To The Sky? Brace For Impact!

February 14, 2021

It was one year and three weeks ago that I decided to buck the Pollyanna Trend that was then dominating the U.S. equity markets and with the S&P 500 within an earshot of record highs, I penned the January 24th missive entitled “Malevolent Microbes” in reference to overseas reports of a mysterious virus affecting segments of the Asian and European populations. I ended the missive with the following advice “With the coronavirus death toll having just jumped to 60% and now confirmed in Europe, traders in all markets are advised to beware the malevolent microbe…”

With the Citibank Panic-Euphoria Index straining to break the borders at 100% bulls, I warned the world of impending doom and as I had been short the S&P since January, I was flabbergasted that stocks were completely ignoring the warning signs that were absolutely screaming “Danger!” from every window, scaffold, and yardarm as the back pages of every major newspaper had tiny little snippets of “Coronavirus Coverage” while the CNBC bubbleheads were running flash updates of “80 points from the all-time highs” and “ less than half a percent from all-time highs” and “Stocks are off the lows!” while RSI and MACD were obviously decelerating while the music continued to play and the traders partied like 2001 again.

George Soros once wrote that he could tell when he had entered a potentially losing trade because his back would act up. I know precisely that of which he wrote; when I suspect that a trade I have entered is going to blow up, my eighty-pound Rottweiler leaps over my desk and tears out of the room only to be found days later hiding under the tool shed, shivering, and whimpering out of fear for his life at the hands of a crazed stock trader. Fido knows when things are about to go awry and if were not for him (and the odd rolling pin clanging off my noggin), I would be destined for rudderless navigation in an ocean of doubt.

There is a well-used anecdote about Joseph Kennedy, father of John F., Bobby, and Ted, a former bootlegger from Prohibition Days and, it is said, a prominent member of the Irish Mafia that ran large portions of the northeast crime territories along with the Italian and Jewish mobs. Being a market mover and shaker, Kennedy was in New York for a meeting on Wall Street and not wishing to be anything but presentable, he elected to cop a shoeshine from one of the many street kids that patrolled Broad and Wall. As he was sitting reading the Journal, the shoeshine boy proceeds to begin opining on the stock market providing “hot tips” for the seasoned robber baron whose shoes he was buffing. As legend would have it, Kennedy paid the kid, returned to his office, and proceeded to sell every share of stock in his portfolio. The date: late September 1929.

When the shoeshine boys start offering stock tips, it is time to exit the market.”

In March 1980, a friend of mine was attending the Prospector and Developer’s Annual Convention and was staying at the Four Seasons Yorkville which is considered “uptown” from the Bay St. “downtown” locale, so he hailed a taxi and ordered the driver to take him to the Royal York (the conference site). Halfway down University Avenue, the driver starts talking up Campbell Red Lake Mines, one of the darling gold deals of the 1971-1980 bubble in gold and silver and the miners.

When the cab drivers start offering stock tips, it is time to exit the market.”

It is winter 2000, and I am attending a New Year’s Day brunch in King City, Ontario put on by my daughter’s friend’s mother from the Country Day School. Doing my absolute best to appear “fascinated” with all the school gossip about Mr. XXXX’s affairs or Mrs. YYY’s breath or Little Marco’s chauffeur, I finally wandered off into the kitchen to a) get some ice and b) break the agonizing boredom where I chanced upon a group of mothers busy preparing some exotic dish that required the input of eight feverishly-whirling, ladies donning carving knives, ladles, and a plethora of juicy rumours. Finally, one of them asked me what I did for a living and I told them that I was in “corporate finance” with a Bay St. firm, after which a machine-gun, staccato-like series on probes came winging my way on the subject of Nortel Networks, the absolute hottest stock of the era in Canada and one which has gone from zero to over $125/share in a matter of months. “What do you think of Nortel, Mike?” asked one of the more “novice” of the group. Placing my soda water on the counter and clearing my throat, having been immersed in thought (and very distracted) over the car Curtis Joseph had parked next to mine, I answered:

“Well, I do not OWN the stock but if I did, I would sell it on Monday morning. In fact, I might borrow some Nortel stock from our loan post and sell that too! It is a dangerously overpriced piece of garbage that is headed lower and will cause a lot of tears to flow.”

