Inflation in Crosshairs

Michael Ballanger

Michael Ballanger delves into inflation, the Fed’s actions, and the way they have an effect on treasured metals investing.

Being my first weekly missive of 2022, I wish to contact upon an E mail Alert I despatched out to subscribers on New Yr’s Day the place I mentioned the “First 5 Days” section of “The January Barometer,” an indicator developed by the late Yale Hirsch (with whom I had dinner again in 1996) who based The Inventory Dealer’s Almanac, a booklet I’ve ordered yearly since assembly Mr. Hirsch in Connecticut whereas on an jap U.S. street journey with a Canadian diamond explorer. The January Barometer has a 73.2% batting common in that each down January on the S&P since 1950 has, with out exception, preceded a brand new or prolonged bear market, a flat market, or a ten% correction.

When the “First 5 Days” of January lead to a internet achieve for the yr, markets have had an 82.6% likelihood of posting an up yr and whereas this indicator will not be as dependable in predicting bear markets, I discover it very attention-grabbing that the final time the market noticed a brand new excessive in December adopted by a damaging “First 5 Days” was 1981, shortly after Fed Chairman Paul Volcker declared warfare on inflation and which kicked off the 1981–1982 bear market that ended when the Fed did an abrupt U-turn and began slashing borrowing prices after throwing the world into recession and unemployment by means of the roof.

The long-lasting Richard Russell used each the primary 5 days and the January barometer as instruments however he additionally added a 3rd sign and that was the mid-month scorecard so if we take all three and apply them to the Dow Jones Industrials, the S&P 500, the NASDAQ 100, and the TSX 300, the outcomes come out as follows:

Index               First 5 Days            Mid-month

DJIA                          -0.29%                       -1.17%

S&P 500                    -1.87%                       -2.17%

NDX 100                  – 4.46%                       -4.30%

TSX 300                     -0.65%                       +0.65%

Whereas the jury is out on the rest of January, the primary section of the barometer has turned damaging and Richard Russell’s mid-month sign is now damaging so the percentages would favor a down month. I discover it attention-grabbing that the Canadian market (TSX 300) eked out a modest achieve for the primary two weeks but additionally failed the primary 5 days sign. So as to add extra gasoline to the hearth, we now have a hostile Fed being barked at by the White Home to “do one thing” about inflation as a result of these nasty mid-term elections are usually not going to deal with the Democrats very properly with a 7% CPI.

Each time I see Jerome Powell on the monitor, I’m instantly reminded of Marty Zweig’s immortal phrases, “Don’t battle the Fed and don’t battle the tape.” What I discovered on the Wharton College again within the mid-80s was that the error individuals make on a regular basis is attempting to second-guess the Fed. What number of instances have we heard the breathless utterances “The Fed is TRAPPED!” as an excuse for staying totally invested. This week alone I counted no fewer than 5 gurus all singing from the outdated bull market hymn sheet, completely adamant that the Fed would do nothing to derail the inventory and housing markets however what they fail to know is that for the previous three months, Mr. Powell has been threatening to remove the stimulus and in reality provoke “quantitative tightening,” an occasion that has been greater than adequately telegraphed to the member banks, affiliated brokerage homes and, most significantly, to the hundreds of fund and ETF managers which are weak to rising rates of interest. In hockey, you solely telegraphed a go to a teammate that refused to choose up a bar tab as a result of it gave the 7-foot goon on protection an opportunity to line him up; on this planet of bonds and shares, the Fed will at all times telegraph its hostile intentions with a view to keep away from a “disorderly decline in markets.” In different phrases, it cares not in regards to the public buying and selling Apple or Tesla or ARRK funds; it solely cares about its members and that they’re adequately flat or hedged by the point the growth is lowered.

