Unnatural Distortions And The Precious Metals

The most recent U.S. jobs report, which I believes is bound for revision, has me musing on how economic policies are reflected—or distorted—in the precious metals markets.

I was sitting in my den looking out over the swamp—errr—lake tonight when it appeared as though something was flailing around near the shoreline. So I threw on my deck shoes and went for a stroll down to the water to see what all the commotion was about. Now, you must understand that I have been around the Kawartha Lakes since my late teens, having fished for pickerel alongside the Buckhorn Dam in the summer of 1970. Back in the day, the pickerel were so plentiful that we would throw two or three of these two- to three-pound beauties into the live well and then play "catch and release" for the remainder of the day, because you were taught at a very young age that you only take what you need as food and you release anything else so they could grow and make more baby pickerel. At the root of the practice was one remarkably simple fact: Pickerel are the finest-eating freshwater fish in the world and you want to protect them.

So here I am, looking past the weeds and algae in the shallows of western Lake Scugog and what comes lumbering past is the most gawd-ugly creature that I have ever observed—an enormous Asian carp that had to be ten pounds. Before I could say "invasive species," two more appeared, equally as detestable and even larger than the leviathan that first surfaced, after which the fish began to perform a kind of floundering, splashing, mating ritual where they rotated their bodies over and around the female in a manner most foreign to anything I have observed in six decades of angling in the Ontario waterways.

It was at this point in time that I came to an epiphany, the point of the experience that at once provided me with an idea for a topic for tonight's missive but, more importantly, the sudden realization that any of the natural species that have inhabited these lakes (such as my beloved pickerel) have zero chance of surviving in waters dominated by Asian carp. The sad part is that there are no natural predators to keep carp populations in check, so how the Ministry of Fisheries and Wildlife intends to solve this unnatural distortion is beyond me.

That, my friends is not only sad, but also symptomatic of even greater unnatural distortions in the global capital markets, thanks largely to the insanity of the central banking cartel.

The chart you see here is an illustration of three events: the first is the REPO operations launched in September 2019, which forced massive liquidity into the markets to prevent certain select hedge funds from blowing up, and which put a bid into stocks and accelerated into 2020. The second is the media-fueled panic that miraculously grew from a violent strain of influenza into a global pandemic, taking the S&P down 36% in thirty-four days. The final event is what we are living through today: a money-printing convulsion by central banks the magnitude of which makes the Great Financial Bailout of 2009–2011 look like a bake sale raffle.

I was trying to explain this distortion to a group of younger investors earlier in the week, and it was like trying to explain to Phil Kessel why backchecking is necessary, which means it was a) impossible and b) pointless. The only thing that matters to this new generation of investors is that "the Fed's got our backs," and that "cash is trash." It matters not that there is a massive distortion between fundamentals and valuation, the direct result of the implementation of "moral hazard" as a policy tool.

What is important is that rising stock prices will make the average American consumer feel better about spending the money they no longer have. The Federal Reserve has pulled this trick at every sniff of a market correction since 1987, and have now completely engrained the notion that stocks are a "riskless venture," a veritable ATM of government largesse and charity that will never fail.

David Rosenberg is a really smart guy who has been warning investors of a dangerous overvaluation of stocks on the basis that only a "V-shaped" recovery can have any chance of justifying these prices. I argue that it simply does not matter what the economy does, because the deflationary forces that should be knocking stocks back down are actually deflating the purchasing power of the U.S. currency unit.

As more and more fiat gets squeezed out of the pork machine by the Fed's orgasmic display of debt monetization and futures market intervention, the more units of currency are going to be required to replace a common share of stock, any stock. So, when the left-leaning media starts whining about all of this Fed "liquidity" going to supporting the stock market, as opposed to starving citizens, they fail to learn from history that the number one priority of the Federal Reserve bank is to protect the member banks, and that means shareholders of the member banks. It is this unnatural distortion that allows an elite sector of the U.S. economy to indiscriminately manufacture "money" while being bestowed the ordained duty of choosing which citizens (or groups of citizens) are entitled to that taxpayer-provided charity.

The olfactory glands of the precious metals' markets have detected a repulsive order emanating from the Eccles Building and have responded accordingly, with a 13.41% advance year-to-date versus a 3.67% decline in the S&P 500. Mind you, from the March lows, stocks have obeyed their banking masters and responded to the liquidity explosion, while gold has been harnessed to a trading range in the USD $1,700s per ounce, although it looks as though a more serious correction is possible, especially if it fails to hold $1,700 in the seasonally soft May–July period.

If I had to look to one glaring distortion, either natural or unnatural, that is staring us all in the face, it is that gold is not already through US$2,000/ounce, and that silver isn't trading above 1/70th of the price of gold. Instead, thanks to countless blatant and criminal interventions, silver trades at 1/95th the price of gold, and is still over $2.00, beneath the Sept. 2019 high, at US$19.75, while gold drifts aimlessly, as the U.S. equity markets are valued at 147% market cap to GDP [gross domestic product] ratio.

The Friday jobs report came in with a massive "beat" ("better than expected"), with the economy adding 2.5 million jobs in May versus the expected minus 8 million. Just as the ringing of a bell by Dr. Pavlov caused his dog to salivate, the gold and silver markets felt obligated to crash 2.0% and 2.44% respectively.

Notwithstanding almost certain revisions to the Friday number, the Bureau of Labor Statistics (BLS) report showing a 13.3% unemployment rate is around 3.3% higher than the peak number during the 2008 Great Recession/Financial Crisis/Bailout, which came in at 10%.

Dow futures are called up 665 points, and the number of grinning CNBC guest commentators makes me want to lob my tackle box at the screen, because these cackling jabberwockies of self-professed financial acumen are the same clowns that were begging to have them "close the stock exchanges." To see these Cheshire Cat faces all beaming with inferences of "I told ya so" is about as disingenuous as it gets.

I have been urging caution in the precious metal markets since April, and while my exit was premature, preserving subscriber capital has outweighed any need to give back the gains we have enjoyed this year thus far. Now that gold has knifed down to US$1,690/ounce, perhaps the miners will experience a deeper correction that will allow us to acquire our favorite names at prices closer to their 50-dma [daily moving average] levels.

I continue to hold a larger-than-normal cash balance (over 70%) and am overweight one junior gold developer (Getchell Gold Corp. [GTCH:CSE]), and I look to add into the typical seasonal weakness that occurs in the June–July doldrums. Aftermath Silver Ltd. (AAG:TSX.V), in the CA$0.30/share (or below) range, is also on my radar.

In closing, to those of you that wrote off the bullion bank behemoths as being "cooked" in their management of the Crimex gold market, once again, they have successfully capped price during the period of the greatest currency debasement in U.S. history while levitating stocks back into bull market territory. The truly great "unnatural distortion" is the movie being played right before your eyes; if you believe for one New York minute that today's jobs number was anything but fiction, I have some lakefront in the Scugog swamp I will sell you.

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.

Disclosure
1) Michael J. Ballanger: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: Aftermath Silver and Getchell Gold. My company has a financial relationship with the following companies referred to in this article: Aftermath Silver and Getchell Gold. I determined which companies would be included in this article based on my research and understanding of the sector. Additional disclosures are below.
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Charts provided by the author.

Michael Ballanger Disclaimer:
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.

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