My first clue that something in my response had not sat well with this gaggle of soccer moms came when I heard a “HAARRRRUUUMMPH!” and one of them stormed out of the room. One by one, every apron clad veggie chopper exited the kitchen but not before levelling glares of animosity and contempt squarely in my direction. However, one lady stayed behind and glancing to the doorway every few seconds (so as to avoid being “busted” talking to the “enemy”) she explained that this assemblage of Country Day moms were all employees of Nortel Networks and were all large participants in their Employee Stock Savings Plan and Employee Stock Pension Plan with Nortel stock 100% of the two portfolios. Before leaving, a particularly agitated woman in an undersized bulging turtleneck approached me and proceeded to give me five solid “talking points” (HER words, not mine) on why Nortel was “such a no-brainer”. Two years later, Nortel was gone, bankrupt, vapourized in a miasma of false hopes and misplaced loyalty. Sadly, all the ladies from that New Year’s brunch lost their jobs and their retirement funds in tandem…

When the soccer moms start offering stock tips, it is time to exit the market.”

It is now a Wednesday in mid-February 2021. I am in the local Walmart in Port Perry, Ontario searching out a camera-microphone for my desktop computer and seeing that all the models that had been advertised as being “On Sale” had been cleaned out by the kids being “home-schooled” by Zoom teachers and Skype lecturers, I had to settle for the most expensive model on the shelf. However, I wandered over to the check-out counter where a couple of Millennial males were huddled in deep discussion over something that I could not hear but which was most certainly important, based solely on the arm-waving and foot-stomping and other telltale signals of youthful exuberance. As I approached, trying to convey my absolute best “frustrated old guy” look, I heard one of these minimum-wage earners say “All ya gotta do is BUY THE DIP!” after which came “THEY MAKE COPPER WIRES FOR CELL PHONES!” and then “Ya buy it here at $7 and when it goes up to $8, YA SELL IT! BEATS WORKIN’, EH?” Needless to say, I had only one thought…

When the Walmart sales staff start offering stock tips, it is time to exit the market.”

In today’s world of quantitative yarn-spinning and hi-tech sophistry, I can tell you that there are countless arguments being advanced that would have us all believe that stock markets around the world have reached “a permanently high plateau” (Professor Irwin Fisher 1929) fueled by central bank accommodation (“counterfeiting”) and fiscal stimulus (“pork-barrelling”). Just as the nursery rhyme “Jack and the Beanstalk” would have a magic bean create a stalk rising thousands of metres into the clouds, financial advisors the world over continue to pump up the virtues of stock ownership while millions and millions of new investors oblivious to the risks of stock market volatility open new accounts. Their financial “advisor” is a 23-year-old Twitter guru with over 100,000 “followers” whose claim to fame was a tweet six months ago extolling the virtues of Bitcoin along with a picture of his backside tattoos that all say “Tesla rocks” in purple lettering and a violet backdrop. The world as we once knew it has changed and thanks to social media and the internet, getting laid out in a stock market crash is no longer the domain of a reckless husband or a bored housewife. It will soon be a Millennial event just as the assassination of JFK was a boomer event. “Where were you on November 22nd, 1963?” will be replaced by “Where were you when the NASDAQ crashed 35% in three hours taking Bitcoin down 85% with it?”.

The anecdotes I have related to you all today are a macrocosm of a classic top looming out there for this “EVERTHING” bubble in which the world resides. It is not to be construed as “investment advice” or “portfolio guidance”; it is simply an observational offering from a 45-year veteran of Wall Street/Bay Street/Washington/Ottawa malfeasance. Treat it as you would.

The dominant force behind the precious metals remains the U.S. dollar’s ominous and very deliberate downtrend which is a direct result of the dilutive policy decisions by the Fed and the Treasury Department led by ex-Fed chairperson Janet Yellen. The USD embarked upon a sharp oversold rally in early December, ending one week ago and coinciding with gold putting in a bottom at USD $1,784.60 and silver at USD $26.02 the same day. Given the legions of armchair quarterbacks out there expounding on the future direction for everything these days, it seems that neither #Silversqueeze proponents nor pedantic podcasts can outmuscle the U.S. dollar in impact on the metals. As in past bulls, gold and silver will decouple from this dollar obedience at some point but until it becomes glaringly apparent, I stick with the status quo.

