As a child, I used to get quite excited at the prospect of having my English “Gran” read me the Hans Christian Andersen book “The Emperor’s New Clothes.” I found the tale fiendishly amusing, as the charlatan tailor uses lethal doses of flattery and mystery to beguile the poor sovereign into really believing that he is wearing the finest robes ever woven. There is even greater irony in the crowds he passes during a parade as they “Oooh” and “Awww” at his comic preening, knowing full well that he is making a fool of himself but too fearful to do anything but play along. The ending is sublime, with the ultimate moment of reckoning coming “from the mouths of babes,” in the form of a young lad who finally blows the whistle with the innocent but true acknowledgement that, indeed, the emperor was parading pitifully through the town square clad only in his knickers.
I think that I admired and, in fact, envied the scallywag tailor in a manner not dissimilar to the way I am awed by this recent bevy of bankers and politicians. They stand in front of the cameras with their carnival barker bravado and serpentine smiles as they lift trillions of dollars from the future wallets of the taxpaying public and distribute it shamelessly among their capitalist cronies.
You will have to forgive me for defaulting back to the singular best description of the current environment, emblazoned for posterity into our collective psyche by Sir Winston Churchill when he said, “Never let a good crisis go to waste.” The sheer wisdom of that statement is exceeded only by its sheer cynicism, a practice to which I heartily subscribe.
To wit, that I have been (and continue to be) an irritating gnat in the ears of the Millennial Generation is neither a secret nor a placard. However, I place in these youngsters zero fault for taking such an equally cynical approach to the current global health crisis. They should be outraged by the actions taken by the Baby Boom geriatrics in charge of the “handling” of the outbreak, and indeed they are. Swirling around the twitterverse and the blogosphere are conversations about the COVID-19 pandemic that include descriptives like “Boomer Remover,” which, while in very poor taste in light of the death tolls, reflects the growing mistrust of youth in the global leadership, the bulk of whom would fall into the “boomer” demographic.
Ours is the generation that marched in the streets against racism and war, and then promoted the entire concept of “free market capitalism” for decades. We constantly amped up the frequency and volume of monetary inflation while blindly saying “support our troops,” without questioning why they were being sent off to foreign lands to combat enemies too elusive to confront and too abstract to hate. The banco-politico alliance told us that 9/11 was a “crisis,” so invading a sovereign nation was justified. In fact, the West has been at war in the Middle East now for nearly three decades and there are still terrorists blowing up civilians while young men and women are being returned in body bags to native soils in America, Canada and numerous other NATO lands.
Now, I don’t want to get too morose here but there is absolutely no reason to be surprised if there are crowds marching on the capital cities of the G20, torches and pitchforks in hand, demanding big changes in the “bailout and entitlement queue.”
What really irks me (and should irk you) is that the banco-politico alliance have not “let a good crisis go to waste” but, quite on the contrary, have not only seized it but actually may have created it. Conspiracy theories put aside, with central bank balance sheets all seriously impaired by last September, choked to the esophageal gills with the toxic waste of the last crisis (2008), it is quite possible that these cretins actually needed an excuse to launch a “shock-and-awe” campaign of unbridled money-printing, fully condoned by a terrified legislative and “all-knowing” leadership.
As I have written before, the crisis I identified in the 2020 Forecast Issue was debt, and the first inkling of trouble arrived in September, when JPMorgan’s Jamie Dimon first went public with the “trouble in the interbank market” comment during a CNBC interview, followed by the rapid and predictable response by the Fed (REPO). What started as a “temporary” event and “no QE” (quantitative easing) quickly morphed into “permanent” and “massive QE,” and that was before the pandemic even arrived.
No one will ever know for certain, but as Richard Russell would often counsel, “Follow the money.” This leads me to believe that while the elitists probably had nothing to do with the origin of the virus, they have certainly used it to their fullest advantage. Now the Fed balance sheet has grown (and will continue to grow) to unfathomable levels while the treasury departments of all nations around the globe are currently embarked on massive campaigns of debt monetization, the extent of which has become surreal in the true sense of the word.
I was hoping to be wrong in my cynicism, and see the recipient list for the handouts and bailouts not include the banks but, alas, it is not to be. As always, the money has to be channeled through the fee-starved banks because, after all, interest payments on loans held by these “poor banks” must be paid, and as the U.S. is in an election year, they can’t have mortgage defaults spiraling into the abyss while votes are on the table.
In the end, just as that emperor was able to walk without fanfare for what might have been seen as an eternity in retrospect, undergarments disguised as golden robes, the world has long been convinced that the wealth and longevity of the Western World, led by the U.S., was the direct result of “Free Market Capitalism.” That, my friends, is the greatest fallacy of the New Millennium. It did not “go slowly into that good night;” it fell to the ground in ruin, one crisis at a time.
