By The Gold Report
Sector expert dissects recent Fed and other government actions and discusses his recent precious metals trades.
In the 1976 movie “Network,” British actor Peter Finch won an Academy Award for his stunning portrayal of news anchorman Howard Beale, whose on-air descent into insanity, prompted by the social and economic conditions of the times, is now legendary. The iconic scene where Beale, clad in a rumpled raincoat and with wet hair plastered to his head, goes on national TV and implores watchers to go to their windows and scream “I’m mad as hell and not going to take this anymore!” is one of the most awe-inspiring scenes in the history of filmmaking. Should you wish to watch the scene for yourselves, the link can be found here.
You know, I must confess that there are days that are becoming all too frequent now, that I feel like a 2019 version of Howard Beale. I watched last Wednesday as Fed Chairman Jerome Powell stood in front of a room full of reporters and masterfully executed the Art of Obfuscation as he convinced the financial markets that $60 billion per month of paper money creation is a) not inflationary, b) not an emergency measure and c) in no way to be considered “quantitative easing” (QE). As if that alone was insufficient in sending me to the closest window, Friday at 8:30 EST, they trot out the BLS non-farm payroll numbers as an upside “beat” thanks largely to revisions to the Birth-Death Model (for about the 50th time since 2008) after which stocks scream to all-time highs, confirming what I been raging about since September.
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Notwithstanding the obsession that Mr. Trump has with the stock market, I have been saying for the past month that shorting the S&P in the last two weeks of October AND as we approach a presidential election year was (and is) not a very good idea. However, what made me want to pull a “Howard Beale” is that it is all happening under a mirage of phony statistics and doctored economic data.
Nowhere in the MSM was there any mention that the U.S. debt clock just ticked past $23 trillion or that the Fed balance sheet is now north of $4 trillion, both of which serve as testimonials to the insolvency of the U.S. and the fraud called the Federal Reserve. Watching the rejoicing on the anchor desks of CNBC as this magical levitation of stocks occurs in the face of massive debts and critical overvaluation is as maddening as it gets. Listening to Larry Kudlow interviewed each and every time the S&P has a 0.5% pullback on “Trade Concerns” is as predictable as the sun rising.
Rather than rant and rave about conditions over which we have no control, it is more fruitful to discuss the good things that are occurring in our markets such as the resumption of the bull markets in gold and silver and the associated miners. Of particular significance was the two attempted takedowns, the first on Wednesday after the FOMC rate cut and the second on Friday immediately following the jobs report, that were summarily rejected, leaving both gold and silver in fine shape technically and, more importantly, from a sentiment standpoint. The failure of the bullion bank behemoths to send the metals into all-out retreat has now resulted in the weekly charts registering breakouts from well-defined pennant formations, which in turn is significant because we are now into a period of positive seasonality for the precious metals that should last right through Q1 2020. I see new high ground for silver above $19.75 as it remains my “metal of choice” for the balance of 2019.
Of particular interest, as least for me, is the continuing downtrend in the gold-to-silver ratio (GSR), currently at 83.72 but well-off the highs seen last July when more than a few of the market mavens were calling for a move through 100. I took the other side of that trade by shorting it at 92.4 and since then have had to listen to all of the trolls perpetuating the “gold superior” myth that has clearly not been the case since the early summer. I continue to target 70 for the GSR, possibly by New Year’s Day but most probably in Q1/2020. Accordingly, I am overweight silver equities with major positions in Aftermath Silver Ltd. (AAG:TSX.V)(C$0.24) and Goldcliff Resource Corp. (GCN:TSX.V)(C$0.14) while carrying a handful of other primarily gold exploration names as well.