The ten-year yield has simply damaged out to new highs and is on its manner above the two% threshold that many have thought-about “terminal” by way of “accident-creating” however as I’ve been chortling about for what looks like an eternity, accidents will drive the Fed to blink provided that they have an effect on the banking system and if the banks are all hedged, then it’s a “No hurt, no foul” state of affairs. I do know I need to sound like a nagging fishwife with a migraine headache attempting to stop smoking however traders have to know that this insidious inflation that has the Democrats so totally terrorized can solely be fought with coverage strikes which are injurious to every part that isn’t nailed down (besides uranium and presumably copper). Any investor that thinks the Fed can fight the rising CPI with selective concentrating on of particular person items and providers is dreaming. The one instrument the Fed can used will not be a rifle with a telescopic sight; it’s a double-barreled shotgun that can mow down every part in its path, together with tech shares and crypto.

As Richard Russell used to put in writing, “In a bear market, it’s the individual that loses the least amount of cash that wins the race.” Since now we have not had something even approaching a bear market for the reason that 2008 Nice Monetary Bailout – (the COVID CRASH was a quick hiccup with a “pleasant Fed” saving the world) – the overwhelming majority of traders have turn out to be conditioned to markets that solely go in a single course. “Purchase the dip” labored in in 1987, 2001, 2008, and 2020 as a result of not as soon as throughout that forty-odd-year bull market did traders ever run right into a Volcker-esque  disciplinarian with inflation in his crosshairs. Now, Jerome Powell isn’t any Paul Volcker however with the sanction and blessing of the White Home, my guess is that he does a reasonably good impression.

As for treasured metals, they failed the primary 5 days and the mid-month assessments however then once more, I don’t know whether or not they adhere to the January barometer. I stay constructive on each gold and silver however with a cautionary be aware. Through the 1981–1982 bear market, gold fell from USD $555 to $437 for a 21.3% drop, so solely a large secular shift in asset allocation fashions can offset the anti-inflationary coverage strikes by the Fed. Such a shift can solely happen if there’s a extended decline within the U.S. greenback, which may solely happen if charges rise extra quickly and with higher elasticity than within the U.S. I’m a lonely voice within the wilderness after I say that with the  U.S. debt stage at such a staggering peak, the chance of rising curiosity expense deterring overseas funding within the U.S. greenback is excessive (and rising).

Dovetailing again to the Richard Russell touch upon “bear market winners shedding least,” the gold and silver miners stay the most cost effective sector in your entire market to personal with oil and fuel producers an in depth second. Each ESG-sensitive fund on the planet has thrown out oil & fuel infants with bathwater as they scramble for “WOKE” acceptance and politically acceptable pictures leading to structural weak point unaccompanied by operational impairment – and that at all times spells alternative.

The reality is that since valuation for the metals and oils is so low, their threat ranges are additionally low, so whereas they might not be capable of go increased in a secular bear market state of affairs, they may undoubtedly outperform just about every part else (together with housing). Inside the gold mining sector, the senior producers are low-cost, the mid-tier producers are low-cost and the junior builders are past low-cost. They’re absurdly undervalued. By instance, take Getchell Gold Corp.’s (GTCH:CSE; GGLDF:OTCQB) announcement of an 8.2-meter interval of 8.8 grams per tonne gold at its Fondaway Canyon Undertaking in Nevada. Regardless of spectacular ends in a extremely favorable jurisdiction with cash in its treasury, traders simply yawned. You need to return to January 2016 or March 2020 to recall these ranges of investor apathy. To wit, again within the Nineties, if any junior reported 27’ of quarter-ounce-plus gold, the inventory can be halted for a few days and open up over a double.

I’m continually requested what has to happen with a view to create curiosity within the exploration juniors. Why does a Nice Bear Assets (GBR:TSXV) advance from the pennies to over CA$29/share solely on reported drill holes, and not using a useful resource estimate, and get taken over whereas others have the identical high-grade ends in a positive location and are unable to purchase a bid? The reply is discovered between the partitions of the boardroom; Nice Bear has a number of administrators that know the drill on how you can entice potential financiers, traders, and finally, suitors.

