Michael Ballanger: I’m Stacking Gold Because It’s Ridiculously Cheap As Measured Against Inflation

Thursday, May 30, 2019
By Paul Martin

May 30, 2019

I continue to proffer the thesis that gold (and that ridiculously underpriced stepchild silver) are in good shape technically…

by Michael Ballanger via Streetwise Reports

A few nights back, a good friend of mine from Perth, Australia, e-mailed me an article skillfully written by someone from the firm of Goehring & Rozencwajg, in which the lead story was entitled, “The Bell Has Rung: the Contrarian Power of Magazine Covers.” In this really good body of work was a magnificent flashback to a Businessweek cover that I actually cut out in 1979 and had Xerox’d and mailed to all of my clients (numbering 27) by the following weekend.

It was a Businessweek cover that had on it “The Death of Equities,” and as it was within literally three years of the beginning of the greatest bull market in stocks ever, it also marked the top of the “non-equities” cycle, whose main component was the commodities sector—led, of course, by gold. The firm juxtaposed their review of the 1979 article against the recent April 2019 Bloomberg Businessweek cover page entitled, “The Death of Inflation,” in which the authors point to the myriad of reasons why inflation rates are declining and why they will continue to decline. The implied conclusion is that one should avoid inflation hedges (like gold and silver, and to a larger degree commodities) and instead stay with stocks and bonds and live long and prosper.

It was a wonderfully written article. After I calmed down and got down from the table upon which I was jumping, I found myself in conflict. Upon the conclusion of the fourth reading, it hit me. As much as it had me cheering from the sidelines that finally we were overdue for a bona fide commodities cycle, I found myself glued to the frailties of the thesis.

The article “The Death of Inflation” is, in a word, wrong. It assumes (and asks you and I to assume) that the published “inflation rate,” which emanates from the U.S. Commerce Department and excludes food and energy, is a solid number. I submit to all of you that the published “rate of inflation” is nothing but rubbish. It is a contrived, fabricated number designed to, at first glance, placate the masses. Far more importantly, it placates the investor class and cajoles them into believing that the rate of producer and consumer price advances is “muted,” thus justifying ownership of U.S. Treasuries and common stocks.

Let me give you a classic example of the hidden effects of inflation. You have all noticed how supermarket items have masked price increases through reduced volumes. The 10-pack of Ivory soap is today priced a tad higher than in 2010 but each bar of soap has been reduced in size by around 30%. That is inflation.

A better example is the marina where I dock my boat in the summer. In 2014, when we first joined, there were a number of perks, including Wi-Fi, free newspapers, complimentary coffee, and cable TV hook-ups. Dockage fees have risen around 10% in a five-year time frame but gone are all of the amenities that made one content to pay premium dollars to become a member. That, too, is inflation.

The slow creep of these cuts is also seen in the real estate market, where lot sizes are the size of postage stamps while running water is considered an upgrade. Everywhere you turn, you see a carefully contrived pattern where whatever the bankers have in inventory or pledged as collateral against their mortgage book is inflating while all of the traditional inflation hedges (such as commodities) are deflating. That is “targeted” inflation, and make no mistake, it is the continuum of interventions that are training the investor class where to place their bets.

Whenever I read an article that tries to draw a parallel between today’s markets and virtually anything prior to the election of Ronald Reagan (and appointment of Alan Greenspan), I am forced to ignore the assumptions. The assumptions to which I refer are those that choose to discount the interventions in day-to-day trading as a rationale for supporting the conclusion. If the published numbers surrounding what constitutes our “cost of living” are frail, frayed and flawed, how, pray tell, is one able to model a “real” rate of return (ROR)? How, when the risk-free rate of return (typically the 2-year US Treasury) is being clouded by a rate of inflation that lies between “corrupted” and “connived?”

There is nothing more sobering than doing one’s bookkeeping. When I am forced to sit down and go through all of the statements and all of the tax returns and every single trade in any given tax year, it is like putting a volume accelerator in each of my ears and then screeching fingernails down the entire length of a blackboard over and over and over again, all the while playing a Barry Manilow album in the background. Nothing—repeat—nothingsends me into madness more rapidly than looking back upon trades or deals or drilling programs that have dominated my portfolio especially over the last five years, because what always begins with optimism and excitement, has tended to devolve into pessimism and boredom.

When we are finally able to look back upon the 2009–2018 era of “buy the f—ing dip” methodology, with financial assets in complete and total meltdown and hard assets in early-stage, hard-fought acceptance, very few of us have the energy nor the tolerance to rise up on any sort of soapbox and claim victory. What the bankers have done, with the aid of regulators and elected officials, has been nothing short of criminal, but in the court of public opinion, they gave the younger generation a glimpse at “controlled” (as opposed to “free market”) capitalism. Now we have all of these Millennial and Gen-Y traders swooping in and out of markets like birds in a marsh at sunset, and all that matters is that the “system” remains intact and the banks remain solvent so that the campaign contributions will continue to flow and the status quo is allowed to prevail.

I continue to proffer the thesis that gold (and that ridiculously underpriced stepchild silver) are in good shape technically, with relative strength index (RSI), moving average convergence/divergence (MACD), and histograms all trending higher but nowhere close to even mildly overbought. The graphic below lays out my 2019–2021 thesis, as I believe the late 2018 “pivot” by the central bankers was a carbon copy of the one that occurred in Q1/2009. If investors wade into the precious metals in the second half of 2019 the way they pounced in Q3/2010, they will be doing so with an additional $9 trillion of credit creation as armament for the assault.

It is important to recall that in 2010, the investing public was still reeling from the all-out devastation wrought upon them by the bankers, and did not have nearly the liquidity then that they have today. Yet, in the final analysis, forecasting gold’s direction, amplitude and timing is an exercise in handicapping the odds in the same manner that you try to predict the outcome of a horse race—and as everyone learned too painfully from this year’s Kentucky Derby, you can pick the horse and still lose all of your money if someone intercedes and disqualifies the winner. That is exactly what has happened to investors in gold that correctly predicted the monetary and fiscal turmoil that unfolded in 2009: They picked the right horse but the central bank racing stewards disqualified it in 2011. Total, complete, unadulterated disqualification the likes of which we are encountering here in 2019.

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