My remarks on the COT Report are found in the graphic shown below. I tweeted out last week how amusing I find it that it has now become a race to the finish as to who sends out their interpretation first. I find it laughable that certain “gold gurus” that had never read a COT report before 2018 are now fashioning themselves as “authorities” but the fact remains that any “system” that gets embraced by the masses is doomed to failure because once everyone follows it, it loses its luster in a big way. Never considered a timing tool for gold and silver, I use it as a risk barometer whereby extreme positions held by Commercials cannot should not be ignored and, more importantly, NEVER discounted. While it is true that 300,000 net gold shorts is a historically big number, it is interesting (and quite bullish) that both Large Specs AND Commercials were net buyers of silver last weekwhich in turn supports the “short GSR” trade and my overweight silver equities holdings.
The S&P 500 has finally exploded from its sub-3,000 trading range from most of 2019 and is now clearly and undeniably in the “blow-off” stage as money managers exited the September-October period with FAR too much cash and far too few stocks on their books. The scramble to get “fully-invested” has now become a panic move as year-end bonuses are in danger of being vaporized if benchmarks aren’t met and you just know how important those year-end bonuses will be for campaign contributions and re-election campaigns. Expect a lot of Trump tweets and Kudlow interviews extolling the “GREAT ECONOMY” while cheerleading stocks to yet even greater heights and unfathomable risks. As you have read here countless times before, “One can never underestimate the replacement power of stocks within an inflationary spiral” and if you for one second don’t view $60 billion a month of POMO as “inflationary,” then I have an ice cube stand in Nunavut to sell you. As far as the U.S. economy is concerned, one glance at corn prices provides needed perspective on just how bifurcated wealth has become. Farm bankruptcies have soared 24% this year but you sure don’t read many tweets on THAT subject from the Donald.
It was great to see the email from Aftermath Silver President Ralph Rushton late last week confirming that the company had closed the $0.08 financing after over two months of regulatory wrangling with these remarks: “The Cachinal Project required a NI 43101 technical report which was a long drawn out process with multiple moving parts. Approvals took far longer than we anticipated, with a fair degree of frustration along the way, so naturally we’re extremely happy that we can now focus on marketing and advancing the projects.”
I am going to put together a feature article on Aftermath around mid-month but all one really needs to know is that Cachinal is located in Chile, and if it was not so busy being the world’s premier copper producer, it would probably rank higher than fifth in global silver production. I went through Aftermath’s most recent NI-43101 last evening and am delighted that exploration begins from a solid base of nearly 50 million ounces of silver (indicated and inferred) from both Cachinal and Challacollo. While currently considered a “historical resource,” more drilling and subsequent upgrades will allow for substantial re-rating of the stock and (IMHO) substantial price advance.
In a recent article I demonstrated how in-ground metal values were determined and provided a link to Cipher Research Ltd.’s $40/ounce benchmark for gold. Using the same methodology and applying the current gold-to-silver ratio of 83.47:1, $40/ounce for gold equates to $0.48/ounce for silver. Including the recent $2.5 million and $3 million financings in calculating market cap, there will be approximately 75 million shares o/s (excluding warrants). The implied valuation for the current historical resource should be around C$30 million or C$0.40 per share. From the current price of C$0.24 to C$0.40 implies a 66% lift. Therefore, AAG is both undervalued and beautifully-leveraged to three main drivers: 1. The silver price, 2. Increases in ounces through drilling, and 3. Upgrades in the quality of the resource. All of these three are codependent but very highly probable given the wide-open nature of the two projects and the region.
Needless to say, and in the interest of full disclosure, I own the shares by way of the $0.08 unit announced last week but added it to the GGM portfolio on July 13 at $0.10 per share via my Twitter post. That said, initiating a new position or adding to existing AAG holdings is not a bad idea even at current levels. One last thing: the next private placement to close will cause quite a stir and the key was in Ralph Rushton’s email that said: “Next week, we expect to close the second private placement, which is for $3 million at $0.20 cents with the majority going to a strategic investor.” I wonder just who might that “strategic investor” be?
Onward and upward and may God bless Howard Beale.
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.
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 Goldcliff. My company has a financial relationship with the following companies referred to in this article: None. 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.
( Companies Mentioned: AAG:TSX.V,