Nowhere is the time period “skilled administration” extra necessary than on this planet of junior mining. Nowhere on this planet of public markets do you fund such a bifurcation of managerial range; it appears that evidently you end up with both high-integrity operators and awful initiatives or newbie hour managers attempting to advance first rate initiatives. There doesn’t seem like any center floor however when drill gap information is delivered to the market by executives schooled within the artwork of advancing the worth of their corporations, the market pays heed. Administration may be composed of excellent technical personnel and include actually good outcomes, but when they’re weak within the capital markets battlefield, traders will undergo.

Warren Buffett likes to make use of the analogy of “it’s important to await the tide to exit earlier than you see who has no swimsuit on” as a way of describing the true expertise of a fund supervisor. It’s no totally different for the junior miners. Within the six months after the COVID crash and gold broke out to all-time highs above USD $2,000/ounce, the junior gold and silver house grew to become supersaturated with ex-hockey-players, used automobile salesmen, carnival barkers, and snake oil purveyors of all sizes and temperaments wandering out and in of the brokerage agency zoom terminals with fistfuls of money and oversubscribed financings of obscene proportions; that was the tide going in.

We are actually within the eighteenth month of the corrective section within the junior gold and silver mining house. We now know who has no swimming trunks on as a result of the financing tide went out over a yr in the past. Now that every one the simple funding has dried up, we’re going to see who has the mettle to outlive and simply who has the boardroom finesse and undertaking energy to create worth for shareholders. Since success is now not measured by the width and grade of a drill intercept, progressive strategies of attracting the investor greenback and a spotlight span are going to be wanted.

There are occasions when markets render us into the “Jim Phelps mode,” that memorable character performed by Peter Graves within the legendary 1960’s motion serial Mission: Not possible. I discover it empowering that regardless of the title, the missions have been at all times accomplished completely.

“Your mission, Mr. Phelps, must you select to just accept it, is to find these junior mining corporations which have sub-par administration however above-average initiatives that may truly go up in worth. This message will self-destruct in ten seconds.”

Initially revealed on Jan. 15, 2022.

Observe Michael Ballanger on Twitter @MiningJunkie. He’s the Editor and Writer of The GGM Advisory Service and may be contacted at [email protected] for subscription info.

Initially educated throughout the inflationary Nineteen Seventies, Michael Ballanger is a graduate of Saint Louis College the place he earned a Bachelor of Science in finance and a Bachelor of Artwork in advertising and marketing earlier than finishing post-graduate work on the Wharton College of Finance. With greater than 30 years of expertise as a junior mining and exploration specialist, in addition to a strong background in company finance, Ballanger’s adherence to the idea of “Laborious Belongings” permits him to focus the apply on deciding on alternatives within the world useful resource sector with emphasis on the valuable metals exploration and improvement sector. Ballanger takes nice pleasure in visiting mineral properties across the globe within the endless hunt for early-stage alternatives.




1) Michael J. Ballanger: I, or members of my fast family or household, personal securities of the next corporations talked about on this article: Getchell Gold Corp. My firm has a monetary relationship with the next corporations referred to on this article: Getchell Gold Corp. I made up my mind which corporations can be included on this article primarily based on my analysis and understanding of the sector. Further disclosures are beneath.
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Michael Ballanger Disclaimer:
This letter makes no assure or guarantee on the accuracy or completeness of the info offered. Nothing contained herein is meant or shall be deemed to be funding recommendation, implied or in any other case. This letter represents my views and replicates trades that I’m making however nothing greater than that. All the time seek the advice of your registered advisor to help you together with your investments. I settle for no legal responsibility for any loss arising from using the info contained on this letter. Choices and junior mining shares comprise a excessive stage of threat that will consequence within the lack of half or all invested capital and due to this fact are appropriate for knowledgeable {and professional} traders and merchants solely. One ought to be accustomed to the dangers concerned in junior mining and choices buying and selling and we suggest consulting a monetary adviser in case you really feel you don’t perceive the dangers concerned.

All charts and graphics are offered by the writer.


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