The 2-year chart for gold is unremarkable right now in that it remains in an uptrend off the March lows but locked in an intermediate term downtrend off the August peak. These ascending and descending trendlines are going to converge shortly and that will ultimately resolve this battle between bulls and bears, although if I use the November low at USD $1,771.30 rather than the Feb. 5th low, that converging triangle has already been resolved to the downside. Any way I draw the lines, gold needs to catch a bid and hold USD $1,800 this time or I fear another wave of capitulatory liquidation may be upon us and that would spell USD $1,700 near term and (Heaven forbid) a probable longer-term peak at USD $2,101.10 back in August.

Silver, however, remains in a beautiful uptrend with the short and intermediate term uptrend lines solidly bullish. There appears to be little trouble as long as it holds USD $26 and even the 100-dma at USD $25.02 with pretty much clear sailing to a test of the highs at USD $30.00. I remain impressed with silver’s resiliency and continue to call for the GSR to touch 50 before this bull market reaches its terminus,

The chart on page nine placed the Junior Silver Miners (SILJ:US) beside the Junior Gold Miners (GDXJ:US) and the technical divergence is obvious. Just as silver remains in an uptrend, the silver juniors are also in good shape. The gold chart and the chart of the gold juniors look shaky, with downside risk a definite possibility. Now, the pundits would wag a finger at me and say that IF gold and gold miners crack, they will drag silver down with them, but I have seen other occasions (1979-80, 2010-11) where silver actually diverged from gold and took on a life of its own, creating a parabolic plunge in the GSR which marked the final gasp of the dying bull. I do not see that until well into 2022 or 2023 and from much higher levels.

It is difficult to argue with the current narrative where this generational shift toward silver over gold as both a monetary haven and a “green” metal seems to dominate the blogosphere and in podcast-driven lectures usually presented by young men new to the practice of shaving. As you have read before, I care not the reason for silver’s uptrend; I care only that it exists.

I leave you all with one final chart – COPPER - and were it not for my obvious discomfort over the “Everything” bubble that has engulfed the global markets, I would have already been busy accumulating Freeport-Mac and BHP call options and every junior copper developer on the board. As it stands, my only exposure to copper shows up - quite ironically - in the form of the Star Point and Star South projects owned by my top-ranked Getchell Gold Corp. and the Silver Switchback and Silver Vista projects owned by next-to-top-ranked Norseman Silver. High-grade copper showings are present on all these projects but are nevertheless casual sideshows to a predominantly gold (Getchell) and silver (Norseman) focus.

The chart of copper since the March 2021 lows is “textbook”, as are the two graphs below it, showing how copper inventories on both the London Metals Exchange and the Comex have plummeted. I recently learned that global copper production dropped 2% in 2021 and it is no secret that the big Chilean mines representing the bulk of that production are starting to fade. One of my contacts that deals with the major base metal miners as an M&A consultant told me that it would take “some effort” to put a bunch of major mining executives into a room to look at a new gold or silver discovery but “one drill hole into a new copper-gold porphyry” and it would be a “standing room only” affair in one nanosecond.

There is nothing I would welcome more than a six-week correction in stocks because you can expect that copper would suffer a similar fate as the predictive role of the global stock markets would signal a slowdown. However, the advisory highways are littered with the body bags of those advisors that have tried to short/sell this market, noting the Buffett Indicator or the Panic-Euphoria Model flashing warning signs. As I have told you all time and time again, in forty-five years of studying markets, I have never seen lunacy like we are experiencing here in 2021. As overvalued as everything is, the central banks and the government bureaucrats that formulate policy are representative of the politico-banco elite and the only other time in modern history that compares to 2021 is 1920 Weimar Germany just before the Reichsbank blew up. The arrogance of the German bankers in 1920 was nothing compared to the arrogance of the U.S. Fed and its global banking brethren in 2021 and despite the century of supposed “advancement”, my fear is that every modern unit of exchange, from dollars to yen to rubles, is on a path to destruction and replacement.

Brace for impact, indeed…

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The Fourth Coinage Act of 1873 embraced the gold standard and demonetized silver, known as the “Crime of 73”

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