell, they post a cash bond with no requirement for physical, loaned or otherwise. When one shorts a stock, the rules say that one must be able to borrow the stock in order to sell it; in futures, you need only cash and the banks have a ton of that as collateral.
The discussion surrounding the likelihood of gold and silver being "rigged markets" has been rendered moot by way of the countless flash crashes and, of course, the infamous "Sunday Night Massacre" back in April 2013, when the precious metals were bombed unmercifully into oblivion by interventions that occurred in literally "the middle of the night." More recently, the flash crash in silver on Friday July 7 was initially blamed on a "fat finger" and then later by a "rogue algo" but in the end, had that flash crash occurred in GE or Tesla or IBM, they would have cancelled the trades. In the silver market, since the lows seen during the "event" were retested several times, the damage done by the intervention was successful in destroying morale such that it aided and abetted the egregiously large short position held then by the Commercials.
All one can do with any degree of effectiveness is continue to monitor the activities of the bullion banks and be on the alert for sudden, sharp changes. One can also monitor the behavior of my 120-lb.-Rottweiler whose antics tend to be synonymous with major turns in the precious metals markets. Between bullion bank behemoths and reactionary Rottweilers, trading the PMs should be a piece of proverbial cake but when you throw in computer-assisted trading systems known as "predatory algorithms" (that specialize in breaking down markets), you have an especially difficult environment and one that could be considered a proverbial piece of "something foul." Nevertheless, the rate of change in the aggregate shorts held by the Neanderthals suggests that the seasonally strong months of July through December should set up yet another tradable rally not unlike the Q1/2016 advance that was breathtaking in scope and size. Accordingly, I am once again tiptoeing back into the JNUG and USLV with purchases this afternoon at $16.80 and $10.23 respectively and am doing so with gritted teeth and clenched fists, a condition synonymous with the effects of Nembutal and Jack Daniels, taken jointly and copiously for absolute maximum impact.
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.
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.