Once the bastion of goodness, “Free Market Capitalism” is now a smoldering pile of rubble, while in its place rises a new world order of “Rigged Market Socialism,” where the wonderfully fertile process of true price discovery has been supplanted by interference, manipulation and price management. Ayn Rand wrote of it in 1957 with her epic novel “Atlas Shrugged,” a work that is now prologue to the events of the last eight weeks, with the phrase “Who is John Galt?” echoing throughout the chambers of policy debate and political strategies.
As greatly as I might resemble a Scrooge-like curmudgeon in today’s missive, I give thanks that my portfolio is solidly anchored in a balance of gold and silver assets whose prices are divergent but, on balance, largely positive on the year. To be down year to day anything less than the 22.79% drop in the S&P 500 is a bonus, but to be ahead is a testimonial to the utile effectiveness of a gold-centric portfolio.
Silver, by contrast, has been a dismal underperformer, for all the reasons I mentioned earlier, and despite recent strength remains in a bear market.
I usually roll my eyes when I read some newsletter “guru” taking victory laps for making a lucky guess at the short-term direction of the precious metals. But even worse is the guy that reminds you that he has “always advocated gold” while failing to remind us all that gold endured a horrific bear market from August 2011 to December 2015, with the HUI falling from over 600 to under 100. I try to identify swings in both gold and silver because you do not want to be 100% long anything all the time. However, never in my forty-plus years in association with the mining and metals arena have I come across a more opportune time to hold gold assets than now. I cannot underscore this. We are going to go through a near-term deflationary scare here first, but what will follow will be an inflationary firestorm, the likes of which will make Weimar, Zimbabwe and Venezuela look like Switzerland.
Year to date, gold has been like a dutiful Saint Bernard. It pulled all of us out of an avalanche of snow and continues to revive of us with the barrel of brandy around its neck. It has behaved, and continues to behave, exactly as it should. It is really important to understand that as we look back in time, we see an asset that not only responds to current demand, it also responds to the current policy initiatives of “those in power that would try to save us.” So, these desperate measures being undertaken by banco-politico alliances across the globe are the reasons that I am buying more on any weakness that appears.
Tactically, on the assumption that we will see a $2,000/ounce gold price by 2021, the biggest leverage comes in owning the marginal producers, but even more so in the developers. The developers that own gold ounces in the ground, but not yet mined, represent outstanding upside because if they are valued at $20 per ounce for a deposit carrying an AISC (all-in sustaining cost) of US$1,500/oz., they will get a $100/ounce lift as their profitability moves from $150 to $500/ounce. That one-million-ounce deposit valued at $20 million gets suddenly rerated to $120 million, and whereas the price of gold advanced 21%, the value of the company rose by 600%. This is the epitome of leverage in the world of gold mining.
While the list of companies that fall into the “developer/explorer” category is reserved for subscribers, there are a few that have been outstanding performers. Two of these “penny dreadfuls hit 2020 highs this week and both are gold deals. The same thing is going to happen when silver finally breaks out of its bear market. But for now, the marginal producers and nascent gold producer/developers are the place to be.
The chart of silver shown above, containing some Fibonacci levels covering the peak-to-trough crash, offers some guidance, and while I do not pretend to be a technical analyst by any stretch, silver has finally scratched its way above that first resistance at US$14.38/ounce, with the next two levels possible. To turn the near-term trend positive (i.e., something more than a dead-cat bounce), we need a solid close above US$16.08/ounce.
Back in November the Fed’s REPO actions began to accelerate, making it appear evident that the Fed was content to let the economy run “hot” for “awhile” in order to jumpstart productivity. This was a clear signal to many of us that all was not well with the U.S. economy, and while people shrugged it off as a temporary problem brought on by Trump’s Trade War (with everyone), I surmised that it was going to have unintended consequences, which it did.
The constant interference in the paper markets include the Crimex in New Yord and the LBMA (London Bullion Market Association) in London, and as I wrote about in “A Tale of Two Markets” last week, investors are moving rapidly up the learning curve with this insatiable appetite for physical gold and silver. Seeing a paper market offering at US$14.55 for an ounce of digital silver, but having to pay US$23.87 for a deliverable ounce of the same metal with six-month lag time, is the largest and most malodorous smoking gun ever left at a murder scene. The banks are playing a totally different game with a totally different set of rules, and it will not end well.
I wrote in the Forecast issue that I fully expect to see a reset in the U.S. dollar gold price, prompted by the very people who have been resisting it for decades. Continuing along the path of “follow the money,” look no further than U.S., the International Monetary Fund and Germany for the instigators of this collateral mark-up. The banco-politico alliance is not only out of new bullets, and not only are the old bullets having little to no impact, they have only one option left, and that is the gold holdings. They must re-collateralize their precious banks and they have only one means to do thatthey must re-price their only remaining collateral.
With the bullion bank shorts still at uncomfortably high levels (280,000 plus), it could not come at a more propitious time.
Welcome to the New World Order of “Rigged Market Socialism.”
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.
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